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Condos are suddenly worth the risk.

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For years, an old law has kept condo developers away. Now, the hot market has builders rushing back

Build condos, get sued.

That’s been the status quo in Washington state for nearly 30 years, thanks to the Condominium Act.

That’s not changing. Despite some lawmakers’ and developers’ best efforts, the law, which makes it easy to sue for building defects, remains in place. What has changed is that developers have suddenly decided building condos is worth the risk.

Why the shift? The most significant factor is that the apartment market has softened, thanks in large part to the 40,000 new apartments that have been built in Seattle in the last eight years.

Combine that with the surging condo market and improvements in construction quality, and developers are deciding it’s time to build condos again. Several condominium towers are going up in downtown Seattle and Bellevue and more projects are planned on both sides of Lake Washington. Early plans recently emerged for a 45-story condo building near Pike Place Market.

The risk of lawsuits hasn’t gone away. There’s a very good chance developers will get sued over construction defects. Suits against the 1521 Second Avenue and 2200 Westlake projects, both of which went up in the 2000s, settled outside of court, as most such cases do.

That’s not the deterrent it was just a year ago.

For Josh Nasvik, Polaris Pacific’s vice president regional manager in Seattle, the equation is simple: “Eight years of no condo supply has led to pent-up demand.”

His San Francisco-based condo marketing company expanded to Seattle two years ago in anticipation of the condo boom.

Now Polaris is selling 766 condos across four Seattle and Bellevue projects. The company sent in reinforcements from California in Project Director Christina Milovancev and Senior Marketing Manager Dana Van Galder.

Apartments become condos

One of the Polaris offerings is downtown Bellevue’s new Mira Flats, which was originally planned as apartments. Most of the 162 condos will be studios and one-bedroom-plus units for between $500,000 to $700,000, with some larger units listed in the $1 million range.

Apartment leasing has been slower, especially in recent weeks, “with very few showings and just an overall sluggishness to the rental market,” said David Drake, managing broker at Lori Gill & Associates, a division of Windermere Property Management.

His firm dropped rents on 57 percent of its Seattle properties to find tenants in July, compared to 38 percent in July 2017.

Polaris Pacific said the median sale price of Seattle-area high-rise condos increased 23.8 percent year over year to $1,010 per square foot, and the median condo price increased 16.3 percent to $610,500.

Another group making the switch is the Neighborhood Collection, a partnership of real estate professionals who planned 133 apartments in three new mid-rise buildings on Capitol Hill and in Wallingford.

The group’s studio and one-bedroom condos will be ready for occupancy this fall in Atrium (750 11th Ave. E.), Edison (121 12th Ave. E.) and Wallingford 45 (1601 N. 45th St.). Prices range from below $400,000 to more than $800,000.

“We always planned for this as an option,” said Seattle real estate veteran Elliott Severson, principal of the Wallingford Development and part of the Neighborhood Collection group. “There just is not product in this price range, especially in the neighborhoods.”

When Severson’s group announced their plan, the only unit offered for less than $800,000 near their buildings was a Pike-Pine corridor home built nine years ago, though a comparable 32-unit project called Hendon Condominiums opened this spring in the Phinney Ridge area.

Besides Severson, the other members of the group are longtime Seattle builder Robert Hardy; investor Greg Walton; B9 Architects Principal Bradley Khouri; listing broker Carlene Pride, managing broker of Pride Group NW of Realogics Sotheby’s International Realty; project preferred lender Brandon Ehrlich of HomeStreet Bank; and Realogics President, CEO and co-owner Dean Jones.

Jones said the lack of condo development in recent years is about the economics of apartment development. Developers built big apartment projects, rented them out for increasing rents and sold many of them, typically for huge returns on their investments.

Suits continue to scare developers away

Despite the demand, some developers are still staying away.

“We’ve done three condos and lost money on every single one of them,” said Ada Healey, director of real estate strategy for Vulcan Inc., during a Business Journal event earlier this year.

