Seattle's Red Hot Housing Market

We’re all aware of the low inventory of single family homes and the price wars that ensue because of this.  However, an article from the Puget Sound Business Journal this past week highlighted that it isn’t just homes that are in short supply.  Demand for condos is also through the roof.  Last weekend the Nexus in downtown Seattle opened its doors to pre-sales with non-refundable deposits.  Despite the rain, a line grew AROUND THE BLOCK for people looking to secure a unit!  The units range from $350,000 to $3.5M, and the nonrefundable deposit was 5% of the purchase price (AKA $17,500 to $175,000 – these nonrefundable deposits weren’t exactly chump-change!).  The building isn’t even expected to open until mid-2019, yet by the end of the weekend 75% of the building’s 382 units had been purchased.  GET OUT OF TOWN!  This is officially crazy.  Link to this story is HERE. 

So it looks like single family homes, townhomes, AND condos are all in short supply, but where is all this demand coming from?  As discussed in this CNBC story, last year alone Seattle’s tech industry needed to import around 3,500 people with computer science degrees.  Really quick, let’s go back to simple economics:  high demand + short supply = increasing prices.  With Seattle and all its tech titans hiring faster than the UW/WSU and other area colleges can produce computer science graduates, the high demand and low supply of these candidates has resulted in the highest annual salary [adjusted for cost of living] in the country!  After accounting for cost of living, a computer science graduate has about $46,000 more annual spending power in Seattle than in San Francisco ($21,000 more than Chicago, and $47,000 more than New York).  No wonder the attraction to Seattle!  This article pretty much summarizes why I don’t think Seattle is in a housing bubble, and why prices aren’t going to fall anytime soon – Despite Seattle’s housing market appreciation, Seattle’s overall cost of living after accounting for average income is still much lower than many other large and desirable metropolitan cities nationwide.  I would contend that the appreciation rate will eventually slow, but I don’t see the housing market DEpreciating anytime soon.

Happy Investing!

Today's blog post courtesy of Kyle Bergquist, Guild Mortgage. 
Cell:  425-478-0961

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The positions, strategies, or opinions of the author do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates.

Homeless in Seattle

Last weekend Allie, Jack and I were at Greenlake when Kiro7 pulled up and asked to interview us on the subject of homelessness.  Long story short, according to the news crew there’s a bill being put to a vote at the Seattle City Council for whether or not we should allow homeless people to camp in “Safe Places”.  I’m all for keeping the homeless safe, but the “Safe Places” they were voting whether or not to allow homeless encampments were parks like Greenlake (which is where we were at the time we were asked to interview), Gasworks and other city parks.  This has got to stop. 

Seattle is becoming one of the most prosperous cities in America.  However, as our incomes and housing prices rise, so does our homeless population.  What’s the deal with that?  The 2016 One Night Count of Homeless in the Seattle and King County area (coordinated by Seattle/King County Coalition on Homelessness - SKCCH) tabulated just over 4,500 people sleeping on the streets in Seattle.  That’s a 63.28% RISE since the bottom of the Great Recession in 2010.  Are you kidding me right now?  There were less homeless during the Great Recession than there are now?  While Seattle as a city has outpaced much of the country in economic recovery, we’ve also increased the number of people sleeping on the street by over 60%.  This is so absurd to me that I can barely even organize my thoughts right now.  All I know is that I love our city – I love the culture, I love the relative safety, I love the beauty, and I love our growing economy  ß all things that will be negatively impacted if our resolution to homelessness is to expand their camping boundaries and allow them to camp in our parks.   In the end, I want everyone to know that I support helping the homeless find safe shelter and homes (but not more campsites).  They’ve had a rough go, and helping them doesn’t only change their lives, but all of our lives. 

Please Note:  As of last Thursday, the city is heading in a new direction to resolve the issue of homelessness.  We’ll see how it goes, but I’m at least relatively content knowing they’re trying. 

The One Night Count from 2010 through 2016 for those living without shelter are as follows:

Year	Count	Citation
2010	2,759	[6]
2011	2,442	[7]
2012	2,594	[8]
2013	2,736	[9]
2014	3,123	[10]
2015	3,772	[11]
2016	4,505	[12]

Today's blog courtesy of Kyle Bergquist, Guild Mortgage Company

Foreign Investment in Seattle

Another great training I attended last week was a clock hour class sponsored by Chicago Title that was a Regional Outlook for 2016. Featured speakers were Mike Appleby with Chicago's Builder Division in Snohomish county; Dan Shin, real estate attorney specializing in foreign investors from Asia; and Jennifer O'Neal, a cultural anthropologist specializing in foreign cultures.


