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The Central Puget Sound Real Estate Research Committee is a non-profit organization whose profits are donated to worth while real estate causes. Please continue to support the report with your subscriptions and you suggestion of how the report can be more useful to you in the future.The Central Puget Sound Real Estate Research Report is prepared semi-annually for King, Pierce and Snohomish Counties by the Washington Center for Real Estate Research, PO Box 644844, Pullman, WA 99164-4844. Telephone: 800-835-9683; Fax: 509-335-7863; e-mail wcrer@wsu.edu. One year subscriptions (including sales tax) are $163.20. Single current issues are available at a rate of $103.36 (including sales tax). [CLICK HERE FOR SUBSCRIPTION FORM] The Executive Summary provides highlights to the content of the current report. Spring 2007 Executive Summary Since our last report, hiccups in the sub-prime lending market and contemporaneous cyclical downturns in housing starts gave rise to fears that the general up-trend in real estate was over. Renewed talks about “housing bubbles” and other fear-fads surfaced in the popular media. A more calmed read of the national scene would suggest that real estate continues to be a healthy sector of the economy. From all indications, the Central Puget Sound market continues unabated, with our primary concerns being lack of space to meet demands and inability to deliver affordable housing. Our population is continuing to grow at 1.8% per year, while excise tax affidavits (a measure of the volume of housing transactions) is actually down in all four counties. Add the two together, and we get a continued housing squeeze. Speaking of housing, new home construction in the region continues strong, both in quantity demanded and in pricing. King County’s average new detached home price in the last quarter was $576,771 (on volume of 1,078 sales) while attached homes averaged $351,085 (on 1,584 units). Interestingly, the more expensive detached homes were on the east side, particularly in Bellevue, while the priciest attached homes, on average, were found in the City of Seattle. Snohomish County followed King County’s pattern, with the more expensive homes in the county as a whole ($457,859 detached, $275,768 attached) contrasted with the city of Everett ($354,292 detached, $237,353 attached). However, following its usual pattern, Pierce County’s more expensive homes were in Tacoma ($400,626 detached, $335,851 attached) versus the county as a whole ($368,853 detached, $277,022). Kitsap County’s results were somewhat skewed by the fact that only two new detached homes sold in the City of Bainbridge Island last quarter, and these averaged a whopping $899,500, contrasted with the average detached price for the county as a whole of $318,512 (on volume of 182 total units). However, attached sales averaged $453,786 in the city, versus $400,625 in the county, suggesting that the pricier homes indeed were in the city limits. Residential listing and resales data helps illuminate the issue. According to a report from Standard and Poors, this market continues to experience one of the highest price appreciation rates in the country—11% in 2006 versus a negative 0.2% for the U.S. as a whole, and available listings under $500,000 are below a 2-month supply in our market. A major driver is healthy demand fueled by continued in-migration of new residents, and any softening in demand in our market is offset by a shortage of supply. Indeed, residential resales volume dropped in all four counties—a 15.3% drop in King County up to a 25.7% drop in Snohomish—but in the face of continued shrinking supply, prices continued upward. Illustrating the supply problem is the total excise tax collections, which topped $567 million in King County for 2006 on 54,976 applications. The dollar total was up a respectable 6.2% over 2005, but reflects the fact that substantial housing price increases was somewhat—but not totally—offset by volume declines. Total affidavits were actually down 8.9%. Contrast this with a 25.9% dollar increase in 2005 over the previous year, and a 27.8% dollar increase in 2004, and you see what we mean. King County excise tax collections for the first two months of 2007 were down very slightly from the same period in 2006, perhaps reflecting the abysmal winter weather. March collections were up about 6% in dollar amount, although down about 5.8% in volume. Snohomish, Pierce, and Kitsap Counties all had similar excise tax collection patterns, with affidavit volumes down slightly and total volume up marginally as a result of pricing increases. A discussion of housing affordability closes out the residential owner-occupied analysis. In summary, it continues to be a problem, although the negative trend in affordability seemed to ease a bit in at the end of 2006 as a result of softening house price trends. However, this trend is only slight, and so-far the data only suggests a one-quarter relaxation in an otherwise abysmal affordability trend. We’ll wait for our Fall, 2007, report to see if this trend is reflected in additional quarters of data. Of course, housing isn’t the only story—it’s just the part that seems to grab most of the headlines. Apartment vacancy rates continued downward to 4.3%—not the lowest in the past 20 years, but nearly so. The driving factors include the afore-mentioned in-migration, softening in the owner-occupied volumes, and record breaking condominium conversions. As a result, the average rent in the region is $883, up 6.9% from a year ago. Only 15% of apartments are offering any sort of incentives, down from 65% two years ago. The average incentive, “when you can find one”, is less than two-weeks rent. Not surprisingly, apartment investment trends continue substantially upward, with average prices per unit up 9.3% in just six months to $121,368 per unit. The gross rent multiplier is now at 12.3, up from 11.6 six months ago. Our actual cap rate has now fallen thru the 5% barrier down to 4.97%, down from 5.12% just six months ago. In the last six months, investors closed on $1.58 Billion in apartments, up from $1.35 Billion during the prior six-month period. And what about office space? Well, to understand that, it’s important to understand employment trends. According to Conway Pederson, employment in the region is growing at 2.8% annually. Two of our key “basic” employers—Microsoft and Boeing—continue to expand operations into the intermediate future. As a result, asking rents increased about $0.63 per square foot across the market, up to the highest rates we’ve seen since 2001. Downtown Seattle saw rents jump $3.00 per foot, the biggest increases since 2000. Construction and absorption are both positive, and vacancy rates remain about where they were last year. The industrial market also shows substantial new construction and healthy absorption. The first quarter of 2007 marked the 15th consecutive quarter of positive absorption in the Puget Sound Region. Direct vacancy is currently the lowest it has been since the end of 2005, standing at 6.14%, but plenty of new industrial space is coming on-line, and vacancies are expected to rise in the short-term. Thanks again to all of our section editors and contributors! John A.
Kilpatrick, Ph.D. |
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© 2007 The Central Puget Sound
Real Estate Research Committee |