As Glenn Crellin so aptly stated, it appears as if Seattle has now succumbed to the national recession. This report was an interesting one to discuss.
As reported by New Home Trends, the Spring of 2009 offered some positive signs with many new construction markets seeing an increase in transactional velocities. However this has, for the better part, been offset by retraction in pricing. An uptick relative to the 4th quarter is to be expected; however, it appears as if developers are now becoming more serious about the disposition of inventory. This being said, we are a unique market geographically and there are substantial variances in the numbers relative to location as well as product type.

We note that the Seattle market saw generous increases in transactions in the first quarter of this year relative to the 4th quarter of 2008. However, pricing of both attached and detached product declined. In Bellevue, attached sales were down, but prices were up and, in the single-family arena, sales were up substantially, but prices retrenched by 12 percent over the prior quarter!

Looking out to the other three counties, we note a similarly mixed bag. In Tacoma, attached transactions were down but prices improved. Detached sales surged and prices were higher. Everett suffered on the attached sales front but velocities were substantially higher, and moderately higher in price. Finally, Kitsap county’s sales velocities surged and pricing was positive for attached product.

Financing potential developments has become nearly impossible. This is reflected in the slowing of permit activity across our region. In as much as developers are to be lauded for slowing down their own activity (whether this be a forced move or not), I am starting to be a little concerned for the future. At some stage we will get through this recession and start to create jobs. This, in turn, will generate structural demand for housing. Will we have sufficient new product in our pipeline? Permitting is very time consuming. It will be interesting to see how this plays out.

Sarah Bland at HUD continues to provide insight relative to affidavits and excise taxes collected. Her chart showing these items from an historic perspective really does show us how far we have fallen. In King County, taxes collected are now back at 2002 levels and affidavits are below that of the recession of the early 1990s; disturbing indeed. I was pleased to see that there appears to have been a little push in March of this year. A move that I hope continues. In the other three counties, we note similar declines in tax revenues and affidavits. It is pleasing to also see that all counties are seeing improved transactions as of this March.

J. Lennox Scott makes an interesting point about our market—that we appear to be a “Tale of Two Markets.” Stability and lower inventory levels appear to be in place relative to the more “affordable” markets (those with a propensity for conforming loans) while the more expensive (jumbo loan) markets still appear to be stagnant.

First time buyers are key to growth in the residential world. When they buy a home, it generally starts a chain reaction of transactions that, eventually, ends up in sales of the more expensive units at the end of the chain. Personally, I am hoping that there will be an extension to the $8,000 tax credit that is being offered to first time buyers through November; we shall have to wait and see. Many of our lawmakers are now starting to understand that a recovery in housing is critical to an overall economic recovery.

Talking about affordability, in addition to his discussion of price and velocity of residential real estate across our region and state, Glenn Crellin looks at affordability in our region and I continue to be pleased to see that move up housing continues to become more affordable as prices soften further and mortgage rates flatten; however, this is not totally endemic. He notes, with some concern, that first time buyer affordability is not where we want to see it. It is still very difficult for people to get on the first rung of the ladder. This has an obvious effect on inventory levels and he notes that we remain oversupplied in our region.

Tom Cain of Apartment Insights informs us that the upward pressure on vacancies that he mentioned in the Fall report has become more pronounced. A result of this is that concessions are now far more prevalent than we have seen in years. With the plethora of new product being delivered to our region over the next 18-month period, this smells a lot like 2001! Apartment developers and owners should take note. It took us four years to stabilize following the last glut of inventory.

Apartment buyers continue to remain skittish as valuation has become increasingly difficult and financing continues to restrict transactional activity. Greg Wendelken reports that sales in the first half of 2009 are down by an astounding 66 percent from the first quarter of 2008. The financial repercussions of this are astounding with $61 million in transactions, a figure 50 percent that of a year ago. Needless to say, there has been a flight to quality along with declining transactions that has pushed cap rates up by 70 bps.

As I mentioned in our last report, I remain very concerned with the office market in our region. New development, of any form, is inherently dependent on job growth. This applies to our commercial, as well as residential markets.

As Jeff Scanlan notes, and in keeping with our theme of a “Tale of Two Cities,” the Eastside market is in better shape than in Seattle. The Eastside, thanks to new space being occupied by Microsoft and T-Mobile, is still seeing activity. In Seattle, however, we actually added to our stock of available product by over 600,000 square feet; not an encouraging sign when we are developing over 3.3M additional square feet of product.