There were several surprises to me in the content of this class:

• The Seattle metro area may very well be the #1 job market in the country, with a historic all-time low of 3.7% unemployment
• The Seattle area is projected to add over 1.2million people in the next 20 years
• Increasing the supply of buildable land, and dealing with water rights are two of the top issues addressing this population growth
• Seattle is the third most congested city in the US; we are #9 on the list of most well-educated states. Yet, the University District was recently named the most affordable, walkable neighborhood in the US.
•  The residential construction industry is the fifth largest local employer, ahead of Amazon, Starbucks, Nordstrom, and Costco.We are at an all-time high for the local construction industry.
• Zillow lists Seattle as the 2nd hottest residential market in the country, with prices estimated to rise 5% in the coming year. We had perhaps the fastest home price increases in the country in 2015.
• 40% of all Bellevue residents were born in another country
• 56% of area sales - and 40% of high end home sales - were to foreign investors, mostly Asian.
• The average college student debt is $35,000.
• As credit has tightened, an additional 5.2million people did not qualify for mortgages.
• One-third of all homebuyers now pay cash for their homes. 

Dan Shin's presentation was all about the explosion of Asian investment in the Seattle market, and it was fascinating. I will blog about that tomorrow.

Happy Investing!

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Good News Bad News

We are enjoying the greatest economy here in the Puget Sound area. However inadequate transportation planning could cut it short. There are other dark clouds on the horizon as well.

Jon Talton recently outlined a number of macroeconomic concerns in his January 30 article for the Seattle Times. China and other emerging economies dependent on Chinese investment have been struggling; oil and commodities prices have been collapsing; tech stocks may be overvalued; and there is trouble in the manufacturing sector, often a precursor to economic downturn.

The NY Times reported recently that American businesses are hoarding $1.9 trillion as a hedge against future economic turmoil.

While our tech industry has buoyed our local economy, other markets dependent on housing or manufacturing have been left behind in an uneven economic recovery. But there are several other concerns in Seattle's economy. Venture capital that fuels local tech start-ups actually declined in the fourth quarter of 2015. Boeing's employment numbers have dropped in 2015 to 79,238 employees versus more than 86,000 in 2013. Seattle risks overbuilding in its hot commercial market. Global economic slowdown has already impacted rail traffic dependent on coal and oil, and could also have significant impact on the new ports alliance between Seattle and Tacoma.

Chris Mefford, president of the research group Community Attributes, expects the metro Seattle economy to grow in 2016, albeit slower than in the past. Robert Kiyosaki has predicted a big crash in the national economy in 2016. Jason Dimond of JP Morgan Chase dismisses this possibility. The Federal Reserve puts it at a ten percent possibility; while Citigroup puts the chances at 65%.

What are you doing as an investor to prepare yourself?

Happy Investing!

Seattle Tops for Jobs

Seattle was recently named the number one city in the country for jobs by WalletHub. The top ten cities for jobs are all located west of the Mississippi.

Seattle is one of the fastest-growing cities and the country's 21st largest, and boasts a variety of large employers, like Amazon, Starbucks, Microsoft and Nordstrom. Read the complete article here.

Happy Investing!

Innovation and Entrepreneurship

Silicon Valley may get all the buzz, but don't underestimate the power of Seattle and its surrounding communities.

A new analysis by Bloomberg indicates that Washington State is the most innovative place in the country. According to the analysis, tech companies make up 21 percent of the state's public companies compared to 29 percent in California. Also, the number of people working in STEM jobs (science, tech, engineering, and math) came in at 2.82 percent of the total population compared to 2.26 percent in California.

Successful startup founders have all followed integral steps to become successful with an innovative business idea. Here are a few tips for creating a lasting and powerful business idea: choose an idea you think is important; find a company you can pour ten years of your life into. Write down a mission statement; articulate what you aim to do and why it is important. Focus on growth; think about where the growth is going to come from.

Happy Investing!

Seattle Real Estate Investment Market

Regional Overview

The subject property of this week's blog, 4354 S Henderson Street, is located within the City of Seattle. Following is a brief overview of the regional economy and real estate markets.

