The in-city housing market in our Emerald City has a split personality. Buy or rent, the message is the same – it’s going to cost more and more to live here. This fact is reigniting the debate between renting and homeownership and developers are listening. Downtown Seattle is a very robust rental market, which has welcomed more than 12,500 new construction units since 2011. Despite this massive increase in supply, economist Brian O’Connor says rents have still grown by more than 40-percent over this term due to an imbalance with supply and demand. According to Zumper, Seattle is now in the top ten most expensive rental markets in the nation with a median price of $1,800 per month (half are more, half are less) for one-bedroom apartments. Average rents of newer apartment towers downtown can demand $3.50 to $4.25 per square foot, per month. So a 600 sq. ft. one bedroom could easily cost a renter $2,100 to more than $2,500 per month. That kind of monthly payment could service a healthy mortgage. Recently, Zillow stated that 22-percent of Seattle’s renters can afford to buy. They have the incomes and credit scores to own, so why don’t they?
“Convenience – most of the recent apartment demand is from transplants fulfilling job openings in the Seattle area – especially within the tech industry,” said Dean Jones, President and CEO of Realogics Sotheby’s International Realty (RSIR). “A new recruit will more likely rent first to see how their job works out before laying down roots and making large financial commitments. Generally speaking it doesn’t pencil to own unless the resident lives in the home for more than a few years within a rising market.”
That said, Jones is quick to mention that the residential surge on in-city housing began five years ago so he’s not surprised that many renters are now seeking to own.
Meanwhile, developers delivered only 866 new condominiums for sale over the past five years compared to 12,500 apartments; does that mean the demand for homeownership is now 6.5-percent of the population? Jones says the condominium market overcorrected because developers preferred to build apartments. They have been just as profitable with less risk and liability, benefitting from high rents and low capitalization rents (below 4-percent). Essentially, large investment funds have been paying as much for an apartment building as they would be worth as individual condominiums. Why? Because they think that rents will grow even more and the demand for housing in Seattle is seemingly insatiable. The Washington State Department of Licensing reports that in September 2016 alone, nearly 7,000 requests for driver’s licenses were processed, led by Californians relocating to the area. The majority of these new residents will settle in the urban markets of Seattle and Bellevue. Most will rent for now, but perhaps not for long.
“These new apartment towers are effectively incubating future homebuyers,” adds Jones. “After a few years of digesting rent increases and having no tax benefits, homeownership begins to make more sense. We’re seeing many of those renters becoming buyers – some immediately targeting resale opportunities and others planning ahead exploring condominium presales.”
Rising demand to buy has led to the return of condominiums in the pipeline, finally. Still no new, for-sale inventory had delivered in downtown Seattle since 2010, until 2015 when Insignia – a 698-unit twin tower condominium built in Belltown – began closing units that started preselling in 2013. In total, 350 units in the south tower were delivered in 2015 and 348 units in the north tower began occupying in 2016. This project was followed by LUMA, the 168-unit condominium tower on First Hill that begun closing during the summer of 2016. Approximately 40 units remain available for sale at Insignia and LUMA, as well as a few resale units that are being offered at higher prices. It’s important to note that most of the closings are presales that have occurred in the years past and may reflect lower prices than what could be achieved today.
Looking ahead, Gridiron in Pioneer Square will deliver 107 units in 2017. This historic brick building in the Stadium District is being converted into new construction condominiums with approximately 25 homes sold or reserved to date. Given the lack of additional groundbreakings and protracted construction schedules required by high-rise construction, it’s unlikely any new condominiums will enter the market in 2018. Additional supply isn’t expected until 2019 and 2020, and not before consumers experience significant increases in home prices.