Things are changing in Seattle.
The average home in Seattle costs over a million dollars. And now, rising interest rates have made mortgages more expensive. Homebuyers just can’t seem to get a break.
Condominiums used to be a gateway to homeownership. Even if you didn’t have a big nest egg, you could get your foot in the door and own a tiny slice of the “American Dream” while saving up for something bigger.
In my neighborhood, there’s a sign in front of a property, announcing the construction of a new apartment building. Someone has graffitied it with a message containing an expletive – it says, “F_____ condos.”
But the building under construction isn’t condos, it’s apartments. Actual condos that you can buy are much harder to find.
In fact, there may be only one significant condo project opening in Seattle next year: The Graystone.
Luis Fernando Borrero is with Daniels Real Estate, the developer of the 31-story Graystone condominium tower on First Hill, across the street from St. James Cathedral.
He takes me up the construction elevator to one of the unfinished floors. From there, we have uninterrupted views of Smith Tower, the Duwamish River, and Puget Sound.
On the concrete floor are lines marking where the walls will go. I walk along the outline of one. It’s a studio. Borrero says it’ll sell for around half a million dollars.
“Every time you put something on social media, people [say] – ‘Ah, you thieves, how can you charge $500,000 for whatever.’ Well, look where we live. The median [home price] is $900,000. So actually, we have affordable units, as part of the mix, we have middle-income units and we have luxury units on the upper floors. Like a community, like a system, like a city is. We have room for everyone.”
Condos should theoretically be the one of the cheapest kinds of homes you can buy. They split the high cost of land between many different people. Their small size makes them attractive to many first-time homebuyers and older homeowners ready to downsize.
So why are new condos so rare and expensive?
“Because not everybody has the same stomach for taking such risks,” Borrero said. Building condos is very, very risky, he said. Condo prices must be high enough to cover those risks. And so, almost all condos built today are luxury condos.
James Young, director of the Washington Center for Real Estate Research, studies bottlenecks in the housing supply.
“One of my big areas that I focus on is the rental to homeownership transition,” Young said. “As people and households want to move into homeownership, are they able to do so? What’s the housing supply available to them?”
Young highlights two big reasons why builders aren’t cranking out condos like they used to — timing and lawsuits.
Timing the housing market
First, we’ll look at timing.
It takes years to get any sort of building built, especially in Seattle, where the review process has extra steps. When the developer begins the process, they are taking a bet on what the housing market will look like when they finish.
“If I’m building condominiums, I have to be able to sell them when they’re finished all at once,” Young explains. “So I have to sell a hundred units pretty much at one time, or within a six-month period, in order to make the return on my investment. So I’ve got to time the market perfectly.”
The Graystone building took 10 years to go from an idea to a finished building.
Who can predict what the housing market will look like in 10 years?
Anything that speeds up that lengthy process would reduce risk — and help bring down costs, Young says.
You’re gonna get sued
The second reason condos are rare and expensive is the risk of lawsuits.
In the 1990s, Washington state lawmakers decided condominiums should come with a four-year warranty. The intent was to protect condo owners from shoddy workmanship, which was on the rise in the 1980s.
The problem was that, as materials became more modern, some contractors did not immediately understand how to properly install the new materials, explains Ken Harer of the Condominium Law Group in Seattle.
First, Harer said the problem was vinyl siding, improperly installed. Later, the problem was an exterior foam insulation panel system, that leaked and caused water damage when installed improperly.
It may be the threat of lawsuits that forced developers to improve their procedures.
Single family homes and townhomes don’t come with four-year warranties, Harer said. The warranty is unique to condos.
Legislators have attempted over time to limit the scope of what’s covered by the warranty, but in practice, James Young said many condo developers today still end up making expensive repairs for minor defects.
“So you’ve got all of your costs up front, but there may not be a market when you’re done — and you’re gonna get sued,” Young said.
Money and how much developers can ask of condo buyers in advance
Back at the Graystone, Borrero said those risks, along with the difficulty of getting financing for condos, make them more expensive.
He adds that, in cities like Miami and Vancouver, B.C., consumers take more of the risk themselves, putting up massive deposits of 20% to 50% that the developer can use toward development costs.
Dean Jones of Realogics Sotheby’s International Realty said such deposits become part of a developer’s “capital stack” (investment portfolio), which decreases their financial risk and the amount of money they have to borrow with interest.
Borrero and Jones said those massive deposits are illegal in Washington state. Here, the law prevents consumers from losing more than 5% of the cost of a condo unit, should the buyer decide not to go through with the purchase.
All these laws were created to protect consumers from fraudulent or irresponsible developers. And that’s important.
But Borrero said shifting all the risks onto developers is a tradeoff that results in higher costs.
“In some ways, the consumer protection under the Washington Condominium Act works so well, it scares developers away from taking the risk, which results in a relatively undersupplied market and higher housing costs,” he said.
Borrero hopes that his company’s condo building will time the market just right. A couple weeks ago, there was a party to celebrate the building’s progress.
“It was the end of the event and the sun came out shining and this place looked miraculous – there were rainbows – I’ll send you a picture – double rainbows,” he said. “People started going crazy, sharing photos online.”
But with interest rates rising, people can now afford even less home than they could a couple months ago. So it’s unclear if this developer made the right bet.
We began this story looking for reasons why condos are so rare and expensive. The answer, like most things in real estate, is complicated.
James Young said it’s worth it to try to encourage condo development with new laws. He said creating more condos could help more people escape the rental market so they can stop sending payment to their landlord and start investing in home ownership instead.
Here are some other reasons the Washington Center for Real Estate Research’s James Young says condos are rare and expensive:
Washington State’s Growth Management Act, while successfully protecting farms and forests around the Seattle metro area, prevents sprawl. Young said many cities use cheap suburban housing to meet market demand quickly (we’ll save arguments about the long-term costs of sprawl for another day). In those cities, the housing market is highly elastic and can respond to changes in demand very quickly.
Because this region cannot sprawl, it must grow denser to meet demand. Young said it’s not possible to build densely enough to meet demand by building only townhomes where single-family homes used to be. Greater density is needed — and yet with greater density comes greater risk to the developer.
The inevitable result of our failure to build densely enough is gentrification, Young says. Here’s how this works: When people cannot find affordable homes to buy, they stay in the rental market, which drives up rents further. Because after all, if someone had a little money socked away to buy, they could likely afford rent increases. Meanwhile, single-family homes, increasingly a scarce resource as the population grows and the stock of single-family homes shrinks, dramatically increase in value because some people are willing to pay for that lifestyle.
Seattle and Vancouver, B.C., have very different markets, so it’s not always useful for Seattle to try and achieve what Vancouver has. For example, in the U.S., institutional investors, such as Real Estate Investment Trusts, invest heavily in apartment buildings, but do not like condos as an investment. The reason is that apartments generate a trickle of reliable income, whereas with condos, the profit comes all at once, at the time of sale. This creates administrative challenges for these funds, because by law, they have to return large profits to investors as dividends unless the funds can be quickly reinvested.
In contrast, Vancouver, B.C., does not have large institutional investors like this. Large apartment complexes therefore have trouble getting funding there, Young explained. In the absence of an adequate supply of apartments, Vancouver is dominated by condos, which cater to individual buyers looking for condos as investments to rent out. These patterns have made Vancouver one of the most expensive places to live in the world, Young said.