Is new round of condo conversions headed our way?

By TERRY FAHEY
Research West

It's not lurking, it's right around the corner and gaining momentum. Developers are taking it slow and careful, but it's on the verge of explosion.

In the past, being in this market was like riding the Matterhorn at Disneyland. Phenomenal growth in the late Seventies crashed down to earth in the mid-Eighties, then shot back to outrageous levels in the late Eighties and plummeted again in the early Nineties. Enough action to make a grown developer cry.

Since the Horizontal Regimes Property Act was enacted by the Washington Legislature in 1963 (The Condominium Law), there have been about 73,000 units recorded as condominiums in the counties of King, Pierce, Snohomish, Thurston and Kitsap.

Through the first three quarters of 1997, King County recorded 1,661 units, Snohomish County recorded 397 units, and Pierce County recorded 264 units. Thurston County recorded 83 during the first nine months of 1997. That is already over 2,400 units recorded in 1997, which was almost double the 1,300 in 1996. We expect that over 3,000 units will be recorded in the Puget Sound region when all counts are in.

There has also been enough activity in Whatcom County to mention that 392 units were recorded in 1996 and another 100 were added through the first three-quarters of 1997.

Condominium conversions hit their apex during the period from 1977 to 1980. During this period there was an extreme housing shortage. At that time, an average of 200 people per day moved into King County. Today, estimates are very similar, with the employment market growing at about 60 jobs per day. Every employee brings a total of 2.8 people to the region, making today's growth rate at approximately 218 people per day.

Those in the conversion market are eager to accommodate this rapid growth. Owners of the Electra at 9th and Harrison were the latest in Seattle to announce plans to convert. Leslie Williams of Williams Marketing said over 125 units at the Electra have been sold since September. The owners sunk over $8 million into refurbishment and it's paying off.

However not all owners believe that it will pay off. Ken Walkky, vice president of income properties for First Mutual feels that fewer owners are considering conversions.

"It's not the cash cow that owners think. They have to empty their building, make improvements before selling. This really dries up the cash flow," Walkky said, adding that it is important for owners to objectively do their homework.

Other large conversions in the works include the Victorian and, although it is not an apartment building, Murray Franklyn is converting the Austin Bell into 42 condominiums.

Other conversion projects downtown include:

• Bay Vista Tower at 2821 Second Ave., 69 units.

• Grandview at 3rd and Blanchard, 110 units.

• Continental Place at 1st and Blanchard, 124 units.

• Royal Crest at 3rd and Lenora, 132 units.

Why are developers and owners considering conversion? It's the fastest, easiest way to bring home-ownership and a relatively reasonable sales price to the public. Land costs have skyrocketed and the red tape has reached epic proportions for start-from-scratch projects. If a developer can bring a building up to today's standards and provide all the necessary amenities, they can save themselves lots of time and make lots of money.

There is definitely a housing shortage. Single family homes are increasing at an average of 10 to 15 percent per year in value. The rental market is impossible for renters. In some areas such as Queen Anne vacancy rates are under 1 percent, according to Mike Scott of Dupre + Scott, a local authority on the Puget Sound's apartment rental market.

Scott says condominium conversions can be a very good business. Still, the margins are thinner than most imagine, so step in with care.

Condominium conversion was the motivating factor in just over 7 percent of the apartment sales in the past 12 months. While a small group of buyers planned conversions, only 37 percent said they definitely would not convert. That left over half the buyers undecided.

With such a tight rental market, owners and property managers are raising rental rates to levels that make a monthly mortgage make sense. The successful new and converted condominiums have something that makes them special. They are either in a prime location like downtown Seattle, Queen Anne, Lake Union or Kirkland, priced right or in an area with a very aggressive job market.

Location and price remain very critical factors. Careful, independent research should be conducted. The condominium market, especially the conversion market, can be tricky and hazardous. You'll want to make sure that it is worth the effort.

So is the condominium market hot or just scorching? Well, it depends upon where you are according to Leslie Williams, "All markets in the Seattle area are scorching. No cold spots from north to south in the Seattle market." Owners still need to be careful in Tacoma, Puyallup and most of the Olympic Peninsula. These markets don't have the same favorable characteristics as the rest of the Puget Sound.

Walkky believes that the two hottest markets are Kirkland and Queen Anne. He also mentioned that units above $500,000 move very slowly, although $250,000-to-$400,000 units are moving surprisingly well. Bothell-Kenmore is showing life again after a little hesitation.

Agreeing whole heartedly with Walkky and Williams is Moira Holley of J.L. Scott. Holley specializes in the downtown Seattle condominium market. She points to favorable interest rates and people catching on to what big city condo living is all about: being close to shopping, the opera, the ballet, Seattle Center, Pike Place Market, the waterfront, sports venues and live theatre. Other markets such as Chicago and San Francisco have seen strong downtown markets, and condominium buyers here have come to realize this.

Holley said the market is so strong and volatile today that comps from just six months ago are almost useless because prices have risen so dramatically in the last six months. She reports multiple offers on many units as late as Feb. 1 of this year.

We agree the market might still be only lukewarm for condominiums priced over $500,000. There are units well worth that price out on the market but we still see some hesitation at this level. Especially in Kirkland where last February there were 25 to 30 units priced in this range; today there are still about 17 to 20 left, enough for two or three years at the current rate.

Research West has done a large volume of work in Snohomish County. This county is hotter than King County and has been for over two years. Senior housing, single-family subdivisions, mini warehouses and condominiums have all seen phenomenal growth in Snohomish County.

Shawn Hoban, senior vice president of Coast Management in Everett, said, "Mukilteo, Harbor Pointe, Millcreek and Silver Lake are the hottest condo markets in Snohomish County." According to Hoban, conversions are a big part of this. Over the last two years, the cost of development has driven single family home prices to $130,000 minimum and up. Some conversions can still be had for under $75,000.

Purchasers look for condominiums for several reasons. No maintenance headaches, easy to leave, affordable and nice amenities. Developers see increasing land costs and added government intervention causing higher costs. It only makes sense to build multi-family projects to increase their return. It makes even more sense to convert apartments to condominiums as the owner or developer does not have to purchase the land or carry the money until he or she sees their project come to life in two to four years.

More than ever it is important to get a good honest opinion of where your property is and what the important factors are in successful conversions. The chances are that you will be successful in today's market but like any good investment, do your homework.

Copyright © 1998 Seattle Daily Journal of Commerce.