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The Next Sector Of The Market To Cool Off

A report from the Seattle Times in Washington. “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.”

“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. ‘There’s just so much apartment supply now. The next cycle they’re seeing is just going condo.'”

“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,’ said Marc Coluccio, chief operating officer for SolTerra developers in Seattle. Otherwise ‘you can lose money as a developer.'”

“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. ‘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.'”

“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.”

“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.”

“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. In all, condo prices plummeted 46 percent in King County over five years, from the peak in 2007 to the low in 2012.”

“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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This Post Has 13 Comments

  1. ‘There’s just so much apartment supply now’

    I said this was going to happen, four years ago.

    ‘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’

    Oh dear…

  3. “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. ‘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.’”

    Ahmed cracks the code….

  4. ‘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.’

    Selling the site (or trying to) is what almost all of downtown San Francisco’s developers just did. What these apartment guys are trying is going to be a disaster.

    ‘There’s just so much apartment supply now. The next cycle they’re seeing is just going condo’

    I don’t think it works that way Jeff. They are just drawing a check for a few more months til the money runs out.

    ‘It doesn’t make sense to build condos without that premium price point,’ said Marc Coluccio, chief operating officer for SolTerra developers in Seattle. Otherwise ‘you can lose money as a developer’

    Well yeah Marc, and if you already built them (as apartments), like you did, either get the suckers to pay that “premium” or walk away from the loan. Don’t panic!

  5. “‘Developers are kind of like sheep,’ said Windermere broker Jeff Reynolds. ‘There’s just so much apartment supply now. The next cycle they’re seeing is just going condo.’”

    So they were just speculating that rents will go up forever?

    “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.”

    2 years ago, wait isnt that 2016? Lets hope Gharib wasnt one of those campers and bidding wars winner. What would be a killer is if he sold his FB stocks to buy that condo.

    “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.”

    He knows or he is assuming? Waiting until a few years and lets talk to Gharib again to see if his assumption was correct. In seattle, they went from an apartment bubble to housing bubble to soon to be condo bubble.

    1. These mass conversions are out in the open failures to access the market. It happens over and over. Apartments to condos and back again. And it’s just wishful thinking to believe they will get $800k or more for these airboxes, especially when you can rent for less, as the article points out. This is going through the motions to pretend they aren’t all completely fooked.

  7. “‘Developers are kind of like sheep,’….‘There’s just so much apartment supply now. The next cycle they’re seeing is just going condo.’”

    And yet….

    “The number of condos on the market in King County has more than doubled in the past year, while sales have dropped 30 percent.”

    Then those developers are like sheep to slaughter. Teo’s tongue in cheek comment really rung in my head after reading this post!

    Harvard University
    Harvard Extension School
    “How to Use Real Estate Trends to Predict the Next Housing Bubble” – Teo Nicolais

    “….The First Indicator of Trouble

    The delineation point between expansion and market hyper supply is marked by the first indicator of trouble in the real estate cycle: an increase in unsold inventory/vacancy.

    This occurs as new completions from the mid-expansion phase begin to quench the market’s thirst for product. With occupancy rates above the long-term average, rents are still rising but the rate at which they are rising now changes: rent growth is no longer accelerating, but rather decelerating.

    This is a precarious time in the real estate cycle. And what happens next will determine how severe the upcoming recession will be.

    Wise developers, noting the change in direction of rent growth and factoring in the likely consequence of units currently under construction being completed, should choose to stop building. If you find such a developer, please let me know.”

  8. Ben, at this point I dont care if people believe its a housing bubble or not. The more supplies they build, the better for me. As more and more units get listed for sale or rental, the better for me. If people end up buying at peak or near peak, then its a lesson they need to learn.

    KEEP ON BUILDING BOYZ!

    1. I understand the sentiment. But a lot of people get burned with overbuilding. Big projects like this get institutional money, which means pension funds and life insurance companies. Vacancies on this magnitude hurt the bottom lines of everyone around them.

      April 19, 2018

      From Bisnow on Florida. “‘Palm Beach is completely on fire,’ said Todd Michael Glaser, a high-end homebuilder who made his name in Miami but has lately been concentrating on Palm Beach County. ‘I’ve never seen the amount of $8M to $70M homes as in the last three and a half, four months. It’s staggering.’ It’s not just single-family homes that are hot, but a new wave of high-end condos and mutifamily apartments, especially in downtown West Palm Beach.”

      “Kolter Urban President Bob Vail, who is developing the Alexander, said that there is something of an arms race for amenities in the new supply of high-end homes. ‘You see that across the U.S. There are [apartment] buildings in Atlanta, Denver and Dallas that are nicer and more fully amenitized than condominium units, because that’s what it’s going to take to get people to choose that building,’ Vail said. ‘It’s just sort of a differential advantage. It’s really become a race in those more in-demand markets.’”

      “Though the market is healthy now, the developers agreed a slowdown is possible as new supply takes time to be absorbed, construction costs rise and actionable sites get harder to find. Low salaries in Palm Beach County mean that not many workers can afford high rents. When an audience member asked whether they were concerned with an economic downturn, Vail responded half-jokingly, ‘Condo developers, we don’t forecast those kind of things, you know what I mean? We’re just go, go go,’ he said. ‘And the faster we go, the faster we get to the closing, and then, I’m not going to say we don’t care, but … ‘ The audience chuckled as he trailed off.”

      http://thehousingbubbleblog.com/?p=10407

      Think about what this guy said to a room full of RE people. He doesn’t care about the people who bought from him. About the lenders, the economy, he just doesn’t care. I’m not saying they are all like this, but it’s prevalent enough.

  9. “Wall Street’s Riskiest Loans Flash Dangers as Watchdogs Muzzled”

    (snip)

    “Take Bomgar Corp., which just lined up $439 million in loans. The deal marked the software company’s third trip to the debt markets this year. By one estimate, Bomgar’s leverage could soon spike to 15 times its earnings, raising questions about whether the firm could ever pay it off.

    “These kinds of transactions are increasingly common in the U.S.’s more than $2 trillion market for leveraged loans and junk bonds, and agencies including the Federal Reserve can’t do much about it. That’s because some of the most aggressive financing is being done outside the traditional banking sector.”

    (snip)

    “If regulators can’t maintain safe standards, it’s not just Wall Street’s over-levered corporate clients that might be at risk. Thousands of jobs could be at stake should companies start defaulting on their loans.”

    (snip)

    “If Bomgar does run into trouble, Jefferies and Golub may not take a hit. That’s because leveraged loans are usually either bought by mutual funds and other fund managers or packaged into securities that are sold to investors.”

    A nation of dummies.

    ttps://www.bloomberg.com/news/articles/2018-09-27/wall-street-s-riskiest-loans-flash-dangers-as-watchdogs-muzzled?srnd=premium

    1. !?!?!?

      BOMGAR???

      I used that software on a daily basis for years…it’s just a glorified remote desktop. It’s good at what it does but I can’t imagine it supporting those kinds of values.

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