August 8, 2016

Does latest MLS data mean more new condos?

Image by Weber Thompson [enlarge]

Condos in the 40-story, 374-unit Nexus tower are 80 percent reserved even though construction hasn't yet begun. Completion is set for 2019.

The Northwest Multiple Listing Service last week released its July sales data, which in King County — by far the region's largest and most expensive condo market — show relatively flat supply and sales figures, but a big jump in median price.

Compared to July 2015, last month's pending (900) and closed sales (855) were hardly changed. The real news was a 17.7 percent leap in price, from $297,500 to $350,000.

In Seattle, the median rose 20.8 percent, from $385,000 to $465,000. Those figures include both resales and new construction, the latter being harder to track separately and yielding an even smaller sample size.

So what are the implications for future condo development?

“We predicted it,” says Dean Jones of the July surge. The CEO of Realogics Sotheby's International Realty adds that, “We are already exceeding our July peak from 2007,” referring to the last condo boom before the Great Recession.

Realogics is currently marketing the 40-story, 374-unit Nexus condo planned for 1200 Howell St. It is now 80 percent reserved, though construction hasn't yet begun. Completion is set for 2019.

“It takes supply to draw out the buyers,” he says. “We're still playing catch-up” compared to other West Coast cities when it comes to condo development.

Even allowing for Washington state's strict construction-defect liability law (a perennial complaint among condo developers), Jones says, “We have crossed a threshold. It pencils out to build new condos.”

Matthew Gardner, chief economist for Windermere Real Estate, takes a somewhat cooler position on the MLS data. He warns of “wildly erratic swings” in the small sample size of the monthly MLS numbers. It only takes one new building like the Insignia, he cautions, to create a giddy bounce.

Gardner also said that reports of units flipping at Belltown's Insignia “are very familiar to back when the real-estate bubble burst.”

Never mind what consumers want, says Gardner; consider what institutional investors and banks want: A quicker, safer return from developing apartment buildings. High-rise steel-and-concrete condos like the Nexus are less likely to leak and cause lawsuits, but they carry a big cost premium.

Therefore, while he sees “more demand than there is supply” in the condo market, he asks, “how deep is that demand level at prices north of $800,000 or $900,000?” Such numbers may be affordable to empty nesters cashing out of expensive homes, but not to the average Amazon code jockey.

As a future market indicator, both Jones and Gardner cite Omni Group's two planned 41-story towers on the old Seattle Times' property. Designs haven't been approved yet, no start date has been announced, and the roughly 2,000 housing units could open as condos, apartments, or some combination of both.

“It could go either way,” says Jones of the project. “But if it comes on as condos, the market will digest it.”