From an economic perspective, to say that the first half or 2011 was lackluster would be an understatement. Positive results from the continued qualitative easing that the Federal Reserve implemented in 2010 have been sporadic at best, and all eyes are on the second half off the for any positive signs that the ship is turning around. Time will, as it always does, tell the story.

Lennox Scott suggests that there are some signs of improvement in the single family housing market, but that they are mainly to be seen in-and-around the urban job centers. That said, there are headwinds that may negatively impact demand as we move forward.

Glenn Crellin concurs with this sentiment and, on a more macro basis, provides interesting data on county level transactions and pricing. Additionally, he provides very meaningful data on housing affordability in our region which, not surprisingly, continues to indicate that affordability has not been as high as currently measured for several years. That said, stringent lending standards, as well as continued uncertainty on the part of buyers, is still keeping many “on the fence”. With total market inventory still elevated, he suggests that we are still likely to see further price erosion before we hit bottom.

New Home Trends data shows that plat recordings continue to remain muted, and that condominium product has, for the time being, all but dried up. One can assume that there is still no appetite for this type of product by the capital markets.

Information from Sarah Bland at the Department of Housing and Urban Development shows us that permit applications are up when compared to the first half of 2010, but much of the improvement can be attributed to multifamily product that will surely be delivered as apartments.

Talking of apartments - Tom Cain at Apartment Insights shows us that the rental market continues to improve which is not surprising. That said, it is my opinion that there is a need for a certain amount of caution as we look beyond 2012. Development of new product is occurring at a blistering pace and, with high expectations relative to rents, we have the potential to deliver too many luxury units to the market over the next few years.

Transactions of existing apartment projects increased by 24 percent over the same period in 2011 as institutional investors see improving fundamentals and the potential for high returns going forward. Capitalization rates continue to compress as rental rates improve.

Jeff Scanlan at CBRE is seeing continued strength in the office market with positive absorption occurring, but at a cost. Absorption is up, but rents are down. I am pleased to see any activity in the office market but it appears that, until we see new businesses moving in, and not just relocating, overall market vacancy will remain elevated.

According to Vic Ulsch at Bradley Scott, there are some signs that the Kitsap County market might be awakening, albeit very slowly! The current vacancy rate of 16.3 percent is 0.8 percent lower at mid-year than it was in February. This is the first year since 2005 where vacancy rates have decreased!

The industrial market is also exhibiting positive trending with absorption up and vacancy rates down. With effectively no new construction in the market today, I expect to see continued improvement in this sector.

Retail vacancies rose slightly in the first half of 2011 according to Susie Detmer at Cushman & Wakefield/Commerce. However, this can mainly be attributed to the closing of all Borders Books locations. In aggregate the retail market is performing surprisingly well.

Alan Jute & Scott Biethan at CBRE suggest that we are seeing modest improvement in the lodging market with occupancy and room rates up over 2010. That said, all locations are not equal and the Pierce County market is still in the doldrums. They do believe that fundamentals are good; however, if we see a further slowdown in economic activity in the U.S. and a prolonged stagnation in Europe, this may well change the picture.

As always, Brett Manning at the Federal Home Loan Bank offers a very interesting take on the financial markets. He opines on several topics but the one that is of most interest is that, for the time being, there will continue to be demand for U.S. debt and that this will function to keep interest rates low.

Desiree Phair at the State Employment Security Department gives us good data on the local employment situation and shows that our region continues to improve on the job front. She also cites a study forecasting that 722 occupations that are expected to grow between 2010 and 2012 and just 166 expected to decline – a great improvement over the same study published in 2008. She is not calling for an all-out recovery, but the early signs of one appear to be showing their heads at last!

Finally, Dick Morrill at the University of Washington, discusses the further data that has been released by the Census Bureau. In his piece he suggests that there are actually two Washington’s and that, although they are very different, they also exhibit interesting similarities. This first is the Seattle area (no great surprise here) where we have seen dramatic growth on the edges of our urban growth boundaries. What is interesting is that the second Washington (on the other side of the mountains) is also seeing significant growth in its metropolitan areas.

Additionally, Dick discussed the continued gentrification of Seattle with the displacement of minorities and the less affluent out of the City center.
My take on all of this very interesting data and commentary is that we are still heading in the right direction, but that the pace of improvement has all of us frustrated. We live in a global environment and have to accept the fact that there are outside forces out of our control that do affect us here in Seattle. When this is placed in concert with a government that cannot seem to decide what to do next when it comes to revitalizing our economy there are still substantial headwinds out there.

That said, I firmly believe that this is a country of innovators and entrepreneurs – especially here in the Seattle area. We will continue to push forward and all that's left is to hope that the government doesn’t get in our way!

As always, I would like to thank all of our contributors for the time and effort in gathering data and analysis relative to their fields of expertise.

Respectfully,
Matthew Gardner
Gardner Economics
Editor