Seattle Bubble

Almost a year ago, a family that has accumulated ownership of 13 near-contiguous acres of downtown real estate in the Denny Triangle finally put the whole lot of it on the market.

Mr. Clise is convinced now is the ideal time to sell. The job-market outlook is robust for Seattle, and the office market, with a low 5% vacancy rate for top-quality “Class A” buildings, is hungry for more space, says Michel Seifer, managing director of capital markets for Jones Lang LaSalle, the real-estate-services firm handling the sale.

Yet, there is a possibility that Mr. Clise, age 57, may have missed his window. Increases in the cost of borrowing — with the yield on the benchmark 10-year Treasury note rising to nearly 5.25% last week — could keep some previously active real-estate investors on the sidelines for this blockbuster, but inherently risky, transaction. Mr. Clise says if he doesn’t get the price he is seeking for the land — well into the hundreds of millions of dollars — he could still take it off the market.

Well, as reported by the Wall Street Journal yesterday (subscription), and picked up by the Seattle Times and Seattle P-I today, it looks like they were indeed a bit too late:

In retrospect, Clise said, the family should have begun marketing the property a year earlier, before the credit crisis deepened.
- Seattle Times

“Large real estate deals are not being financed right now,” Clise Properties Chief Executive Alfred Clise said Thursday afternoon.
…
Frank Bosl, a senior vice president in the Seattle office of CB Richard Ellis, said the move makes sense.

“The changes in the financial market are causing the capital for doing deals to be out of sync with the value of the real estate right now,” he said.
- Seattle P-I

Some see this as a portent of a growing trend in commercial real estate, heading into a downturn 12-18 months after residential. Personally I don’t follow commercial real estate really at all, so I wouldn’t attempt to derive any sort of market meaning out of this move.

Does anyone here deal a lot with commercial real estate? Have you seen a significant slowdown there, too? Or was the failure of this deal more a result of its massive size?

Story tip: Deejayoh’s forum post

(Jennifer S. Forsyth, Wall Street Journal, 06.18.2007)
(Jennifer S. Forsyth, Wall Street Journal, 04.25.2008)
(Eric Pryne, Seattle Times, 04.25.2008)
(Aubrey Cohen, Seattle P-I, 04.24.2008)

Granted, this is pretty much old news by now, but the issue of the disappearing condo views is at least worth mentioning.

Benjamin Shanfelder signed up to buy a condominium on the west side of downtown Seattle’s Cosmopolitan building in 2005 because it was one of the first new downtown high-rises and was convenient to amenities like the downtown bus tunnel and South Lake Union streetcar.

But before choosing a condo on the west side of Cosmopolitan’s 21st floor, he looked into plans for the adjacent lot and found the city had approved a 13-story office building there.

“I bought with that assumption,” he said last week.

Shanfelder knew other nearby projects would block some of his view. But it was a nasty surprise when developers of the neighboring building, which would be 18 feet away, revised their planned height to 34 stories — one story higher than Cosmopolitan.

“I would lose most of my remaining view and pretty much all of my sunlight and privacy,” he said.

Actually, he won’t: He sold his condo last month and moved to Queen Anne.

This tale of two towers raises questions about the city’s rules for tower spacing, the process for notifying neighbors and reviewing potential effects, and the obligations of a developer to tell buyers about plans for adjacent projects.

Developer Schnitzer West applied to build the 34-story tower in April 2006, just after the city raised downtown height limits. On Schnitzer’s site, limits went from 300 feet for a commercial building and 360 feet for a residential building to 500 feet for either.

Adjacent property owners, including Cosmopolitan developer Continental Properties, were notified of the new application, as per city requirements. But those who had signed agreements to buy in Cosmopolitan were not.

Ah, the joys of downtown condo living. Amazing views (for a year or two), trendy granite and stainless steel finishes (which will never go out of style, ever), and easy access to the SLUT. Who wouldn’t want to pay half a million or more for all that?

