Condo Boom Bust or Wishful Thinking? Supply vs. Demand
Many areas of the real estate industry (sellers, Realtors® and developers) have been scratching their heads wondering where all the buyer’s went. Rates are low, Seattle job growth continues to be one of the nation’s strongest, rental vacancies have declined dramatically, and local demand isn’t those of investors (flippers). So, has the market busted, or can we expect another hot trend in Seattle real estate?
Is there really any demand? We are constantly bombarded with media telling us that market time and inventory is increasing. That pendings and solds are decreasing. So are there really a lack of those willing and able buyers or, are they renting ever-increasing high priced rentals waiting until “the market to hit bottom.” What about the population growth? It’s certain that since the announcement of Amazon and Microsoft moving to downtown, along with the Bill and Melinda Gates Foundation, the desire for condominiums in the urban core is increasing. Another recent fact to consider regarding residentail real estate is the current boom in commercial space. With 5 million new square feet of commercial space, each 1,000 creates approximately 4 jobs! The picture for ‘demand’ is clear. A LOT of jobs are coming to downtown Seattle.
Is there too much supply? Were you planning on attending the symposium today? Many of the new developments are “postponed” or will never be built. The other half of the graph above (displayed below) gives a approximate representation of how many new residential condos we can actually expect.
Here’s an excerpt from Dean Jones at Realogics, Inc.:
Meanwhile, rising construction costs and a national credit crunch will continue to compromise new construction deliveries beyond 2010. These new projects are delayed by the “new rules” of real estate lending that is requiring more presales, more equity (lower leverage), and far more conservative development proformas. This all adds up to higher costs for the developer as well as the buyer, which burdens the further introduction of new projects to the market at this time. Specifically, unless a considerable amount of this proposed inventory enters the marketplace for sale in 2008 and provided it subsequently breaks ground by 2009, the current “buyer’s market” temperament will likely transition to a “seller’s market” as demand outstrips supply by 2010 or sooner.
Seattle’s subsequent market has had the benefit to learn from what we’ve seen in Miami, Pheonix and Las Vegas. Investors who bought into a building with the intent to flip created artificial demand by buying out projects within a short amount of time. This in turn fooled future developers of the market’s actual demand. This is nothing in comparison to our small time “flipper” issue we’ve seen at 2200 Westlake and The Cosmpolitan.
What’s the outlook? As we move closer to occupancy dates, we’ll see more activity with presales. By 2010, more than 1,000 new construction sales are expected (which excludes resales). The urban lifestyle has become a more popular trend, gas prices are rising with no sign of stabilizing, rental rates are apparently affordable, and we have yet to see the tidle wave downtown’s new workforce. Higher construction costs more strict requirements for developers are causing them to require more presales before financing is even approved.
CLICK IMAGE TO ENLARGE
What’s next? Here are some indicators to watch for when judging what direction the market will go in:
- JOB GROWTH – Amazon, Microsoft, B & G Foundation, WAMU
- COMMERCIAL REAL ESTATE – New Commercial Construction, Vacancy Rates, Lease Rates
- RESIDENTIAL RENTALS – Vacancy Rates, Average Rent
- FINANCING – Condo Developers/New Projects, Condo Buyers, Credit Crunch
- MEDIA – Cosumer Confidence, Election (historic optimism of new President), National vs. Local Real Estate, National vs. Local Economy
- INTANGIBLES – Gas Prices, Energy Costs, Commute Time, Environment, Lifestyle, Safety, Government/Urban Growth Management
This is a very important time for Seattle. As mentioned before, we are optimistic about where the market is today and were it will be tomorrow. Expect much more on this topic over the next couple of days.
Graphs provided by Realogics, Inc.