I was doing some research for one of my clients this week who is interested in getting into a pre-sale construction project for the purpose of selling the property shortly after the construction is complete next year. While this may have been a lucrative practice a couple of years ago, the current data for 2200 Westlake investors tells an interesting story.
Specifically, there are 31 Westlake condo units on the market as of this post. Morever, 12 of them have been on the market for over 90 days and 7 of those have reduced their initial asking prices (price drops ranged from $20,000-$485,000). Regardless of whether one thinks flippers ought to make outsized profits or not, it’s interesting to try and figure out what’s going on. What has led to this challenges of all those pre-construction buyers who snapped up vulcan units, descended on grand openings, and listed their units for sale moments after they got the keys?
The bar chart below shows flipped units on the market by days on market — less 30, 31-90, more than 90.
Why are so few units actually selling and so many sitting on the market for months? Here are some factors:
- Developers took a lot of future profits off the table. By forward pricing the units at pre-construction (charging above-market prices for the pre-construction units approximate to expected market prices when construction is complete), pre-construction condo buyers are unable to further mark up the price of their units to make material gains. This phenomenon is demonstrated by many flippers asking for above-market prices on their resale units and not getting contracts after nearly 100 days for sale.
- There are more flippers than buyers. Simply a matter of supply and demand, condo buyers today have more choices than they used to where they can consider older resale units, other pre-construction projects, or other flipped units.
- The current reality is less exciting than the pre-construction vision for South Lake Union. Many of us are ecstatic about the presence of Whole Foods and most will agree the quality of the construction has been very good. Nevertheless, after you’ve bought your dry-aged Rib Eye and take the elevator back to your unit, you still need to deal with the traffic congestion and lack of a formal residential community feel to the area.
If you are an actual resident of one of these units or about to become one, shouldn’t you be alarmed? Not really. The good news is the flippers will sweat it out a little, drop their prices to match the market, and perhaps take a small financial lump or rent out their units to make a normal return a few years out. Actual residents on the other hand should rest assured that while their units didn’t spike in value the moment they took posession, they’re still worth about what they just paid for it (most real estate works this way) and they’ll enjoy material, reasonable, and steady gains over the next few years.
Technorati Tags: 2200 Westlake, Vulcan’s projects, South Lake Union condos, Denny Triangle condos, Seattle Real Estate, Seattle condos
I agree with Wendy on the overall feel of the area. The development is coming but at this point, who wants to live right now in an area under construction? 2200 Westlake is a very nice place, but it does have that highrise/hotel feel to it that doesn’t quite feel “homey.” I also think that there is a lot of skepticism that the market will fizzle out and so people have been waiting and waiting for that. Soon, I’ll bet people will be making their decision to buy as they see that although the market may have cooled off, it is steady.
We ended up buying at Rollin St. Flats. We like the whole vibe of the SLU area and this building fits with our style. The floorplans are so much more open than say 2200 Westlake or Enso that it really feels like you might even be able to move furniture around if you get tired of it looking one way. (I’m such a girl!) Rollin is only 11 stories (or 12?) so it doesn’t seem to have that “hotel” feel that we are trying to stay away from. Also, we figure that in 2 years a bit of the construction mess will be gone. And not to mention the plus of having the railcar at your feet.
I am wondering what others think of Rollin Street Flats?
another plus is our gym Rain Fitness is building a brand new gym a block away. Talk about great news!
Wendy,
I think I have to respectfully disagree. I think that Cosmopolitan is more in lines of what you are writing about, but 2200 has a feel and a jive all its own.
Seldom do I come home that I don’t see a few residents enjoying the stairs to eat their dinner. Seldom do I wish I were in Belltown with all the crime. Seldom do I wish I would have bought a house.
The truth of the matter is that I have all the amenities I want without the hassle. I have Whole foods (in one stretch, I ate there 14 times in 10 days), I have the Pan Pacific Hotel (Where my parents stayed when they visited from Boston earlier this year), I have a concierge (ok, I wish I had more than one concierge), I have the movie room (which I continue to showcase movie night with friends), the gym is the best that I have seen in the city (Used to live in Seattle Heights, but looked at almost every building in Seattle before taking the leap), and I have a pool table and foosball table for my friends after the movie.
