Record-Breaking Number of Projects in Seattle: A Recap of the 4th Annual Construction and Development Summit
The Seattle real estate and construction market may be in the late innings of an unprecedented growth cycle, but the region’s key developers are cautiously optimistic about moving into extra innings. At the recent Bisnow Seattle Construction & Development conference, Jeremy Vermilyea of Schwabe’s Real Estate and Construction team moderated a thoughtful discussion about where the Puget Sound real estate and construction market currently stands and where it is headed. Attendees heard from Kevin Wallace of Wallace Properties, Claudio Guincher of Continental Properties, Chris Foley of Polaris Pacific, Brandon Miles of the City of Tukwila & Southside Alliance, and Blake Carbonatto of the Rush Companies.
Several themes emerged from the discussion. As Seattle’s supply of apartment and office inventory continues to grow, developers are being more cautious, yet are still looking for (and finding) the right opportunities. Construction costs have risen sharply in large part due to the short supply of specialty trades. This squeeze on skilled labor is putting more price pressure on general contractors. The labor shortage affects traditional developer-contractor relationships as well as self-performing developers, like Rush. Even with this price pressure, though, developers are still making sound investments for which they expect reasonable returns.
To the extent we may be nearing the final innings of the current economic cycle, the panelists all observed that this cycle is starkly different from the subprime mortgage crisis. The panelists all observed that financial institutions are being more diligent and more conservative in their lending practices. There is also less speculation among buyers, and purchasing decisions appear to be based on current economic factors rather than inflated, speculative factors. From the permitting side, Brandon Miles, the lone government representative, observed that the vast majority of the projects in the pipeline are being developed by experienced and reputable businesses, unlike in the period leading up to 2007 and 2008.
Claudio Guincher and Kevin Wallace offered keen insights regarding the Seattle condo market. While there are some condo projects in development, most players are steering clear, for two primary reasons. First, under Washington law, the amount of earnest money that is forfeited if a condo buyer does not close on the sale is limited to 5% of the purchase price. Therefore, the developer is holding the majority of the risk in the event of a market downturn. Developers experienced this firsthand several years ago when scores of prospective condo purchasers walked away from their purchase and sale agreements, and the developers were left with a complete (or partially complete) building with no occupants. In other words, the financial risks a condo developer must undertake to construct a condominium are in many cases greater than the protection afforded by the earnest money if buyers do not complete the transaction.
Second, builders have experienced that condominium projects nearly always result in litigation under Washington’s Condominium Act. Litigation costs are often high and hard to predict. The risks simply outweigh the rewards for these projects, and that is a major factor in the influx of apartment projects we have seen in the last several years.
The event also featured discussion with John Kilroy of Kilroy Realty Group, who has established an impressive presence in Puget Sound. Kilroy spoke of the importance and economic viability of sustainable development, especially with the generation of millennials interested in sustainable housing and workplaces. Other contributors included Paul Rahimian of Parkview Financial, Dave Worley of Swinerton Builders and Brent Robinson of DCI Engineers.