After a half-decade of building rental apartments, developers are switching gears to construct for-sale condo projects, which should open up more homeownership options that are less expensive than single-family homes but still not cheap.
Seattle’s housing builders are starting to party like it’s 2005: That’s right, condos are back.
Developers who spent the past several years building just about everything except condos are pivoting back to them for the first time since the housing bust last decade.
The result could be a flood of new homeownership options for buyers in coming years, which would be particularly welcome news for young adults and other first-time buyers who can’t afford a single-family house, as well as empty-nesters who want to downsize.
But the new condos still aren’t cheap – usually exceeding a half-million dollars for a small one-bedroom. And they can invite more investors who not only drive up prices for regular buyers but also at times park their money in condos while keeping them empty.
In Seattle and Bellevue, only about 2,000 condos have opened so far this decade. But about 6,000 are in the pipeline for completion in the next few years, according to Polaris Pacific, a marketing and sales firm that tracks condos in the region.
More than two-dozen projects totaling 5,000 units are in the works in Seattle alone, many announced just in the past few months.
In some cases, the condo projects are brand new proposals; in other cases, builders have switched plans to turn what they thought would be apartments into condos (the difference being that you rent apartments, and own condos).
Not since the condo boom in the middle of last decade, which preceded the housing bust, has the Seattle area had a case of condo fever like this.
There’s even talk now of some existing, opened apartment buildings that might convert their units to condos, a reversal from the post-bust days, when condos that couldn’t sell were switched to apartments.
Why the condo comeback?
Although people often comment on “another condo” going up when they pass Seattle construction sites, nearly all of the big housing buildings going up during the construction boom in recent years were apartments, not condos. The condo shortage got so bad that as recently as late last year, only 350 condos were on the market in all of King County, down from the long-running average of more than 2,000 – driving up condo prices faster than even single-family home costs. There were two main reasons for that:
First, a state law that makes it fairly easy for condo buyers to sue developers for potential construction defects has frightened would-be condo builders. Those who do put up condos often get tied up in court and risk big settlement payouts, or have to pay high insurance costs to defend against the risk. Despite some efforts in Olympia this year, the state law hasn’t changed.
But the second part of the equation has changed in a big way: For years, housing developers could just build apartments instead of condos because the rental market was on fire. Why bother with the risk of condos when rental apartments were easy money?
But as a flood of tens of thousands of new apartments washed over the Seattle-area market, rents have essentially stopped rising over the past year.
In some cases, builders sitting on plans for approved apartment projects suddenly can’t get construction funding from banks because of the cooling rental market. So they face three options: wait to see if rents surge back up again, sell the development site or switch to condos.
“Developers are kind of like sheep,” said Windermere broker Jeff Reynolds, author of UrbanCondoSpaces.com blog. “There’s just so much apartment supply now. The next cycle they’re seeing is just going condo.”
Really, condos are the only attractive housing option left at the moment for developers: In the past year across King County, apartment rents are up 2.5 percent, single-family house prices are up 2.9 percent, and condo prices are up 11.3 percent.
Seattle also has a condo shortage relative to other cities. Just 19 percent of homes for sale in Seattle are condos, lower than other pricey markets such as New York (52 percent), Chicago (48 percent), Washington, D.C. (41 percent), San Francisco (37 percent), San Diego (33 percent), Denver (23 percent), Los Angeles (22 percent) and San Jose (20 percent), according to Zillow.
While the overall increase in condos would help buyers, the new buildings themselves won’t be cheap.
Marc Coluccio, chief operating officer for SolTerra developers in Seattle, said because of land costs, labor shortages, tariffs imposed on construction materials and – most of all – the high standards required for building condos, it is very difficult to build a condo that sells for less than $1,000 per square foot. In other words, a new 600-square-foot, one-bedroom unit would start around $600,000.
But in downtown high-rises, the priciest type of construction, condos are being priced even higher.
“It doesn’t make sense to build condos without that premium price point,” Coluccio said. Otherwise “you can lose money as a developer.”
There are generally two types of condo projects getting built: wood-framed buildings that typically top out at about seven stories – the sort of thing you see in neighborhoods outside the downtown core – and steel-and-glass high-rises in the greater downtown area in Seattle and Bellevue.
Coluccio’s new 45-unit Solis project in Capitol Hill, recently switched to condos after being planned as apartments, is one of the smaller buildings. Pricing starts at about $450,000 for a 445-square-foot unit – essentially the size of a studio apartment – and runs to about $950,000 for an 870-square-foot two-bedroom.