The Puget Sound Region (sometimes referred to as the Greater Seattle Area) is comprised of four counties: King County (whose major cities include Seattle, Bellevue, Federal Way, Kent, Shoreline, Renton, Redmond and Kirkland ); Kitsap County (Bremerton and Bainbridge Island); Pierce County (Tacoma, Lakewood, and Puyallup); and Snohomish County (Everett, Edmonds, and Lynwood).

Compared with the volatility of the national economy, the region has seen steady, if modest improvement over the past few years. This has been driven in no small part by robust hiring at a few companies, including Amazon, Microsoft, and Boeing.

Much of the rest of the job growth has been in the lower wage categories.

The region’s economy is still regarded as structurally sound and has outperformed the national level.

In terms of commercial real estate, apartments are in the ascendant phase of the cycle, but this expansion is primarily focused on the best, close-in locations. Investment in commercial real estate has improved in the Class A Core category of most product types, and there have been a few more motivated sales at fifty cents on the dollar, but the middle of the market is stagnant and almost un-financeable. The region is one of the top ten markets on the institutional buyers’ lists; there is just not much product available for sale at this time.

The current economic situation aside, the region continues to rank in the top ten national investment markets in several asset classes. Commercial real estate buyers’ longer-term view of the dynamics of the market is generally positive. Institutional investors returned to the market starting in early 2010 with numerous large Class A core property sales closing through the year. As with the national focus, apartments and stabilized Class A office projects are at the top of the list, followed by industrial and anchored retail. Interest falls off moving down in the markets by asset quality until reaching the distressed level, which has also seen an increase in sales activity for office properties.

Apartments became feasible in this vacuum as the end to sub-prime lending resulted in fewer potential buyers and concern about price durability kept more out of the buying market. Rental rates for apartments jumped up by 30-40% between 2004 and 2008. However, the combination of new inventory, 10,000 new units in 2009 and 2010, a burgeoning shadow market of condominiums and houses for rent and lax demand combined to increase vacancy and push rent discounts through most of 2009. Institutional investors returned to the market with a vengeance in 2010 with over a dozen major sales and capitalization rates back to the 5.0% range for close-in newer vintage properties.

Vacancy in the apartment market fell much faster than anticipated and the regional rate is already below the 5% mark and moving lower. One of the largest rent increases in the Seattle metro area in 2013 occurred in South Seattle (7%).

The demand has been attributed to both reduced access to home mortgages and also longer-term lack of confidence in home buying in general.

Fundamentally, most product types are still attractive long-term investments in the Puget Sound region, and local buyers have remained fairly active for small or owner/user properties.

Happy Investing!

Seattle Economic Forecast

Yesterday I attended the Third Annual Economic Forum, sponsored by Pacific Continental Bank. Generally, the Seattle economy is stronger than most other metro areas, ranking very high in job growth and housing recovery, while overall the national economic recovery is tepid at best.

Here are my notes from that event:

Tapering and Booming in a Tepid Economy
John Mitchell, Economist

...the game of Congressional chicken about the US deficit is the most dangerous game in the world today. US leader in hydrocarbons.

Fifth year of half speed recovery, minimal inflationary pressures, 1.92million jobs below the 1/2008 peak; uncertain monetary policy; intellectual property, housing leading the recovery at about 14% for the second quarter; investment leading GDP growth during the second quarter; job growth in leisure and hospitality is up quite a bit, with declines in federal and state government

Headline unemployment rate 7.3% in august, 37.9% of unemployed 27 weeks and over; avg. workweek for all employees rose, but the labor force was down by 312K for the month

Energy and gas prices cause great volatility in inflation index. Overall, core inflation fairly stable at 1.5%.

Interest rates still under 4%, although increasing on speculation that Feds will taper off their buying spree. Conventional mortgage rates ending 10/04/13 was 4.22%. "Never in recent economic history have interest rates been so low for som many for so long." Economist  4/6/13

Forecasts are for modest continued growth in GDP. Inflation is expected to stay low through 2015. Balance sheets are stronger, world economy looking better, housing making a contribution.

Headwinds:
Fiscal policy actions
Fear of Monetary shifts
Real wealth loss
Global shocks
Uncertainty
Diminished confidence
Aging population

Tailwinds:
Housing Upturn
Stock and Housing prices
Rising income and employment
Balance sheet health
Hydraulic fracking
Monetary policy
Credit standards easing
Europe/China stabilizing

Net worth of households up 45% from real estate in Q2 2013.

