The in-city condo market (NWMLS #701) continued to demonstrate strength through October 2012 as consumers found fewer new listings, rising median home prices and greater competition for homes. Downtown Seattle has become a seller’s market.
The graphic above is featured in the current issue of The Collection magazine and demonstrates the increasing demand pressures on very limited supply in the city. It also compares what’s happening with the Greater Seattle MSA and with the S&P/Case-Shiller 20-City Composite. All indices are showing significant recovery in the 2012 since their post-bubble lows with downtown Seattle now within 10% of its peak median home price (it’s actually higher if you removed distressed inventory). The Seattle Times reported recently that King County house prices were up 16% year-over-year, which is the greatest increase since the real estate market began its correction in 2007. Sales volumes were also higher – up 33% from a year ago. Looking at just condominiums in King County reveals sales are up 35% and median home prices were up 24% year-over-year.
What’s become a clear trend is demand for housing has been rising exponentially closer the job centers. That bodes well for downtown Seattle where thousands of new job positions are posted at in-city employment engines like Amazon.com among others. Investors are taking notice too as underscored last week in the recent sale of Aspira Apartments in downtown Seattle, which was also covered by The Seattle Times. At a record price of approximately $510,000 per unit our sources indicate the purchase by a pension fund has a capitalization rate below 4%. The new owners obviously anticipate further rent escalation over a longer term hold, which mutes some speculation that this project may have been a contender for condo conversion. In fact the per unit apartment values are nearly condo values – a product of high rents, which can fetch upwards of $3.00 per sq. ft. per month and very low cap rates, which plumps the selling price.
Upward pressure on rents would also explain a significant volume of new apartment communities that are under development throughout Seattle. According to Dupre & Scott Apartment Advisors, which tracks developments of more than 25 units, there are 62 buildings with 10,132 new apartment units under construction in the City of Seattle – more than half of which will complete within the next year and many are located in downtown Seattle. Behind this are another 95 buildings comprising another 10,857 units that are permitted. Some percentage of these could make their way to market over the next five years (provided they are able to get financed this late in the market cycle).
What’s surprising is the lack of condo development. Currently the only new construction condo project in the pipeline is the first 700+ unit Insignia Condominium on a full block site bound between 5th and 6th Avenues and Battery and Bell Streets in the Denny Regrade neighborhood. While the condo market is recovering quickly the financing market for condominiums is not. Developers are faced with very limited (if any) options to secure a mezzanine financing or a construction loan since the global credit crisis made banks gun shy. As a result only apartment buildings are being developed with the noted exception of the Insignia project, which is reportedly being built, at least for now, out of cash.
The graphic above illustrates the new construction of condominiums since 2000 in the year they substantially delivered. It also describes the current status of that inventory today. For the first time in recent history there are fewer than 100 new construction units available for purchase and no new inventory is anticipated until at least 2015 (the challenge in the city is new demand can rise much quicker than new supply). Even when resale inventory is added there are still fewer than 200 condo units available.
The surge in apartment deliveries will address some of the increasing demand for new housing downtown but we expect the for-sale market to be underserved. While it’s argued that consumer preference has shifted towards leasehold the complete lack of new condo supply will obviously struggle to keep up with any new demand. Meanwhile rising rents and prevailing low interest rates should encourage more renters to consider purchasing, which has been a noted trend during 2012.
The following graphs provide a snapshot of the NWMLS records for October 2012 and tracks the history over the past four years: