Regular readers may recall past mentions on these pages of Northshore Townhomes, an 86-unit townhome complex in my north Kenmore neighborhood.
The story of Northshore Townhomes is a classic tale of bubble mania. The 6-acre parcel was purchased in 2002 for $1 million by well-known local developer Mike Mastro (via an LLC), but development did not begin in earnest until 2006, breaking ground in the midst of the real estate frenzy (condo prices were up over 24% year-over-year in November that year).
Now, Kenmore is nice, but it’s not exactly near the top of most people’s lists when they are thinking about where they want to live around Seattle. Is Kenmore really the best market in which to build 86 new townhomes priced $280,000 to $400,000, with a feature list that includes “the finest finishes throughout” and “chic cabanas with table, bar, and rollout lounges”? And even if Kenmore is a good place for such a development, does it make sense to put it half a block from a major auction house? Obviously not, but during the bubble everything was being snatched up with bidding wars as soon as it came on the market, so in the mind of the developer it was probably a no-lose proposition.
As construction on Northshore neared completion in early 2008, the marketing began to ramp up. A flashy website came online, sandwich boards were strewn about the neighborhood, billboards were placed all along Bothell / Lake City Way, and promotions were launched. Everything looked great, except for one thing… There were no buyers.
As 2008 wound to a close, not a single unit had sold. Signs and online offers advertising units for rent began to pop up along side the still-listed units that were for sale. Of course, this simply provided an even greater disincentive to any possible buyers.
By early 2009, the days of speculators gobbling up properties in hopes unloading on a greater fool for a massive profit were long gone, and Northshore had been left in the lurch. Mastro finally completely gave up trying to sell the townhomes, and the entire complex became rentals. According to a May deed of trust (pdf) filed with King County, Mastro’s company owes $23.6 million on the property. With rents at the complex averaging around $1,700, it will take at least 30 years to pay off the construction (assuming 100% occupancy and ignoring maintenance costs and taxes).
Today, the ridiculous marketing website has gone dark, the sandwich boards that used to proclaim “NEW TOWNHOMES FROM $279K” have new “NOW LEASING” labels taped over them, and the front door of the former sales center has a slot cut into it for the rent drop. Renters are moving in, but with rents that average 16% higher (in terms of $/sqft) than other nearby apartments, it’s no surprise that the complex is slow to fill up.
We recently posted a link to a Puget Sound Business Journal story about Mike Mastro’s mounting financial troubles. Kenmore’s Northshore Townhomes is just one example of Mastro’s major market miscalculation. $24 million here, $10 million there, pretty soon you’re talking about some real money.
Think of it this way, a few foreclosures and bankruptcies down the road these sorts of developments will substantially improve the quality and affordability of the rental market in Seattle.
Just when I think that people are stupid enough to buy anything, humanity goes and surprises me.
My initial thought was if it was purchased in 2002 but building didn’t start until 2006, the county/city takes way too long to process things.
But then I looked at the pictures. I can’t really say what my thoughts are about those.
Tim, I guess you didn’t see this article a few days ago?
http://seattletimes.nwsource.com/html/businesstechnology/2009492112_mastro18.html
I hope that with the change in the market, new developments are actually desirable to live in. A series of boxes jammed together with no yard or balcony makes no sense if you’re going to live so far outside of Seattle. I don’t think it makes sense in Seattle either. I can’t wait to see desirable properties again, something you can actually live in – something you actually WANT To live in.
I’ve been watching these townhomes for over a year now:
http://www.redfin.com/WA/Seattle/309-27th-Ave-E-98112/home/18659189
The developer put actually zero thought into the design (except maybe how to maximize revenue). They couldn’t even RENT these things, I saw them on craigslist for months. I wonder how long these get-rich-quick development will even last – will they be standing in 10 years?
There would be lots of pickins out of that portfolio that would be great.
This same thing happened with the “Urbane” development in downtown Redmond, one block Southeast of City Hall and the police station, across the street from the liquor store on 160th.
http://www.urbane-redmond.com/
I live in Lionsgate, just kitty-corner to this development, and I watched with interest while it was being built in 2007-2008. I signed up for their mailing list and they sent out mail near completion stating that the townhomes would be listed in the $800k(!) range when completed.
They were on the MLS for several months, and as far as I know not a signle unit was ever sold. A little while later, a sandwich board went up outside stating the units were now available for lease. I talked to someone in the “leasing office” there and they said the units were going for ~$1800/month. Since that’s many hundreds of dollars a month more than I’m paying for a similar sized unit across the street, I just shook my head.
Today, there are people renting there, but not many. There appear to be many vacant units there. None of the business storefronts they built have businesses in them.
Those Townhomes are ugly as SIN!!
They could have sacrificed about 5 of those and spaced them out a little better. Instead they look like glorified 3rd world housing. They could also have made the streets a little wider too. When I look at those it does not look like “Home Sweet Home” at all.
So I think the biggest reasons they arent selling is of course, the price. But almost as important, there is “more to choose from” and those just look awful. Also, they look as if they were rush built for profit.
Biggest flub has to be some townhomes built here in Magnolia. They actually thought they could sell million dollar townhomes in the village? Too laughable look for these to be on auction in a year or so.
RE: Kary L. Krismer @ 4 –
Maybe it’s just me, but I thought the article a little unclear. Columbia State Bank, First Sound Bank, and Venture Bank are not filing for bankruptcy, they are attempting to force Mastro onto bankruptcy.
RE: TJ_98370 @ 10 –
Never mind. I misread the artcile.
Looks like soviet tract housing.
http://www.cheap"chocolate"condos.com
I love that feature of clicking on an image and it enlarges.
RE: TJ_98370 @ 10 – Yes, an involuntary bankruptcy. Creditors in certain situations can force a bankruptcy if they think that’s what’s best for them.
By Aaron @ 5:
I’d agree, even with the last sentence. There’s a project that I think was built a few years ago, and probably all sold, on 85th, just east of Aurora, if I recall correctly. Ugly, ugly, ugly.
So that was the jackass who destroyed Leilani Lanes so that the property could rot as a weed-infested wasteland. Good riddance.
And yes Kary, 85th and Aurora is the very worst of Seattle’s townhome ghettos and home to some of the ugliest construction every forced on a city this side of Kiev. Disgusting.
Is this photo in Aubrey’s piece today the 85th & Aurora units? I don’t go by there that often, but it looks like it might be a picture from when they were new.
http://blog.seattlepi.com/realestatenews/archives/174470.asp
Yep -that’s them. I drive by enough to know. Ghetto in 5 years – in 10 It’ll look like an hourly rate motel (like all the others on Aurora).
Lived on 75th for two years up the street opposite the PCC. Nothing like the weekly sound of gunfire at 3:00 a.m.
75th is on the 40 yard “nice stretch” of aurora.
By Aaron @ 5:
I think you are being too hard… some people would love to live in a storage unit. The homeless, for example.
Believe it or not, we have a similar development on the edge of town in Pullman, WA, bordering endless wheat fields. 2 bedroom “luxury” townhomes with ZERO yards, not even a backdoor. Just a small balcony over the driveway with just enough room for a grill.
We forget about the fight for the 522 corridor between I-5, down Lake City Way, past the Lake Forest Park cluster on the left through Kenmore and Bothell has been going on for decades. it was just settled I think about six years ago.
There were great development plans for Kenmore. The hold up was that darn 522 corridor which they are just now expanding.
Just like Aurora at 85th, the wait for development is taking longer than people thought.
These really do look like someone’s misguided attempt at their own Pleasantville. Why do I expect to see pod people emerge from them? I’d much rather rent a place with character than to own something like this. Thank god the bubble days are over and maybe developers will have to start putting more thought into design…
What I like about them is all the asphalt and concrete. I’ve been looking for a place that is devoid of life and covered in impermeable surfaces.
I would be wary of the floor plan which many of these newly developed townhomes seem to have – a 3-story living space with a small footprint, and the stairway eats up a chunk of the limited floor space (sometimes a steep stairway to fit within the envelope). 1st floor – entry, small garage, maybe a study or small family room. 2nd floor – kitchen and living room, half bath. 3rd floor – two bedrooms and full bath. The luxury ones sometimes have 9 or 10 foot ceilings, meaning extra long flights of stairs. They all seem to follow this general layout in 3 floors, which I think greatly limits the potential market for the townhouse. The baby boomer and retiree age brackets would be out of the question living in a home with 2 flights of stairs. You’re really limiting the potential customer base to 20-40ish active people in generally good shape. I understand the necessary focus on economics, timing and location in the RE market, but I feel livability, functionality, especially the floor plan, don’t get enough discussion here and attention from buyers.
“I understand the necessary focus on economics, timing and location in the RE market, but I feel livability, functionality, especially the floor plan, don’t get enough discussion here and attention from buyers. ”
The latter is subjective, while the former is not.
RE: Herman @ 23 – Well to be fair, there is a little common “green” space in the center with park benches and a little playground:
Although if they ever built the promised “South Beach-inspired party pavilion with jetted spa, plasma TV, fireplace and BBQ,” it is well hidden.
That is one ugly development – it looks like some kind of suburban housing project.
So, should we consider the development of the last 5+ years a lost cause? There is a great deal of land covered with these undesirable dwellings. What happens now? I keep reading about people trying to find new solutions, but it seems like it will be difficult for designers, developers, and builders to bring it all together at reasonable prices. I have read jokes about sheltering the homeless or turning these places into “projects.” Maybe in hindsight these jokes will seem quite prescient.
[...] via Northshore Townhomes: A Case Study in Bubble Mania Development | Seattle Bubble — News & discu…. [...]
By Niz Monkey @ 28:
When we were looking we excluded anything built this century. I’m sure there is some stuff built this century that is decent quality and layout, but it wasn’t in our price range.
RE: Niz Monkey @ 28 –
In the 1980s and 1990s until about 1998 I spent a lot of time in community meetings. They are in the evening, great networking, and a way to see future development trends. It’s a part of the Real Estate business, it’s the main reason you pay a Real Estate agent, you pay them to know what’s going on.
Any way, these town houses were to be low cost housing units as a buffer between larger NC 30, mixed use buildings and residential. NC30, 40, 50 or whatever went by the wayside. Including commercial spaces was a disaster on many levels, that makes no difference here. The point is that “cluster” housing is what was proposed, but row houses is what we got.
Municipalities love these easy to permit, very dense, housing units for the permit fees and tax base. Police and Fire Departments called them hazards. It made no difference, after the first few were permitted everybody started building them.
The low cost of construction and land acquisition soon gave way to the $350K price tags. $160k was the number first bantied about. Now even in South Everett Plygon Homes had a line up to buy town houses at $199K.
These will be blights. Municipalities were warned. Our City Council was warned, but developers packed the meetings and gave campaign contributions. The other thing was how the meetings were structured. Community meetings were held in neighborhoods. People complained, howled, and got all worked up. Police and Fire representatives called them rats nests for criminal activity or stated you can’t get a fire truck into those driveways. Then the policy meetings were held down town at 2Pm or 4PM.
We have a lot of community work to do. Many neighborhoods are now in danger of having criminal enterprise set up shop in any one of these town house settings. There was no infrastructure required in these “residential” clusters other than a sidewalk out front. It’s something that will need to be address far beyond just the resale price.
[...] 24, 2009 by kedamono The Seattle Bubble just ran an article about the apartment complex I ranted about earlier in “A place to live?“. The story of [...]
RE: David Losh @ 30 –
LOW COST LOOKING COMMUNITIES PICTURED IN TIM’S ARTICLE
But the $300K price tag is anything but low cost. With property tax and such, what would the monthly cost be on these apartment homes? $1800-2200 or higher with a lower FICO [probably the type of buyer it would attract too].
Just save your rubles and RENT.
Interestingly enough, I blogged about the livability of this development in February of this year in my Living Sustainably blog. To me it’s a very unappetizing looking development that aspires to be European, without European sensibilities.
Living Sustainably: A place to live?
I cringe when I see what Seattle passes off as “townhomes”. Out here in the DC suburbs, townhomes are extremely popular, and the communities are much better designed. Compare the shoehorned ghetto in Kenmore to a typical suburban townhome out here – each has a small, but usable fenced back yard, big enough for a garden and some privacy, and many back to greenspace or a shared park. About the only advantage of the Kenmore townhomes is the garage – you’re not likely to find that on many sub-$500K properties.
http://www.redfin.com/VA/Oakton/2836-Jermantown-Rd-22124/unit-47/home/9519204
http://www.redfin.com/VA/Oakton/2954-Paddock-Wood-Ct-22124/home/9519872
http://www.redfin.com/VA/Oakton/9977-Cyrandall-Dr-22124/home/9836911
And the bad news is winter is coming…………
http://seattle.bizjournals.com/seattle/stories/2009/07/20/daily51.html?ana=yfcpc
BEFORE YOU BUY ONE OF THESE APARTMENTS
Buy the $139K reconditioned Hud home next door to me in Kent….the sheet rock may smell of mildew from a two year chronic unheated vacancy, but at least its a 1400SF rambler design [comparable to a 1800SF split level in living space] with a dinky lot [at least it has a lot]. And better yet, no neighbor with a wall next door to scream at you to turn your TV down from low to inaudible.
It has new rugs, mahagony floors, new kitchen counters, new exterior panels, newly painted inside and out, etc, etc….
Makes these type of dinky sized two story apartments with stairs to climb [and take up mass SF living space] look like horrifying trailers with no land. Those upstairs bathrooms [water heaters and washers too] are wonderful too: when the toilet flap jams open and the toilet simultaneously clogs with water continuously pouring out destroying the downstairs ceiling and rugs….and its not if it happens, its when it happens…LOL
My favorite townhome that we saw while lookig in 2007 had the ceilign of the stairs angled up in each floors coat closet. You couldn’t hang anyhting longer than waist length because literally the floor of the closet had a 60° pitch that rose to waist height. They were over on 25th in Ballard – they were 375,000 when we were looking.
I was disgusted.
“It has new rugs, mahagony floors, new kitchen counters, new exterior panels, newly painted inside and out, etc, etc….”
It’s in kent for crying out loud. Kent!.
Most people arent really that afraid of stairs.
RE: Racket @ 39 -
I would like to add anyone with young children to the list of those who don’t like stairs. There’s a good two year period when you get grey hair anytime your kids go anywhere near stairs. They have mobility but not cor-ordination = real big risks for bad falls on stairs.
RE: softwarengineer @ 33 –
The whole idea of town home permitting was that the price point would be about $160K up to $225K. When the units started selling over $300K developers thought they had died and gone to heaven.
RE: David Losh @ 41 –
YOU GOT IT DAVID
There were many families that couldn’t understand why I picked a lower priced home in 1999, when I qualified for twice the house. Wellllll…..the way RE prices are going, they respect me now and wave at me. Ohhhh, and my 9 and 11 YOs, back in 1999, actually had over a hundred kids in a fenced playground and park to interact with from 1999 on [fenced HOA with security too]. Where ya going to find that, even in the $300K apartment village, Hades, its all mostly DINKs there?
Another good reason for buying low and smaller, besides mitigating current investment losses and massive property tax with mass energy waste/cost too; imagine trying to sell a $300K unit today, let alone a $600K house in a collapsed wage mitigated job market with banks turning into Scrooges. And IMO, its only going to get much worse.
By the way, the homes in my neighborhood were selling immediately in a week in 2006-2007, Kent or no Kent….that HUD home across the street has been for sale at $110K the last year…..rebuilt with a $29K price increase the last week…..I’ll let you know if it sells….LOL
They may have to reduce it to $100k to get a buyer, but imagine buying a $300K condo and having to reduce its price to $150K to sell it…LOL
RE: Dave @ 40 –
LOL, G-d help you if you’re doing the pick up/put down method at nap time!
RE: David Losh @ 41 – 300K? Try 450K in average Ballard neighborhoods in 2007. I was absolutely floored when I saw people paying that kind of scratch for a townhouse. Battened T-1-11 siding, garages which were impossible to drive into (i.e Austin Powers turnaround). But hey, real estate always goes up, right?
The Tim-
You suggest that the it would take 30 years to pay the debt off with some nice assumptions made.
One of your nice assumptions was that the cost of capital is zero. I am going to suggest that the cost of capital is greater than zero. (We could debate deflation/inflation, and so on…)
Without going further on this topic, let’s look at the return on investment, assuming that the $23.6 million is the total investment, average of $1,700 rent.
1700 average monthly rent per unit x 86 units x 12 months per year = $1.75 million annual rent.
1.75/23.6 = 7.4% return on investment.
Given that the 7.4% is an idealized number that is an upper bound, and does not include normal operating costs, 5% vacancy, and so on, I personally would not touch it. Given that the fixed costs are fairly high, the potential for negative returns is far too likely.
Again assuming the $23.6 million, I know this has been discussed in the past, but I’d like to see more like 2.83 million in annual rent (ROI of about 12%–monthly rent 1% of investment/market value). That’s about $2,750 per unit, on average. Truth be told, the $23.6 million is probably a low number. In other words, the developer probably put some of his own cash in the game. Thus the rents would likely need to be over $3,000 before this becomes financially attractive to an investor.
In other words, the rent only covers the cost of capital, and it is insufficient to cover paying the principal down.
It might be interesting for you to do a post on the Winners and Losers of this game. For example, there were some home owners who made out nice. I suggested to a friend to sell in December 2005 and move to treasury instruments. He sold, put his money in treasuries, and now pays his rent with the interest from the government’s printing presses. Clearly he was a winner in a big way.
On the other end of the spectrum are those who bought at the top, the developer discussed here, and countless people who thought they could finance their way to prosperity with housing equity that was always positive, no matter how often a withdrawal was executed. Divorce, bankruptcy, and other ills soon follow. Oh, and let’s not forget the millions of baby boomers who invested in the ‘mortgage backed securities.’
“When the units started selling over $300K developers thought they had died and gone to heaven. ‘
And now they’re finding themselves in a somewhat “warmer” place.
It looks like a public housing project in Northern Ireland. All that’s missing is gangs of chronically unemployed youth, some ethnic strife, and a few burning tires. Except in Britain those homes usually have little back yards. And a great old pub within walking distance. I’m pretty sure this development doesn’t have that.
[...] notable exclusion from the list was Northshore Townhomes, an 86-unit townhome complex in Kenmore featured on these pages last month. Mastro’s company owes $24 million to HomeStreet bank on that [...]