(Aubrey Cohen, Seattle P-I, 12.02.2007)

Once in a while, you have to wonder why someone would be so excited to buy one of the many $500,000+ condos that are soon to spread over downtown like a tsunami. It certainly isn’t for a secure, friendly neighborhood environment…

Sgt. Rich O’Neill, Seattle Police Officers’ Guild president, said officers aggressively policing the drug problem in Belltown and downtown might pull back after seeing other officers’ reputations tarnished.”Drug dealers must be laughing all the way to their next sell,” he said.

…

Below Greenwald’s apartment on Third Avenue, one police officer epitomized the blown morale some residents worried about. He said he became less aggressive, and so did other cops, long before the current controversy.

“You get what you ask for,” he said bitterly as he watched suspected drug dealers and others hanging out on the corners around Third and Pine. “It used to be that when you saw these thugs on the corners, we’d move them along.”

But the officer, who wouldn’t give his name out of concern for his job, said he personally wouldn’t risk being accused of misconduct, unless he has to.

“If I do something, I can get in trouble. But if I don’t do anything, I won’t get in trouble,” he said.

Even in broad daylight, drug dealers appeared to be dealing, passing cash to one another. “You see, they know we’re not going to do anything,” the officer said.

It just sounds so delightful, doesn’t it? Somehow I doubt that “desirable neighborhood” is one of the bullet points on the sales materials. Perhaps the people that will buy these pimped-out apartments are expected to be agoraphobics who rarely venture outside their posh pads.

Also possible is this explanation from the article (emphasis mine):

Steve Aprill [a physician who lives on Third Avenue between Pike and Pine streets] said the “straw that broke the camel’s back” came about 12:30 a.m. one night last month when his 37-year-old son, who was visiting from Los Angeles, was attacked by what one witness estimated to be 20 people while he walked home alone.

“They kept kicking him in the head,” said Elaine Aprill. “Hopefully, someone in one of the luxury condos is going to have the pull to get something done about this.”

I pity the people currently living downtown that have to deal with this every day. I have to say though, that’s some interesting logic. Good luck finding that wealthy, influential condo buyer naïve enough to jump headfirst into a neighborhood with those kind of problems.

On the other hand… if they’re naïve enough to spend $500,000 or more on a condo in downtown Seattle in the first place…

(Kery Murakami & Hector Castro, Seattle P-I, 07.11.2007)

The Seattle Times has had a good handful of real estate stories in the last few days, but none of them have been interesting enough to merit their own post. However, now that I’ve got a little collection of them in the inbox, here’s a roundup with snippets from all four.

Jane Hodges, Buying on a budget out of reach for some after state program cut:

Of course, there are still many options for first-time buyers, including FHA and VA loans, interest-only loans, conventional loans (with higher rates) and 40-year loans.However, Myrick said lenders in general are showing signs of returning to stricter lending criteria — and that may make shopping increasingly hard for first-time buyers.

“In some ways, though, it seems lenders are going back to the old-school math.”

By that, Myrick said, she’s referring to the percentage limit of total debt to gross monthly income that lenders will generally approve.

In the past, she said, lenders didn’t want to loan to a borrower whose total debt (including housing costs) would account for more than 36 percent of total monthly income.

In recent years that limit adjusted up to the current 45 to 50 percent range as lenders got increasingly creative — some say lenient — about packaging mortgages for buyers. Some lenders make loans to borrowers at the 65 percent level — and that, Myrick said, is a loan type that will likely vanish.

Will first-time and middle-income buyers increasingly sit out the market?

“That’s hard to answer,” Myrick said. “There are two issues: There’s the payment comfort level of the borrower and the question of approvability from the lender.”

Some borrowers may be willing to take on interest-only or higher-interest loans in order to secure a home and cross their fingers that their incomes will either rise or they’ll have refinancing options later.

Others may find that the terms under which they can buy are not attractive enough to warrant an offer.

“Cross your fingers,” now there’s a sound financial plan. Awesome.