I think the real problem is that people are trying to sell the least desirable homes with the least desirable price tag. I see units come on the market and sell as quickly as they come on, if the unit is a good unit with decent views.
I can’t say the same for the Cosmopolitan, which my realtor said they had over 70 units for sale!
I expect about 10% of the units in my building to always be on the market. With 261 homes, that means that I expect 26 homes to be on the market at any given time. That means that we are 10 over the norm. I doubt that will be the case in a few months.
Oh, and as far as traffic congestion: I don’t know what you are talking about. I walk to work in downtown Seattle, and the only congestion I get between home and work is avoiding the construction of the Street Car (although I get a free bus pass from work and will be able to use it this year to take the street car 1/2 way to work). The other congestion? Standing in line at Whole Foods to get my food and waiting for the elevator to circle back to the lobby.
I think I will either purchase at Enso or Rollin Street later this summer. I like the idea of Rollin Street because the space is so large and unencumbered. I like Enso because the finishes are so nice and I love the steel and glass buildings of Vancouver.
Decisions, Decisions!
Andrea,
What a well written response however I do have one question, if you like 2200 so much, why are you mentioning your pending purchase / move to Enso or Rollin?
Seth
Cosmopolitan will be losing their views soon with such nearby construction.
I agree that the Cosmo is a riskier purchase because of the furture lost views and the majority of urban life currently happening in the more western areas of the city. If someone is buying now and looking to enjoy the Seattle lifestyle, Cosmo may be a better purchase over 2200 Westlake. However, SLU sure does look exciting, but not for another 5 to 10 years. Until then, it’s still rather…dead (being that it’s located in the opposite direction of the more dense areas of Seattle).
I really like Wendy’s defense regarding 2200 Westlake (since I’ve yet to hear any). Regardless of 2200 Westlake’s construction quality or opinions on lifestyle, how can someone NOT feel like a ‘sucker’ when purchasing a presale flip?
Although the SLU neighborhood will be a nationally recognized BOOM in the years to come, I’m not sure if I would feel comfortable having to answer everyone’s questions about why I think the investment aspect is soooooo much better than just buying at Newmark Tower a block away from Pike Place Market for substantially less per square foot. Isn’t one of the biggest reasons we buy downtown urban real estate in Seattle because of the ‘cool’ factor? What’s “cool” about a newer Cosmopolitan or 2200 Westlake unit compared to a comparably priced loft in Pioneer Square or lower HOA dues in a traditional Belltown condo?
It is easy, in hindsight, to say today that 2200 pre-sale pricing was ambitious. I don’t think buyers in 2005 actually thought the prices they were paying were way above some future market value, otherwise they wouldn’t have bought. Though, there are a number of flippers looking for big returns and they’re likely the ones sitting on the market.
“There are more flippers than buyers.” I’m not understanding this statement. There are exponentially more buyers than flipper. I agree the market has soften and there’s greater inventory and choices as you stated. I believe flippers make up a very small fraction of the inventory.
Regarding traffic, whether you live in Belltown, Capitol Hill or Queen Anne, you’re going to be dealing with traffic congestion. Also, it seems that most of those sitting on the market for a long time are the high end units.
John:
I don’t think forward pricing means buyers believed they were paying above future market values. You’re right on that they wouldn’t have bought if that were the case. I do think the developers captured most of the premium over the then market rates (I sense the Lumen guys did this too). The buyers probably thought there would still be appreciation beyond the developer premiums which is most likely true, just not a few months after construction was completed.
As for the more flippers than buyers point, I agree in spirit with Wendy that it doesn’t take too many flippers to extend the average time on market for all the units. In fact, if there are many more buyers for 2200 Westlake than flippers, they wouldn’t be sitting on the market for so many months. Perhaps there are lots of buyers for 2200 but not at the prices the flippers want, which brings us back to your first point…
“(price drops ranged from $20,000-$485,000)”
Price drops of $485,000? This must be a typo.