Housing permits up over 8% in last year in Seattle, loss five years ago down almost 18% (vs. 1% increase in Bremerton, 27% loss five years ago in Tacoma). The closer you are to employment centers, the quicker and higher the recovery, and more cushion on the downturns.

Deferred household formation was down during recession. Affordability index is down from record levels, but returning to more normalcy in historic terms.

Consumer debt is increasing (car loans, student loans, etc.). This bodes well for growth moving forward.

Fiscal policy is a drag on performance of the economy. Long term unsustainability of fiscal policy. Cuts proposed for 2014-2023: in discretionary spending for military and health.

"Economic policy mistakes were the primary cause of the Great Depression." - Ben Bernanke

Fed is buying $45B of treasuries per month with maturities 4-30years and $40B mortgage packed securities per month. total $85B/mo.

When will tapering on buying bonds begin? No data as long as the government is shut down. therefore tapering is delayed again.

"the job of the Fed Reserve is to mind the punch bowl so the party doesn't get out of control."

How will the experiment of affordable health care play out?

Some argue that there will be an explosion of entrepreneurial activity, since anyone can buy health care.

What are young people going to do? Young people's premiums go up dramatically under Affordable Health Care. 1% of income penalty if they don't buy - or should they just buy insurance when they need it?

We will become re-acquainted with the Law of Unintended Consequences.

Washington is ranked #7 in job growth; N Dakota is #1 in the country. Washington ranked 4th in the nation for real GDP in 2012.

36% of 18-31 year olds live at home, up from 32% pre-Recession.

Washington is still short 266000 jobs to get back to peak level.


Ron Busse, President, Pacific Continental Bank
Opportunities exist now for growth, but be forewarned: Poorly managed growth or expansion led to trouble pre-recession.

Credit market is strengthening to level not seen in last 5-7 years. Cash flow is king, but stable/improving trends ok. More opportunities for commercial real estate and business formation.

Owner occupied, multifamily and solid commercial real estate projects are areas for bank lending. Non performing loans are now below 1%; healthier banks now willing to lend. Bank capital in the PNW is overall some of the strongest in the nation.

Cash flow stacking issues are a problem for businesses that accept long-term financing for assets that need to be replaced in the short-term. Avoid unnecessary amortizations. Easy growth or expansion can be risky; best credit risks are those with a business plan.


Dan Peyovich, Howard S Wright Construction
What is it like a day in the life on a commercial jobsite? Primary goal is for construction workers to be safe.

How to be effective in the long term strategy? How are developers getting money? What are the primary commercial real estate market opportunities?

Delivery models are changing in the industry. What is the contract that construction company holds with owner, and how does that affect product?

Contracts do not identify price upfront, but figure out what price options are. Private sector tends to be better able to meet budgets, bring projects in on time and on budget. Latest major shift using construction managers onboard with designers earlier to have better impact on timing and pricing. Typically do not require hard bids upfront as in the past,  new contracts with design-build contracts which tend to lead to better pricing and timelines.

Big shift is to bring the contractor on early, to impact architecture and design. Multiparty agreement that ties all parties to success of the project is dependent on trust and collaboration. Metrics show that there is a direct correlation between cost effectiveness and trust/collaboration. Trend today is for more partnerships and strategic alliances between designers and contractors.

Financing solutions and trends -
New academic growth in construction and real estate education. There are some emerging trends in public private partnerships to get capital needed to develop projects. This allows owners to get the capital they need to move forward quickly, perhaps using bond measures. Some contractors will provide financing for owners, e.g. for energy efficiency retrofits, etc.

Follow the yellow cranes down to a lot of apartments. Apartments are leading the way in terms of profits. Oversupply of apartments? In two more years, expecting more continued building and growth. More and more apartments are being built, and rents are increasing. More highrises in downtown Seattle and Bellevue. Most developers are waiting for anchor tenants before building starts.

Innovation
How does technology affect the construction business?

Tablets are now the norm for drawings and plans, vs. old school rolls of blueprint. contractors are now using technology in design, safety and constructability on the jobsite that increase productivity and drive costs down. This is a major paradigm shift on the construction jobsite.

Relationship with architects has changed as well; closer relationships emerging between contractors and architects. This leads to efficiencies in safety and cost, time-savings, accountability for owners.

Technology is making construction more efficient, resulting in savings in time and money for owners, investors and tenants.

Happy Investing!