If you want a lesson in how quickly our volatile housing market can whipsaw on mid-range buyers, take a walk west of Seattle Center, where>"/>
If you want a lesson in how quickly our volatile housing market can whipsaw on mid-range buyers, take a walk west of Seattle Center, where the colorful Expo62 is nearing completion at the corner of John Street and Second Avenue North. With 114 units over ground-level retail, the complex was planned as a condominium by local developer Intracorp. It paid $6.7 million for the lot back in 2005, when demand for condos was insatiable. The sales center opened last spring with annoying pseudo-hipster marketing slogans supposedly inspired by the 1962 World’s Fair. (“Let’s get together baby! Expo62 has de Stijl and then some!”)
Located just north of Denny from pricier Belltown, Expo62 listed most units from $250,000 to over $500,000--not exactly luxury, not a cheapo conversion job, but roughly in the mid-market where demand is highest, particularly for buyers hoping to live close to downtown. Among those early buyers was Nicholas Cenac, who put down money in May of last year, then received an alarming letter from Intracorp last month:
“We want to express our appreciation for your interest in Expo62. Due to market conditions, Expo62 is being sold to a privately held real estate company and will be opened as luxury apartments in 2008.”
This came a shock to Cenac and his fiancée, who had long been renters in Lower Queen Anne (aka the LQA), and were hoping to buy close to downtown and keep their car use to a minimum. He and other buyers describe visiting a rather empty Expo62 sales center (just across Denny from the rival Trio condos). When Cenac found prices too high and walked out, he told SW, an agent from Windermere Real Estate chased him out the door to offer a discounted unit. So he signed a pre-sale agreement and put down earnest money. (He declined to specify the amount, likely in the $10-15,000 range, which Intracorp later refunded with low interest.)
Following the Intracorp letter, he complained on a local real estate blog, “The pricing for my unit was offered below market value. As such, I feel that by failing to close this sale, I am out an appreciable sum. Further, I feel insulted and irritated by Intracorp’s miserly offer of compensation--$10K off my next Intracorp purchase--and the, to date, four phone calls asking my fiancée to send in the rescission agreement, [and] the three latter calls made after she clearly stated we needed time to review the document.” Other buyers vented similar thoughts on the same blog. (A “rescission agreement” basically voids the prior purchase-and-sale agreement.)
Cenac consulted a lawyer, and later wrote to SW that “a satisfactory resolution” had been reached.
All of which begs the question of why Expo62 succeeded in selling only 17 of 114 units. What went wrong? Intracorp didn’t return repeated calls from SW, but earlier issued a statement to the P-I: “We feel that the sale of Expo62 for high-quality apartments is the best decision for this particular building and location.”
True: market demand is up for apartments. Since 2002, according to Dupre + Scott Apartment Advisors, the rental vacancy rate has dropped from seven to three percent, and rents have steadily risen during the same period. This makes owning a rental building a newly attractive investment for those in search of regular annual income. Thus, Expo62 was easier to sell as a whole than in its parts.
Condo demand is a different story, with conflicting numbers. The Northwest Multiple Listing Service reports that for King County, the number of condo sales dipped almost three percent from 2006 to 2007. And for each month of 2007, active inventory on the market rose dramatically compared to 2006. But during the same annual period, last year’s median condo sale price increased 12 percent to $286,000 from 2006, hardly the sign of a collapsing market.
Meanwhile, Intracorp just unloaded a second condo project, the 92-unit Domaine (pictured above), to an apartment developer, removing more inventory from the market. After opening its sales center in June of 2006, it sold only 25 of 92 homes in the $300-800,000 range. (Whether you’d want to buy on Aurora is a different matter, though renters will now have excellent access to Canlis, a Volvo garage, grow-light shop, and hookers.) Meaning some buyers have been off the market for as much as a year. Now they, like the Expo62 exiles, are back on the hunt again in a much less friendly mid-range market.
Another Expo62 refugee, Mike Plummer, told us, “It seemed like they didn’t know where their price points were. I think they thought the market was where it was two years ago.” He had been looking at several condos, he explains, and signed a pre-sale agreement in December of 2007. “I started hearing rumors about it being converted to apartments in mid-December,” he recalls, so he didn’t lock into a mortgage.
Thus, being a later buyer than Cenac, he was less distressed when those rumors were realized. He happily applied Intracorp’s $10,000 discount coupon to one of its Belltown condos, the Parc, where he’ll soon take residence. (The coupon is basically a sweetener, apportioned at the developer’s discretion, from purchase price, closing costs, upgrades, or condo dues--or some combination of all those expenses.)
Still, says Plummer of Expo62’s phased releasing of units, “I think they really shot themselves in the foot with that. If there was a unit you really wanted, they wouldn’t show it to you.”
Instead, per industry practice, the condo was being sold, or “released,” in stages. It’s a concept explained to me by Brett Frosaker of Columbia Real Estate Group: The first units made available in a condo are the cheapest, priced to sell more quickly and attain critical mass. “You wanna bring it to the market and dump that 20 percent immediately. Then raise your prices $10,000 every weekend.”
This initially attracts first-time buyers like Cenac and Plummer, who “want to get in on entry-level pricing.” And as the developer ups its percentage of units sold (10 percent, 20 percent, and so forth), Frosaker explains, the construction lender feels better about repayment from the developer. And if a developer’s building stalls, like Expo62 and Domaine, “Now they have an opportunity, an exit strategy that was not afforded to them in the past.” I.e., the quick and profitable sale to an apartment investor (often a large REIT, or real estate investment trust). The developer gets its money out, the lender gets its money back, and the only people hurt are the early phase condo buyers who are forced to go shopping again.
Or are they really victims at all?
Not according to Frosaker, who tracks condo sales for the industry and runs a consumer site for buyers, www.CondoCompare.com. “In the cases of these people who haven’t been shopping for six months, they haven’t really been harmed. It depends on your perception of what’s a mid-range building. There is a supply at the mid-market level.”
But here’s the catch: Expo62 and Domaine “were not in the affordable category.” And that’s the category where Seattle is short on supply.
Those two echelons can be bracketed by any number of prices. But let’s say affordable means under $350,000 for a one bedroom. Mid-range then goes up to maybe $500-700,000.
The problem for buyers is a confusion between the two. For Frosaker, budget shoppers expecting new construction, granite countertops, one bedroom, and a parking space in an in-city location (e.g. Belltown, LQA, or Cap Hill) are kidding themselves. “Affordable in Seattle either means subsidized…or small, and no parking.” He points to the success of Belltown’s moda condos (yes, the developer spells it with a lower-case ‘m’): small units, many of them studios, many without parking spaces, a model no developer has yet repeated.
Or, in a trend that has cooled of late, according to the city’s Department of Planning and Development, affordable means the conversion of an existing old apartment building into condos. (Reader, I bought one.) Though the state legislature will likely enact further restrictions on apartment owners seeking to paint and flip their properties, and though Ballard’s besieged Lock Vista apartments have been spared condo-ization (for now), that inventory will only gain value when the present market reaches a new equilibrium.
Which will only come too soon for some condo buyers. Frosaker emphasizes, “We’re in a very small window in the normal market cycle. That next wave is gonna make it a helluva lot more expensive” to buy. That may come in five or six years, he estimates. Those new apartment towers being planned in the Denny Triangle will be full. The condo market will be tight. Amazon will be in South Lake Union. And people will be clamoring to buy downtown.
And you know what will be a smart play then? Flipping Expo62 and Domaine back to condos.