Luxury Condos: Overbuilt and Under-Marketed

BY CHERYL LOTZ
Palmer, Groth & Pietka

For sale -- new condo $1,500,000. Call 624-0000.

It takes more than a line in the classifieds to sell a penthouse unit in one of Seattle's luxury condominium buildings. Yet many developers and brokers continue to use a passive "list and wait" marketing strategy.

Demand for high-end units is small. There have never been more than three sales of units priced over $1 million in any one year. According to the Puget Sound Multiple Listing Association, there currently are 23 new units for sale in the region priced over $1 million. Eleven are in downtown Seattle, three are in downtown Bellevue, and the rest are in downtown Kirkland.

All of the new high-end units in Seattle are in One Pacific Tower at First and Lenora and Seattle Heights at Second and Vine. Bellevue Pacific Tower contains the only penthouse units in downtown Bellevue.

One Pacifc Tower is the newest of the downtown high-rises. The 25-story tower is one block from the Pike Place Market in the trendy Belltown neighborhood. Units have sweeping downtown and mountain views to the south and west. Penthouse units are offered on a semi-shell basis with the buyer responsible for buying and installing the wall and floor coverings.

One Pacific Tower made a special effort to target buyers from around the Pacific Rim, but this market failed to achieve the developer's expectations. One Pacific Tower began pre-marketing in 1993, two years prior to its completion in August 1995. Reportedly 44 units have sold including three penthouses; however, one was bought by one of the partners in the development.

Seattle Heights, which has a greater number of smaller units, was built by Cosmos Development in the Denny Regrade. This 25-story, 235-unit building offered a wide range of unit sizes and prices, from 435-square-foot studios to 3,200-square-foot penthouses. The tower reportedly has only 30 units remaining but most of these are the more expensive units in the building. Only one penthouse sale has closed since marketing began more than three years ago.

In downtown Bellevue, Cosmos completed its pioneering Bellevue Pacific Tower in July 1995. This 23-story, 171-unit high rise is part of a mixed-use development that also contains office and retail space. The project features 360-degree views and has units ranging in price from under $100,000 to $1.18 million. To date, only 11 sales have closed, none of which are penthouses. The developer has been unable to close any sale over $532,000.

A sizable share of the Eastside luxury inventory is in smaller low-rise projects, mostly on Kirkland waterfront. All the vacant land along the Kirkland waterfront has been built up, so developers have begun moving to hillside sites overlooking Lake Washington.

The first such project in downtown Kirkland is Marina Heights, a 21-unit low-rise on Central Way. The concrete building has units from 1,600 to 2,200 square feet priced between $425,000 and $1.48 million. Units feature very expensive finishes and large terraces, but are not on the waterfront. The project is expected to be finished by late spring. As concrete construction, Marina Heights will be the test case for high-end units in downtown Kirkland.

Seattle and Eastside real estate agents are struggling to update their marketing strategies as the supply of $500,000-plus units swells past 150. They are recognizing that each of the three main luxury markets in the region -- downtown Seattle, downtown Bellevue and Kirkland -- has its own distinct market niche and buyer profile.

There is little cross-over between buyers of Seattle and Eastside units. Also, buyers are stratified by price.

According to Dan Calvo, marketing manager for One Pacific Tower, it is essential that the profile of prospective buyers be clearly identified in advance, especially for concrete and steel buildings.

Calvo said the buyer of a $500,000 unit is already a Northwest resident. Perhaps it's a cautiousness related to Seattle's Scandinavian heritage or maybe it's because you can still get a large, new, single-family home in this area for under $500,000, but the Northwest buyer is a finicky consumer. He or she is difficult to land and takes a long time to commit to a particular unit.

According to Mike Dattilo, marketing manager for Bellevue Pacific Tower, buyers in this price range are notorious for backing away from deals.

Because the inventory is relatively small, the buyer of the $750,000 unit is able to consider all the alternatives in this price range (waterfront, single family, new construction, resales, etc.) and will choose the unit that best serves his or her particular lifestyle.

