Seattle Bubble

Here’s an interesting story that popped up over the weekend and had people emailing me and discussing it in the comments and forums. A downtown luxury condo building named Escala is having trouble moving the last 70 units (of 270, so roughly 25%), so to try and juice up their sales, they’re raising prices. Yes, you read that right: raising prices.

Developer Lexas Cos. said this week that on June 5 it will raise the asking prices 3 to 7 percent for about 70 unsold units that have been on the market since last spring.

Another 22 units that will be released for sale May 1 also will have higher price tags.

Lexas principals John Midby and Eric Midby said prices are going up partly to send a message to prospective buyers: If they’re waiting to buy until prices drop, they’re reading the local market wrong.

And they have until June 5.

“We look at the underlying fundamentals and see a different picture than those that have been scared off by the national trends,” John Midby said. “It doesn’t match the psychology that’s pervasive in the market, even in Seattle.”

Seattle’s economy is strong, he said. Housing prices here have held up fairly well while those in much of the rest of the country have plummeted.

Stupid? Arrogant? Crazy like a fox? Or perhaps… genius?

Even our allegedly unbiased friend Glenn Crellin at the Washington Center for Real Estate Research doesn’t see the logic in this move:

“We are trying to create value for our current buyers and take [potential buyers] off the fence,” Midby said of the price increases.

But Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University, suspects those are not the only reasons.

“It is surprising that they are increasing prices to that degree unless there’s something else going on,” he said.

Lexas may feel an urgent need to move units, Crellin said: “A developer has to sell them because the carrying costs on a project that size are enormous.”

High-end downtown condo projects are particularly vulnerable to the real-estate market’s slowdown, he said, because many prospective buyers who are looking to move downtown from big, expensive suburban homes are having more trouble selling those houses quickly.

Matt Goyer over at Urbnlivn has some additional analysis:

Here are the number of $500,000 to $5 mil condos sold over the past few years in downtown:

2005: 134
2006: 129
2007: 207
2008: 45 so far

Currently there are 189 units in that price range active on the MLS. There are certainly more than this because not all new construction inventory is in the MLS.

So it looks like downtown Seattle is track to sell about as many luxury condos as it did in ‘05 or ‘06, which would mean about 90 more this year. Apparently Escala thinks that pretty much all of those will be from them. Good luck with that.

On the other hand, an article in the Puget Sound Business Journal this weekend claims that the condo supply downtown is “expected to dry up.”

With 40 condominium projects in the pipeline for downtown Seattle one might expect a glut of new units on the market. But tight-fisted lenders and hesitant buyers, both reacting to the nationwide credit crunch, have severely hobbled the once high-stepping market.

The pace of development has slowed so sharply that local experts predict a shortage in 2010 that could drive prices up. One consultant forecasts delivery of just 189 new units that year — down from an average of 1,100 anticipated in each of the prior three years.

Behind the prediction: No new condo project has broken ground downtown since the last two buildings — 275-unit Escala and 204-unit Equinox — got under way last summer, said the consultant, Dean Jones, president of Realogics Inc., a Seattle-based condo research and marketing firm.

Since it can take as long as two years to build a high-rise condominium tower, the dearth of new construction is pushing delivery into 2011 — assuming those projects, which represent more than half of the 40 in the pipeline, can find financing.

So it looks like that nifty rendering of Seattle’s 2010 skyline might be a bit off. So are the developers at Escala on to something, or off their rockers? I suppose by the end of the year we’ll know.

(Eric Pryne, Seattle Times, 04.26.2008)
(Matt Goyer, Urbnlivn, 04.27.2008)
(Jeanne Lang Jones & Kirsten Grind, Puget Sound Business Journal, 04.25.2008)