Bob Young, Affordable rentals vanish as apartments go condo:

Julie Martin has daily headaches and sleepless nights.Her apartment in West Seattle’s Delridge neighborhood is going condo and Martin, a single mother, is stressed about finding a new home near her daughter’s school and her job at the local YMCA.

It won’t be easy. Vacancies in the Seattle area have sunk to their lowest level in years and rents are climbing.
…
Renters across the Puget Sound region are feeling a similar pinch. Nearly 7,000 apartments in the area were converted to condos last year.

Never mind the piles of “investor” condos and homes that can be found on Craigslist. Renters are feeling a pinch, because we say so.

Bob Young, Developer’s proposal disappoints Seattle officials:

When Seattle city officials sold the Alaska Building two years ago, they expected developer Kent Angier would turn the 15-story office tower into downtown housing.That’s what Angier said he was going to do and what he indicated on a proposal to buy the Alaska Building.

Now Angier plans to convert the historic building into a Marriott hotel. Mayor Greg Nickels is disappointed, along with some City Council members, who thought they had a commitment from Angier to bring market-rate housing to the northern edge of Pioneer Square.

Sounds like a smart developer to me. By the time they’d be able to finish any kind of apartment or condo project, the downtown market will likely be absolutely flooded with all of the projects that are already in the pipeline.

Sharon Pian Chan & Ashley Bach, Megahomes multiplying, but how big is too big?

In an area with little land to build new houses, residents are fighting the megahome — McMansions that balloon to the edges of their properties, three-story giants that block views from quaint craftsman bungalows.Seattle is considering new laws to limit the size of houses replacing those torn down on single-family lots. In Bellevue, residents came to a meeting with city staff Wednesday night to complain of huge homes that block out the sun and “overpower” the neighborhoods.

Those advocating restrictions say megahouses hurt the character and scale of single-family neighborhoods.

I’ll bet those same neighbors haven’t been complaining about how the “character” of their neighborhood was changed by skyrocketing house values the last few years. Go figure.

(Jane Hodges, Seattle Times, 06.09.2007)
(Bob Young, Seattle Times, 06.10.2007)
(Bob Young, Seattle Times, 06.14.2007)
(Sharon Pian Chan & Ashley Bach, Seattle Times, 06.14.2007)

Ah, the joys condodebtorship.

When Jerry O’Leary, 54 and retired, put down over $100,000 dollars toward a new million-dollar condominium in February 2005, he thought he was buying his way into an innovative downtown lifestyle proposed by Vulcan Inc. Vulcan Real Estate’s $200 million 2200 project on two and a half acres at Westlake Avenue…

However, on March 26, 2007 O’Leary filed suit…after a series of delays and construction disputes left him with a condo that…was “substantially [different] from the scope, nature, and extent of the project as it was described”…O’Leary recounts, “The quality, as promised, sounded great.” Instead, he describes the building to The Stranger as “basically a Motel 6.“

Oh, snap!

…some of the problems include irreparably damaged door and window frames; a poured concrete deck that sloped toward his apartment, causing leaks in the unit below; mounting construction delays; and unmet expectations. …O’Leary is not the only person to encounter problems with 2200.

…tenants have dealt with minor annoyances such as low water pressure and leaky shower doors and pipes, as well as major design flaws like incorrectly positioned halogen lights that threatened to ignite kitchen cabinets. The problems were compounded, they say, by promises of room service from in-house restaurant Marazul, a rooftop “garden”—which according to a third resident is nothing more than “a big cement area with a couple of trees stuck in it,”

As of press time, several real-estate websites list 38 condos being resold in the building, and Craigslist reveals at least a dozen units available for rent or sale. … according to John L. Scott Real Estate agent Ben Kakimoto, the number of units being flipped by investors “seem[s] like a lot” when compared to other condo projects of similar scope. Some of these units have sat unsold for months, with several of the pricier units remaining on the market even after $100,000-plus price reductions.

