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BY TIM FAHEY
Property Dynamics
When they're hot, they're hot and when they're not, they're not.
That axiom best describes the history of condominiums in the Puget Sound region. Since the Horizontal Regimes Property Act was enacted by the Washington State Legislature in 1963 (Condominium Law) and revised and rewritten, there have been about 69,000 units recorded as condominiums in the five county Puget Sound Region. Seventy seven percent or about 53,500 have been recorded in King County, with the remaining 23 percent distributed between Snohomish, Pierce, Thurston and Kitsap Counties.
Nearly half of the condos were recorded during the five year period from 1979 through 1983. Be cautious when calculating the number of "unsold" condominiums in the region. Many of the units which fall into the category are actually apartments which were converted to condominiums, and because of a lack of sales, were ultimately reconverted back to apartment rentals.
Conversions:
Eighty percent of the condo conversions occurred during the period from 1977-1980. That was a phenomena which was brought about by an extreme housing shortage during a period when an average of 200 people per day were moving into King County. Under normal conditions, that many people would be creating a demand for an additional eighty housing units per day.
Apartment owners, capitalizing on the extreme housing shortage, converted their rentals into condominiums. In turn, that created a tight rental market with vacancies hovering between 0.5 percent and 1 percent, causing rents to escalate, which encouraged public pressure to have cities and counties enact conversion ordinances to protect apartment residents.
Several jurisdictions did enact those laws, which ultimately put the brakes on conversions. However, by the time most governmental bodies acted, the proverbial cat was out of the bag.
When conversions were hot, it was not uncommon for apartment buildings with more than 200 units to be converted. As a matter of fact, at one time in 1979, we had 10 such developments with more than 200 units, including one with 750. Over the past year, in the five county area, we have had a total of 19 buildings being converted containing about 600 units for an average size of 31 units.
The present activity in condominiums conversions is relatively subdued for the following reasons:
Conversions today, for the most part, do not make economic sense. Apartment building owners simply want too much money per unit, to make the conversions work. When the professional converter adds in the upgrading costs, the legal and engineering fees, the selling, closing and marketing costs, there is typically no room for profit and risk.
Although some of the projects which have filed a recording declaration have been taken off the condominium rolls over the years, here are the estimates as of Jan. 1, for the four county condo market.
In King County, about 20 percent of units recorded are located in Redmond. Another 20 percent of the units recorded are in the city of Seattle, including Capitol Hill, Downtown, Madison Park, Queen Anne, University, Sand Point and Green Lake. About 37 percent of the units have been built or converted east of Lake Washington from north Renton to Woodinville, while 38 percent are located within the city of Seattle and north King County. The remaining 25 percent were distributed throughout all of south King County.
In Pierce County, about half of the recordings were in south Tacoma and about one sixth were in the Gig Harbor and in extreme north Tacoma.
In Snohomish County, about 70 percent of the activity has occurred in the southern part of the county in the cities of Edmonds, Mountlake Terrace, Lynnwood, Mill Creek and South Everett.
Kitsap County has had the most activity in the Bremerton and Bainbridge Island region.
To demonstrate the cyclical nature of condominiums in this region, it should be pointed out that for the first 10 years, there were only 1,676 units recorded; in the next five years (1974 - 1978) there were 5,487; between 1979 and 1984 there were 27,199 and in the past 12 years (1985-1995) there were 17,992.
From the recession period of 1982 through 1988 the condominium market became ice cold. Eight high rise condominiums in downtown Seattle and in the First Hill area were the victims of overbuilding and a recessionary period, and were either converted to rentals, returned to the lender or sold at an auction or sheriffs' sale. More than 500 units priced at over $200,000 were unsold. It was 1988 before the market turned back and the units were reconverted to condominiums and sold out in two years averaging about a 35 percent discount from the original asking price.
In mid-1990, the market became very difficult and 1991 represented the slowest building permit year we had in a decade. After about two years of difficulty with sales, the market began to perk up, and since about the autumn of 1992 closing have shown renewed strength.
Most of the new activity since 1992 has occurred in North King County and East of Lake Washington. In 1994, South King, South Snohomish, Pierce, Kitsap and Thurston Counties, which had been dormant for 10 years, sprung to life.
One of the changes in the 1990s has been the size of projects. While 15 years ago, the average size of a development ranged between 40 and 200 units, it is rare to find new projects with more than 30-40 units. The average of all projects in January was 39. Larger proposals are almost always phased.
More projects were recorded during 1994 and 1995 than at anytime since 1979. The number of units were noticeably less since the average size of projects have been greatly reduced.
Several traditional single family housing developers in the region are converting their efforts to condominiums, as the average sales price of all single family housing hovers around $162,000. As houses continue to escalate out of the affordable price range, look for moderately priced condominiums to take their place in the market as starter homes. In 1995, 62 percent of the multi-family units permitted in the Puget Sound area were condominiums, with 38 percent being either rentals or senior congregate care or assisted living.
There are some recent trends which are worth noting.
35 percent of the closing during 1994 and 1995 were to single females. That was an increase from about 20 percent in 1980.
As of January of 1996, there are more than 200 condominiums priced at $400,000 or more in the market area that are in planning, under construction, or actively selling. There is no guarantee that all of those which are in planning will proceed, but if they do, based on historical closing, we have enough of that product to last until 2010. We have about a two-year supply of every other category. It is extremely difficult to convey to developers that an extremely small percentage of households in the area can qualify for and want a $400,000 condominium.
Condominium sales in the moderate prices ranges from $80,000 to $150,000 will sell well in 1996, with about 3,500 closings for all price ranges in both resales and first time sales. At this time most of the economic indicators are pointing towards a better 1997.
Tim Fahey is co-founder and director of research for Property Dynamics, a Kirkland-based company that does market and feasibility studies for real estate development.
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