The price drops is for one particular unit from $1,675,000 to $1,190,000.
Seth,
My friends have continued this and I will do the same:
Buy a condominium at X value today. Hold onto it for a while, then buy a new construction condo that will be completed in two years. Now, you can afford much more 3-5 years later, so be a bit ambitious. Sell the old condominium at X+ (3-11% appreciation) thereby giving you much more downpayment on the new condominium while keeping your monthly payments approximately the same.
I want to continue to do this in the South Lake Union neighborhood because I feel they have the best potential for continued and sustainable growth.
I attended the ‘condo symposium’ earlier this year, and one of the economists that talked (forget his name) said that downtown is moving North to South Lake Union. If a huge economist is saying this, why shouldn’t I buy into it? Further, I am not paying anything more to continue to ‘move up’ in my size/view of my home, except that I am out 5% of the next purchase price. Once I have enough saved for the 5%, I will do the same thing with Enso or Rollins. I was sad to see that my favorite floor plan is sold out at Enso, so I may have to settle on my second choice.
My question to the flippers is this: How greedy are you? We know you are making a killing (I know I would if I sold today).
Where can we find a listing of these 31 available Westlake units? Everywhere I looked online, including RedFin, Windermere, and John L. Scott, only lists a handful of available units at the most.
Here you go.
http://johnlscott.com/PropertyList.aspx?GroupID=46943705
http://johnlscott.com/PropertyList.aspx?GroupID=46943768
http://johnlscott.com/PropertyList.aspx?GroupID=46943818
Thanks for the links Wendy! I just sent you an email about helping me find a condo in Belltown.
Wendy –
Good article and I think you are pretty accurate in your assessment. Another factor that is not helping is the high HOD (homeowner dues). I’ve heard they are going to 24/7 concierge, which will be a good improvement. But they have also just instigated a new $1000 move-in fee! That’s the highest I’ve seen in Seattle. Makes the Cosmo look better and better with its low HODs and low comparative price-per-foot.
Hi Wendy- Thanks for the interesting post. I also find the flipper situation quite fascinating and have written about it over at the Cosmo Seattle blog.
Pricing of the available Cosmo & 2200 units seems to be stabilizing from the earlier days of radical variation in price for an otherwise similar value. You mention that currently flippers “will perhaps take a small financial lump”. This suggests some incremental appreciation over pre-sale price—but I wonder. Have you looked at the sale prices of 2200 and Cosmo re-sales and determined that flippers are in fact profiting? I question this particularly given the carrying cost (and opportunity cost) of 90 days on the market. I also wonder, *who* are the flippers?
My theory regarding the flipper demographic (with only anecdotal evidence) is that many flippers work in the real estate industry. It makes intuitive sense as realtors and others in the industry know the real estate market and often, regularly invest in the real estate market. The other contributing factor is that someone in the industry would likely be able to avoid some, perhaps even all, of the sales commission, thus increasing the potential for profit. Any thoughts?
I agree that the pricing of the SLU units has not left much on the table for immediate appreciation. When you purchase a condo prior to completion (or initiation of construction) you are sharing in the project’s development risk and should share some piece of the upside. I don’t see this happening now. In addition, you are buying into a vision of what the neighborhood could be, but paying prices as if its already there. Savvy buyers should factor in the risk, and not just look at appreciation. If I expect 5% per annum from the market for a complete project, I would expect some premium to that to account for my assumption of development risk of both the project and the neighborhood as well as interest rate risk (some cases) and opportunity cost for the deposit (although somewht mitigated by intererest -bearing accounts).
I like Veer Lofts and South Lake Union, but $675 for 5-over-1 wood construction? Heavy timber or not, that seems excessive.
Agree with Chris. Our agent steered us away from certain pre-construction units a couple of years ago for this exact same reasoning. We ended up investing in a resale unit in Belltown.
Another way to describe this phenomenon of certain over-hyped projects leaving no money on the table for short term appreciation is the concept of “underwater options.” My colleagues at MSFT will know exactly what I’m talking about.