Negative absorption is a function of businesses leaving our area or moving to smaller, cheaper space. We are aware of numerous firms renegotiating with their landlords. This results in either the space being given up (increasing vacancy rates) or a renegotiation in rent (a reduction in effective rental rates). In either circumstance, it is not a pretty picture.

Continuing his positive statements in our last report the Kitsap County office market, Gary Gartin of Bradley Scott, suggests that his region is seeing positive employment growth. A “kicker” to this, though is that the growth is in the public sector (mainly Navy) and that this has not generated any private, office using tenants. This has pushed up vacancy rates somewhat but it appears as if developers have halted most plans for new space so the likelihood of overbuilding does not appear to be an issue.

The industrial market of the Puget Sound suffers similarly with new product being delivered into a market where there is little new demand. There is a direct correlation between our markets health and demand for consumer goods as they enter through one of our ports. We can use this as a crystal ball of sorts and he suggests that we will see improvement in this market when imports and shipping increase.

Kelly Ross over at Cushman & Wakefield believes that the tough times that were seen in 2008 are flowing over into this year. It should not be a surprise as consumers still have their pocketbooks firmly closed for everything other than necessary items and, even in this category, they are comparison shopping in a way not seen for years. Retail vacancy rates have started to climb in most sub-markets and a potential “second shoe” drop may occur as more firms file for Chapter 11 protection as was the case with Linens ’n Things and Shoe Pavilion. These are early losses from an increasingly competitive market.

She suggests that our region will remain sluggish through the middle of 2009 and that there will be further downward pressure in rents as tenants renegotiate leases. Potential projects have been shelved which will help our area as we emerge from this recession.

We are lucky to have brought Alan Jute and Scott Biethan from CB Richard Ellis on board to give us their outlook on the lodging market; one that has its own issues at this time. In as much as most other land uses saw a marked pullback throughout almost all of 2008, it didn’t affect the hospitality industry until the fall when collapses in firms such as Lehman Brothers and AIG saw firms cut their costs dramatically. This affected corporate travel and, therefore, the hotel industry as a whole.

An obvious result of this was a dramatic decline in RevPAR (revenue per available room) and occupancy rates across our region and the country as a whole. As with all development forms, new projects already underway add keys to our marketplace that we really don't need right now.

Transactions slowed as the credit market dried up and I do not expect them to improve in the near-term. They conclude that “belt tightening” will continue through this year but there are opportunities for well capitalized companies to pick up distressed assets that should prove fruitful in the mid-term and beyond.

Brett Manning, from the Federal Home Loan Bank, in his inescapable manner equates our banking climate to that of the NCAA Tournament. Without getting into specifics, he discusses the Credit Crunch of 2008 and where to place the blame (which he deems to be widespread!). His is a fascinating article that captures the essence of the current malaise and the fact that there are no concrete answers as to how we, as a nation, will come out of this and more importantly, when. I, personally, am more a disciple of Keynes rather than Smith. Morality is, indeed, a requirement of civilization; however, Keynesian theory of government intervention in economic crises will probably win out irrespective of the dubious morality of those that got us into this mess in the first place!

Sobering comments come from Doug Pederson over at Conway Pederson. He suggests that our local recession will not conclude until the start of the second quarter of 2010 and that we will lose nearly 68,000 jobs in our region; more severe than 1981-1982 but not as bad as the 2001-2003 recessions.

Richard Morrill from the University of Washington discusses the loss of the Long-Form Census data, which has been replaced by the American Community Survey. The Census has just released its data for the 2005-2007 period, and he offers some fascinating insights relative to the demographic shifts in our region.

The term “it could be worse” has become the new “good!” In a continuing effort to find the bottom of the market, we have become reluctantly accepting of fairly miserable market conditions. It is too early to say whether we have found the bottom or not. Without a doubt, the ‘reset’ button has been pushed in respects to values and until we see the capital market open up their check books again, we will certainly not see anything like the number of projects start that we have seen for the past several years.

It is my opinion that we are close to the bottom, but it is a spongy one. Assuming that we don't see any surprises on a macroeconomic level, I still hope that the second half of this year will see some stability return to the residential markets. The commercial markets, however, still have some more turmoil to endure, but conditions will improve in 2010.

Matthew Gardner
Gardner Johnson LLC
Editor