On the luxury end, The One88 tower being built in downtown Bellevue features condos that start at $825,000 for a one-bedroom and go up past $3 million for the biggest units.
Ahmed Gharib, 27, a project manager at Facebook, has been looking around for a potential new condo in Seattle recently and has taken note of the new supply forthcoming.
“It kind of reminds me of all the apartments being built recently – they’re all targeting the same market; the tech worker looking for something high end-ish, but not too high end,” Gharib said, noting he’s squarely in that target demo. “And they’re all the same.”
“I still think a lot of them are pretty over-priced,” Gharib said, noting some units are priced over $1 million. “That’s like New York-level pricing.”
Even older condos aren’t the bargain they used to be. Since the market bottomed out in early 2012, condo prices across King County have skyrocketed 137 percent, while single-family home prices soared 112 percent.
Condos are considerably more expensive than renting a similar-sized apartment. If you tried to buy the median Seattle condo today and put 20 percent down, you’d need to fork over $100,000 up front and then have a roughly $2,500 monthly payment for your mortgage, taxes and insurance, plus likely HOA dues that run over $500 a month. Compare that to the average Seattle apartment, which costs about $1,950 a month. (Of course, you can get equity with a condo, and the quality of units is almost always higher with a condo than an apartment.)
But condos generally remain a much more affordable option than single-family homes because they are smaller. Across King County, the median condo costs $415,000 compared to $669,000 for a house. In just the city of Seattle, condos are $505,000 and houses cost $760,000.
Building too late?
There are signs that condos could be the next sector of the housing market to cool off, however.
The number of condos on the market in King County has more than doubled in the past year, while sales have dropped 30 percent. Condo inventory still remains at half the long-term average, but rising inventory and falling sales often foretell drops in actual prices.
The Solis project had an open house earlier this month and received tentative reservations for about half the units, with buyers preferring the cheapest condos. Even six months ago all of the units would have been snapped up immediately, Coluccio said.
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Two years ago, about 130 eager buyers lined up, some camping out a day ahead of time, to secure rare new units in one of the only Seattle condo buildings going up in years; a similar scene played out at another condo sales event in February. But this month, sales previews for four new condo projects produced only a few people who showed up ahead of time far more people were lined up at a sneaker store nearby, according to condo broker Matt Goyer’s blog.
If condo prices do stall, then some of the projects planned today might not get built. Or they could be swapped back to apartments, or in some cases could be switched to offices in the planning stages.
The condo bust is still fresh on many people’s minds. A decade ago, a flood of new condos hitting the market coincided with the housing crash and recession, a disastrous outcome for developers. Some condos opened and were unable to sell any units for months at a time; others took several years just to get partially full. Thousands of units were converted to apartments. In all, condo prices plummeted 46 percent in King County over five years, from the peak in 2007 to the low in 2012.
And even with the recent spike in condo plans here, the pipeline for potential future apartments still remains far greater.
“I still think the big guys are going to build apartments because it was such a bad experience (with condos) 15 years ago. And I don’t think the smaller guys are going to jump into the condo business, I think they’ll tip-toe in,” said Elliott Severson, manager of the Neighborhood Collection, a group of three new condo buildings opening soon in Seattle.
“I think (condo) supply will lag demand, no matter what happens,” Severson said.
The addition of new condos also presents another challenge for Seattle.
Other pricey cities that have built lots of condos – like Vancouver, B.C., Boston and Miami – have attracted a wave of investors, often from out of the country, buying condos simply to park their money. Usually, those condos are rented out, turning them into de-facto apartments, but in other cases they sit empty.
Seattle has already dealt with an apparent influx of foreign buyers – although no one knows exactly how many, since homebuyer nationalities are not tracked – gobbling up some single-family homes as investments, sometimes keeping them empty, helping drive up prices for regular buyers.
Dean Jones, who sells condos in several buildings in the region as president of Realogics Sotheby’s International Realty, said about 30 to 40 percent of the condos in his buildings are sold to investors. Most rent them out, while some others set them aside as second homes or reserve them for their children.
“It’s frustrating for buyers who are basically competing with cash investors,” Jones said.
Gharib sees both ends of the market: In addition to shopping for a new condo, he also owns one on Capitol Hill, and knows he could sell it for a healthy gain over what he paid in 2016. He’s keeping a close eye on the condo projects set to flood the market with new units in coming years but isn’t sure whether it’s worth reserving one ahead of time.
“If you’re bullish (on the market) it makes sense. If you’re not bullish, it doesn’t make sense,” Gharib said. “I would suspect they’re not going to sell out as quickly as they used to. And then it’s a question of what’s left over and who is willing to make cuts with their pricing.”
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