Lance,
I work at MSFT and don’t see the correlation to underwater options at all. Stock options were always priced at then current market values, and were never intended to generate short term appreciation. I see nothing wrong wtih pricing pre-contruction pricing based on conservative estimates of appreciation in the 2+ years until completion. It’s not yet built, so why should you get to reap the benefits of appreciation until it’s completed and you take ownership? Until it’s done, the developer is taking the risk, not you. It’s up to the individual to determine if that estimate is realistic or not. In the current real estate market, there’s going to be risk no matter what, so whether you’re buying an existing unit, or one that has not yet been built, you could see depreciation sometime between now and then.
As for the comment about factoring in risk in the price of a project or neighborhood, it all depends on the neighborhood and the project. SLU is already well on the road to being a rejuvenated area, with new corp hq’s, retail and current construction underway. This coupled with the solvency of Vulcan, make factoring risk into SLU tough to swallow. Sure you can factor risk into the overall RE market, but come on, find someone who doesn’t think SLU will be a thriving community within the next 4-5 years. On the other hand, if you’re buying in say Georgetown, or Columbia City, then by all means, factor the neighborhood and growth prospects into you how value the property/area.
Jerry:
You said: “I see nothing wrong wtih pricing pre-contruction pricing based on conservative estimates of appreciation in the 2+ years until completion.”
The problem is the 2200 Westlake developer didn’t go with “conservative estimates” but instead went with highly aggressive estimates. By the time buyers took posession, they found that they actually paid over the current market value for their homes. It’s not just 2200 Westlake, Lumen is equally guilty of this.
One thing no one seems to mention is that the developer, while greedy, is not the one in this picture. Buyers who purchased pre-sale with the sole intention of flipping and who agreed to pay the developer’s prices have no one to blame but themselves.
I agree with you Lance, they do only have themselves to blame. That’s why it’s critical to do a thorough evaluation of the existing market prior to venturing into pre-construction waters. There’s always some amount of risk in any RE purchase, especially given the last several years of extremely strong growth. If people were willing to pay any more than current prices plus historical averages for appreciation for comparable units, they unfortunately were too caught up in a business that they didn’t know enough about to make an informed purchase. Those people that made their purchase and intend to live in 2200 will eventually reap the rewards as homeowners have for years. Those that thought it was a way to make a quick buck are getting a lesson in reality.
As a proud 2200 owner, one thing I do regret is taking the advice of the agents in the sales center a little too easily. I was so focused on being able to get my hands on a unit, I actually thought using the on-site agents would give me some advantages (like access to the most sought after floor plans or at least knowledge of how the whole allocation process worked).
Now that I think about it, I’m kinda disappointed that it wasn’t made more explicit to me that my agent was employed by the developer and charged with representing my interests at the same time. I guess I’m partly to blame for not doing more research. Sigh.
Nevertheless, even if I had my own external agent or if I did more homework on my own, I still would probably have bought a unit there (perhaps not as pricey of a unit as I ended up buying) but perhaps might have looked more closely at alternatives before making the plunge. I still think the condo will be worth a lot more in a few years so I’m not worried about the flippers right now.
I think what we are seeing is the much-famed Seattle market finally starting to soften. We’ve been tracking about 6-8 months behind the rest of the country, and now I fear that some seriously bleak times are ahead for real estate appreciation. While I’m generally happy with the building (traffic? construction? not a problem at all for me so far; I love SLU), I can’t help but feel like I could have gotten a better deal on a condo if I had waited a couple of years.
With all of the new inventory that is slated to come onto the market in the next 2 years, consistent increases in interest rates, and the disappearance of the urgency to buy (a frenzy that propelled so many into the market), I think we’re in for a reality check… not drastic, but potentially prolonged.
I certainly wish I had waited it out. I think it will be a fantastic time to buy starting at the end of this year, with significant downward price pressures becoming more widespread in this area at that time.