While Vulcan would not release information on its vacancy rate, anecdotal evidence hints that 2200 currently isn’t the bustling urban utopia it was supposed to be. Resident Chris Tanaka notes that he “never see[s] that many people” in the buildings, and Dierst remarks that “the building is not full.”

Matt Goyer, the operator of Seattle condo blog Urbnlivn and a program manager at real-estate website Redfin…believes the problem is oversaturation. “It feels like they’re overbuilding in the higher-end market…. Goyer faults vacancies at 2200 to “people trying to make a fast buck. A lot of [these] people [have] unreasonable expectations.”

Huh? What’s so unrealistic about purchasing overpriced downtown condos during the peak of the greatest real estate asset bubble in history and expecting to flip them for an easy buck?

…units [at 2200] for sale have seen price reductions ranging from $1,000 to $175,000. And one seller is even throwing in a 42-inch flat-screen TV to sweeten the deal.

Is that 1080i or 1080p?

Addressing the O’Leary lawsuit, Jeffries states, “I don’t know why Mr. O’Leary feels like that’s something he needed to go to the media about.” She would not respond to anonymous complaints about the development (nor did she return several calls after a few residents put their names by the complaints). “We’re doing everything we can to take care of our homeowners. The vast majority of people at 2200 are really happy,” she originally told us. We asked Vulcan to put us in touch with some of those tenants, they did not respond to the request.

On a recent Saturday night, as 2200’s three concrete and glass towers loomed in the night—the downtown skyline to the southwest…many of the windows were dark, save for the glow of several flat-screen TVs large enough to be viewed from the street.

During 2005 in downtown San Diego, I noticed much the same. At the time I just assumed that everyone was simply still working at 10pm each night, desperately trying to make their $4500 mortgage payments.

When I am ready to purchase my next house after the crash, it certainly won’t be a condo. I probably won’t buy anything made after 2000 as they’ve likely been built of balsa wood and bailing wire.

While it’s difficult to tell if Seattle will be hurt as badly as other bubbly areas such as San Diego (and this is only the beginning), it certainly won’t be pretty. Be patient - a sixteen year speculative bull market in housing doesn’t land quickly - and certainly not “softly”.

As they like to say on HB, “got popcorn?”

(Jonah Spangethal-Lee,The Stranger, 04.12.2007)

Tacoma: Your mission, should you choose to accept it, is to sell 1,500 high-end condos in 14 months:

Hundreds of new, pricey condominiums exclude young singles needed for a thriving city core, according to the author of a study analyzing the downtown housing market.

Builders and developers say land costs and water views push prices beyond the mid-$200,000 range generally considered doable for the first-time buyer. And even though the number of unsold units remains high in some neighborhoods, they say demand is strong for high-end condos. Tacoma’s average new condominium price, according to the study, was $348,893 at the end of last year.

The 149-page report, finished last week, identified three kinds of future condo buyers: female baby boomers, young professionals, and married folks with no children at home. It recommended adding edgy lofts and more small spaces that Generation Y buyers can afford.
…
As of December, all six neighborhoods surveyed averaged 14 months of condominium inventory, which measures how long it would take to sell everything built and approved.

A healthy market for new construction tends to be in the six- to 12-month range, said Deanna Sihon, the study’s author.
…
Since 2004, nearly 400 condos have been sold downtown with another 525 for sale and about 1,500 proposed, according to the study.
…
A year ago, a hot market meant condo shoppers had to make rapid buying decisions, said RE/MAX real estate agent George Pilant.

Not so now.

“Buyers have so many choices they don’t feel a sense of urgency,” he said.
…
As in any type of residential real estate, demand is driven by population and job growth, said Paul Turek, an economist with the state Employment Security Department.

But condos are a niche product that at higher inventory levels, he said, raise this question: Will good-paying jobs needed to sell such downtown housing continue to be created?

“I suppose that’s where the gamble is,” he said. “In the Tacoma area, we have some high-paying jobs. Whether there’s enough to support the building of the condos remains to be seen.”

Good luck with that. Seriously.

(Devona Wells, Tacoma News-Tribune, 03.25.2007)