Building condos practically guarantees you’ll find yourself in a lawsuit for five to seven years after you deliver the product, she said. Vulcan had insurance, had photographic evidence of the quality of the buildings and had done everything it could to protect against lawsuits.

“We’ve done that, lost money and we’re going to do something else going forward,” she said. Bob Wallace, CEO of Wallace Properties, agrees. (Disclosure: Wallace is a columnist for the PSBJ.)

“The problem with condos is that you have to sell them, pay a chunk in taxes, and have nothing but cash to show for it,” he said. “Cash is a commodity that tends to evaporate.”

Now, however, with high-rise condo prices exceeding $1,000 a square foot, developers are deciding it’s worth the risk, Wallace said.

The big demand, though, is for entry-level condos that are priced lower than these luxury high-rise homes. “I will be interested to see if the little guys jump in,” Wallace said. “I would be very wary — interest rates are rising, construction costs are obscene, employment growth is slowing, so (condo development is) not for the faint of heart.”

Some small developers already have jumped in. Seattle-based Build Urban is planning a project with small efficiency dwelling units in Seattle’s Eastlake neighborhood.

They’ll be priced in the mid-$200,000s, said company President Ed Gallaudet, who is building the project to create a less-steep path to homeownership.

Condos come with a price

Condo demand is remarkable. Buyers waited more than 18 hours in November to buy homes in the 389-condo Nexus tower rising at 1200 Howell St. in Seattle.

By the end of the next day, all 28 units offered for between $341,000 and $668,000 had been spoken for.

That brought the 41-story project to 90 percent reserved, and now 93 percent of the homes have been taken.

But condo builders are paying a price to protect their projects. The Neighborhood Collection bought insurance with all subcontractors wrapped into the policy for around $300,000 for each building, Severson said.

And Severson said his group built the units to condo standards, spending “hundreds of thousands” of dollars on the building envelopes to guard against water intrusion.

“I’m sure I have done everything humanly possible to make sure the buildings will not leak,” he said.

Still, that doesn’t necessarily mean Severson’s group won’t be sued, but the market is saying it’s time for attainably priced condos.

“There just is no product in this price range,” Severson said, pointing to the significant uptick in condo prices and demand among the mammoth millennial generation. “It just seems they are ready to buy.”

Condo law remains in place, despite critics

Washington state Sen. Jamie Pedersen, the Democratic chairman of the Senate’s Law and Justice Committee, this spring blocked a bipartisan bill that would have reduced the risk of construction defect lawsuits.

Developers and affordable housing advocates said the bill would encourage condo development and provide attainable entrées to homeownership.

But the existing law, Pedersen said, isn’t preventing development.

“We’ve had multiple cycles of boom and bust in condo development since the (Condominium Act) took effect in 1990,” Pedersen said in February.

The proposed legislation was “an absolutely terrible bill,” he added, saying it overreached in outlining when a condo association could sue a builder and limited consumer protection for home buyers.

Despite his decision to block the bill, Pedersen’s view on condo regulations appears to be moderating. He is talking about regulatory reform to promote lower-cost condo development in outlying suburbs where condo development remains at a standstill.

The legislation Pedersen blocked would have allowed developers to fix defects before a legal duel with those who bought units in their projects. The Condominium Act practically guarantees developers a lawsuit for construction defects even before any might be found.

The Legislature did adopt the Washington Uniform Common Interest Ownership Act, which took effect July 1. But it does nothing to reduce the risk of getting sued, said land-use attorney Kerry Bucklin of Bucklin Evens on Mercer Island.

State lawmakers, trial lawyers and representatives of the real estate industry have met to examine the issue of condo construction defects.

“I feel like we are all learning together,” said Pedersen, who represents a district that includes Capitol Hill and talked about the need for moderately priced suburban condos for first-time buyers and downsizing empty nesters. “That’s the piece of the market that has been nonexistent.”

Pedersen said affordable housing is a complicated issue, and the region needs more housing options.

“Let’s not make impediments to affordable housing,” he said, “but at the same time let’s ensure there are
protections for consumers.”

Read it at Puget Sound Business Journal

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