I agree with the others that the pricing from 2200 sales center was out of whack — on the other hand, no one forced those buyers to buy at such high prices. I disagree with “disappointed 2200 buyer” that the *overall* Seattle market pricing will come down. Most units in other buildings are selling well at firm prices. The people trying to sell 2200 Westlake units simply asked for above market value and came out of the gates trying to use a Cost+ model of pricing. At the end of the day, I think the Seattle market will continue holding up but the 2200 Westlake (and soon Lumen) people who overpaid and are trying to make a quick buck will be disappointed in the short term.
From what I can gather, there aren’t many original owners (spring-ish ’05) who have paid more for their units than what they could sell them for today. The presales prices might have been “agressive”, but hardly makes an early purchaser foolish.
If there are any owners out there who feel like they might’ve gotten themselves into something that’s worth less than they paid, do yourselves a favor and pull up the 2200 complex on condocompare *dot* com and look at the prices paid for similar units. Bare in mind that the completed resales (mostly in 2007) were completed in an environment where lots of buyers are on the sidelines and there is much financial pressure on the part of the flippers to sell.
I’m going to venture a guess that most of the owners (especially ones who bought early in the process – pre-March 2005) will be happy with what they see.
Also, notice that of the 35 active listings on the MLS, there is a shortage of “moderately” priced units. I can see that there are about 11 units under 550k.
Of the 11, 3 are studios/open 1-br, 6 units are on lower floors (3rd or 4th), and one is slightly overpriced (S1205; even worse, the pictures suck and it’s not even staged!). Finally, 2 of the more “desirable” units (S503 & S703) have gone to STI in the past week or so.
There are 12 units at or near the $1 million mark (which is always going to be a tough sell). The other 12 are tweeners (>550k, <950k)... and I'll be honest with you, I just haven't had much time to look into yet.
The numbers just don't bare the evidence that "good" units at the 2200 are stagnating on the market. As is the case in any property, less desirable units, those priced out of line with "the market", or when lots of people are on the sidelines (wait-and-see-approach)... activity will slow.
Ahhh…yes…S503…STI at $499,900.
Think the seller is actually getting 499.9k? I dunno…I’m guessing he’s not.
almost 6 months carrying costs…and it appears that they paid 508k for it originally.
Yeah…sure…they made money.
EconE,
My comments aren’t focused on the performance of flippers at the 2200 (though the original post does). I’m speaking to the angle of the owner who bought early & is in for the long-ish haul. My observation is that despite the results of early resales, those in the profile noted above aren’t in as nearly a bad financial shape as the doom & gloom crowd purport.
Plus, when Tuta Bella opens later in the year, I’m guessing S503 will be worth 900k! No wait, that’ll be the HOA dues. *angry grumbling*
I bought a unit at Rollin Street and am very happy with my purchase. I think you have to consider that for the $$ you’re purchasing a lifestyle as well as a unit. I’m much happier with the floorplans at Rollin (the units are so much larger than 2200 and Enso). I’m glad to wait for 2009 occupancy when most of the contruction in the immediate area will be complete.
I just love comments like this one:
“If a huge economist is saying this, why shouldn’t I buy into it?”
A huge economist whose name she can’t even remember…
I believe the president said there were WMDs in Iraq too. Did you believe him as well?
Hey, LCubed. We bought a unit at Rollin Street too. We are feeling good about our purchase as we like the floorplan, area, and plan to live there for quite a while! Look forward to seeing you in a couple of years. Hee hee.
I found the comments on here fascinating, especially Andrea’s. This is a whole sub-culture of people I have never met – the pre-sale condo buyer. I expect Andrea is late twenties, early thirties, makes a lot of money and spends a lot of money. I can’t believe her math. She puts 5% earnest money down on a, what, $550K unit that she doesn’t have to close on for two years, when she plans on making more money. Then she moves into a nicer, better, newer condo and sell her old one to fund the difference between her old mortgage and her new one. Between dues, insurance, taxes, and mortgage, she is spending $40K/yr on housing. She pays an additional $55K every two years in frictional real estate costs, and puts $25K – $30K down at a time. Renting the same place would probably cost her around $25K per year, leaving her with about $50K/year to invest in the stock market.
Wonder how Andrea is doing now…