The inventory of $1 million-plus units is even smaller, but so is the market. Brokers must look even farther afield to sell their $1 million-plus units. Some buyers may be local, but the majority are from cities where housing prices are much higher. Units priced above $1.5 million attract buyers who can afford to live anywhere in the world.

While these criteria can be applied loosely to all expensive units, the preceding discussion applies pretty much to downtown Seattle. Rules change for the Eastside.

One of the biggest problems facing the luxury condo market is that half of the units under way now are on Eastside, but there is little agreement about what Eastsiders want. Cosmos built an excellent building in downtown Bellevue, but the demand is failing to materialize. Many observers are speculating that the project is premature.

Only "Eastsiders" live on the Eastside, and market evidence shows that most Eastsiders like to be close to the ground (look at the success of The McKee). Developers have pinned their hopes on the legion of Microsoft millionaires and other affluent techies, but for $500,000, these people can buy really nice houses closer to work (and the ground). Young people can be attracted to stimulating, cosmopolitan neighborhoods, but downtown Bellevue lacks the energy needed to attract affluent young buyers in any numbers.

On the other hand, recently built high-end projects in downtown Kirkland have sold mainly to senior citizens. In Lake Pointe and Marina Pointe, the two most recent projects, 70 percent of the buyers were over 65 years old.

Strategy is not tactics and vice versa. Developers may be shooting themselves in the foot by using ineffective marketing tactics. Traditional marketing tactics have consisted of listings, broker open houses, brochures and display ads in upscale publications.

There also have been two basic philosophies in the marketing of luxury units. The most prevalent approach has been to strive for as many pre-sales as possible, using marketing brochures, focus groups and advertising. The other approach is to delay marketing until a finished unit is available for viewing, as will be done at Marina Heights.

Intracorp has tried to get the best of both worlds in its marketing campaign for Waterfront Landing, a three-building, 235-unit project on Elliott Bay in downtown Seattle.

Although it is across Alaskan Way from the water, this project will pioneer in an area that is primarily industrial in character and has a mainline railroad track abutting the site. The history of projects close to the Alaskan Way Viaduct indicated that sales could be slow.

Intracorp used innovative marketing techniques and sophisticated technology to show the 78-unit Viaggio.

Intracorp, however, decided to build Waterfront Landing in phases and use cutting-edge marketing techniques. Phase I of this project, the 78-unit Viaggio, was marketed using an innovative virtual reality system that showed prospective buyers views they would have from their units. They also created mock-ups of unit kitchens and baths.

Buyers were initially attracted by an extensive multi-prong media campaign which included direct mailing of high-quality brochures, press releases and display ads in major publications. This marketing blitzkrieg was wildly successful: the entire first phase (including the penthouse) was pre-sold within two weeks.

Marketing makes a big difference, but it does not, by itself, guarantee success. The Viaggio's sales may simply reflect its price point and the fact that it is the only waterfront property available in downtown Seattle. This theory is being put to the test by Intracorp, which is using an improved version of its Viaggio marketing effort to sell Phase II of Waterfront Landings, as well as the Portsmith in Kirkland.

Although the final results are not in, Intracorp's is gaining a reputation as the best condo marketer in Seattle. Maybe it's because of the company's experience in the larger, more mature Canadian market, where multifamily living is a more integral part of the urban experience than in the western U.S.

Marketing is important, but in the end it all comes down to demand.

At present, the Seattle market is not big enough or sophisticated enough to support demand for more than one to five luxury penthouse sales per year. Although downtown Seattle is slowly becoming a more interesting place to live, we do not have the sophistication of New York or San Francisco. Kirkland and Bellevue appear to be Northwest markets for condos.

Developers must face this fact and either design their projects to contain fewer luxury units or become better marketers.

Cheryl Lotz is a senior appraiser with Palmer, Groth & Pietka in Seattle. She specializes in condominums as well as other commercial properties.

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