Why So Few Condos in Seattle (Part 1)
The record-setting number of cranes visible in the Seattle and Bellevue skylines reflect a construction boom that began in earnest in 2015. Companies such as Amazon, Google, Facebook and other IT darlings are hiring like crazy. Like San Francisco, Seattle is a hot area to live, bringing thousands of new residents each month. With all of this growth, construction, and demand for housing, you may wonder why more condominiums are not being built in King County.
It comes down to simple economics. The massive demand for apartments drove up rental rates so much that since the economic recession in 2008 apartments became significantly more profitable than condominiums.
The building industry claims that the pro-homeowner warranties in the Washington Condominium Act (RCW 64.34.) make condominiums too expensive these days. But, those warranties have been in place since July 1, 1990 and there have been multiple construction boom cycles where thousands upon thousands of condominium units were constructed. Clearly, the Condominium Act warranties are not the deciding factor. We will address this attack on the Washington Condominium Act’s implied warranties of quality in next week’s email. For today, we’ll stick with basic numbers and economics.
The reality is that the market drives what is built, pure and simple. News articles reporting on the dearth of Seattle condominiums began appearing in 2015. Here is one such article from the Puget Sound Business Journal. The articles reflected the increased value of apartment buildings versus condominiums. In fact, local real estate consultant and appraiser Brian O’Connor conducted an exhaustive Condominium Market Conditions & Feasibility study in 2015 addressing this exact question. Here is an excerpt from his study reflecting a side-by-side comparison of apartment vs. condo for a specific Bellevue project.
Based upon empirical data and hard numbers, he concluded that in the current economic climate “apartments are more feasible, profitable and less risky” than condominiums. His numbers, and all other indicators reflect basic economics: supply v. demand. Due to the huge demand of apartments, driven significantly by the younger demographic moving into Seattle and looking to rent rather than buy, the rental rates increased considerably and the profit to be made in developing an apartment building increased dramatically as well. The profitability of apartments increased so much that they became more profitable than condominiums. Developers took note, follow the profits, and are building apartments.
Now, in 2016, the numbers are starting to turn. Single family home values, and condominium unit values, are heating up creating bidding wars. The region’s newest large-scale condominium sold out, and others are instituting waiting lists. Thus, it appears the economics are changing, and that we may be on the cusp of large scale condominium development in Seattle and Bellevue—good news for those wanting to buy homes and condo units in the region.
In next week’s post we’ll address how the building industry is using this short-term crisis to attack the pro-consumer provisions of the Washington Condominium Act.