By Laura Calugar
Buying a condominium in Seattle seems to be harder than ever. Most of the development is targeting the rental market, so downsizers and Millennials who move toward family life are having trouble finding a suitable home to buy. According to Yardi Matrix’s most recent multifamily report on Seattle, the metro has been one of the strongest rental markets during the current cycle. Demand has kept up with completions, rising average rents nearly $500 over the past five years.
Alex Henderson is vice president of co-investment for Grosvenor Americas and is responsible for the company’s structured development finance activities. He recently spoke with MultiHousing News and identified a growing gap in Seattle’s condominium market. Given the oversupply of rental products and the continuous rising rent values, Henderson anticipates that developers will shift their interest toward for-sale properties, particularly condominiums. He believes that we will see huge demand for condos priced in the $500,000 range, in the next few years.
Why have developers and potential tenants opted for apartments instead of condos in Seattle during the past few years?
Alex Henderson: From a developer’s point of view, building apartments has made sense for the last few years as a result of rising rents and cap rates. Specifications for apartments tend to be lower than for condominiums—therefore costing less—and values have been higher. Developers have been able to build multifamily rental at a time where there has been political support for this type of development and there is less perceived risk in developing condominiums. Also, banks tend to prefer lending on apartment buildings. In Vancouver, Canada, where you can pre-sell condominiums, 75 percent of new development is for sale and 25 percent for rent. In Seattle, the inverse is the case! Consequently, there have been less condos in the market—which has meant that people who wanted to buy have had less of an opportunity.
Which Seattle neighborhoods are performing better in the condominium market?
Henderson: That’s a difficult question to answer. Generally, the market has been very strong with a double-digit growth rate for the last several years. But, right now, if you wanted to find a condo for less than half a million dollars, you would struggle to find it. So, I think across all neighborhoods the smaller, more budget-friendly side of the market is constrained.
Henderson: To my knowledge, there are very few condo products coming out over the next two years, especially in comparison with apartments, which continues to be a major challenge and opportunity for the Seattle housing market. When you look at the full development pipeline of Seattle, we are expecting 12,000 rental units this year and only a handful of condominiums. I’m told that there are only two buildings in Seattle that will deliver just 500 condo units in the next two years versus around 25,000 apartment units.
What is driving demand for condos in Seattle?
Henderson: Seattle has become a magnet for Millennials who have been drawn to the area by new jobs that have been created by the large conglomerates in the market. This has created a whole generation of Seattle residents who have come for their jobs and have stayed for the Seattle lifestyle. Naturally, they are coming to an age where they are becoming interested in joining the housing market and building some home equity. However, there is currently a gap in the housing market that is keeping these aspirational homeowners from investing in the market in the long-term.
What are the main reasons you think condominiums will begin to be seen as viable investments?
Henderson: It all comes back to simple supply and demand: there is a gaping hole in the housing market which needs to be filled. Over the last few years, from a financial point of view, the condo vs rental model has been heavily skewed towards developing apartments due to competitive rental rates. But, if you do that same comparison now—and factor in mortgage vs rental rates in downtown Seattle, I think the gap has narrowed. My bet is that you will see that there is huge demand for condos priced in the $500,000 range.
From the City’s development perspective, continuing to ignore the need for reasonably priced condominiums in Seattle is incredibly short sighted. The balance of available product is currently in a state that is unsustainable for the future of the Seattle housing market. With the lack of condominium options available, there is a whole generation of people who are going to be forced into the sidelines of homeownership. Condos are typically the first rung on an ownership ladder that, theoretically, leads to townhouses and houses. So, when you eliminate these lower rungs for potential buyers, you are in danger of them pursuing purchasing options in other markets, or removing themselves from the ladder all together. More condominiums have to become available if we want this generation to continue to place long-term roots in Seattle.
Are high insurance fees the main deterrent to condo development in Seattle?
Henderson: There is no question that the litigious nature of Seattle as a result of the Washington Condominium Act and the risk it poses to developers does deter the development of condominiums. However, with careful planning, there are ways to build anticipated costs into your plans for creating and maintaining these buildings—you can get ahead of your concerns by being pro-active with the home owners upon completion. And of course, developers and their contractors have to be sure that they are building good quality buildings, too! That being said, I think there is a general assumption that at some point a developer will be hit with a lawsuit, so it is important that you have the right insurance and that its underwritten into your cost base.
Image courtesy of Grosvenor Americas