More economic projections for our area!

In reading the committee members’ reports I am heartened at some, but not so much by others. It is certainly a mixed bag with no firm direction for our overall real estate market and suggesting that a recovery, when it comes, will certainly be uneven.

Firstly turning my attention firstly to the single family market, I agree with Lennox Scott’s position that we will see a rise in interest rates, albeit at a slower rate than I or any of my peers has thought as we move into and through 2011, and this will have a negative effect on transactional velocities. He suggests that we appear to be seeing a market divided by price with more affordable areas, and areas proximate to job centers, demonstrating strength in sales in the first half of 2010. That being said, he suggests that the homebuyer tax credit has pulled sales forward and that we will see a slowdown in velocities in the second half of this year.

Sarah Bland over at the Department of Housing & Urban Development expands on Lennox’s data with detailed information on Excise Taxes & Affidavits that paints a more dour picture of transactions relative to the tax revenues that they generate. This is sobering from a political standpoint as revenues received by the State from taxes collected on transactions is back at 1997 levels. This will certainly have an effect on ongoing budgets at both the state and local level. However, 2010 figures, through the first half of the year, are up and one hopes that this is a trend that will continue.

Glenn Crellin at Washington State University also opines on the housing market and concurs with Lennox Scott that transactions in the first half of this year, although higher than in 2009 still remains well below the 15-year average. Sales prices exhibited greater declines in the second quarter than the first and that housing affordability in the 4-county area remains high and that today’s buyer making median income (together with certain other assumptions) can indeed afford to purchase. That being said, the ability of a first time buyer to get into our market is still very hard. I have discussed this numerous times before within the pages of this publication and it remains a great concern of mine personally, and it should also be of concern to our elected officials.

New Home Trends data shows a mixed bag of results when looking at sales of newly constructed product between the first and second quarters of this year. Single family transactions are down on all four counties, however prices are up in King and Kitsap counties. Looking at attached product, I note that sales are up in Pierce and Kitsap County and that sale prices are higher in all counties other than Snohomish where they are flat.

Overall, it appears to me that the housing market is still trying to find its balance and that buyers appear to be hesitant to dive in as they believe that we will not see rates rise in the near future nor will we see much in the way of price appreciation. A standoff is in play!

Turning our attention to the future, permit data provided by HUD, the King County Office of Budget and Management and New Home Trends continues to be somber and demonstrates that builders are not chomping at the bit to start new projects. Perceived lack of structural demand, particularly in the attached housing sector, in concert with a difficult financing environment, is still hobbling our regions builders.

Tom Cain at Apartment Insights offers some happier news as it appears as if the apartment market, which has struggled in recent years, is showing some very positive signs with vacancy rates improving and rent incentives dropping.

His belief that much of this improvement comes at the expense of home sellers as potential buyers, as attested to above, continue to believe that there is no rush to buy and this has been positive news for the regions apartment market.

Transactions of apartments, which one might think would be improving bearing in mind the above statements, has not improved in aggregate, but we have seen an uptick in transactions of projects with more than 50 units. unfortunately however, Greg Wendelken at Marcus & Millichap suggests that despite this uptick, distressed developments make up the majority of transactions and this will likely be the trend through the rest of the year. He also believes that the sale of distressed product will be to blame for continued depressed prices for the rest of 2010.

The regions office market appears to not be hemorrhaging as badly as it has been of almost 2 years now; however, vacancy rates remain stubbornly high. Jeff Scanlan at CB Richard Ellis suggests that it isthis high percent of empty space that is actually bringing perspective tenants back to the market but they are looking for deals.

Structural demand is a function of employment growth and, if forecasts are to be believed, we will grow employment this year and this should take some pressure off vacancy rates as we head into and through 2011.
Over in Kitsap County, Gary Gartin at Bradley Scott Inc. suggests that the bottom of the market, if it is here at all, is likely to hand around for a while. New business ventures are being created: however, space that they are starting to occupy is being given up by failing companies and, therefore, we are not seeing the overall improvement in occupancy that was being hoped for. It appears as if our friends to the West have some distance to go before seeing much in the way of tangible improvement.

Many tend to overlook our regions industrial market; however, as it comprises of around a quarter billion square feet we should really pay it more attention. The Port of Seattle, a major player in our market, appears to be seeing improvement and vacancy rates are stabilizing in core areas as we are not adding to inventory very much with low new construction activity.
The Kent Valley, by far the largest market as measured by overall square footage, saw positive absorption in the past quarter but the increase of available sub-lease space will drag on overall occupancy for some time.

Susi Detmer at Cushman Wakefield is a new contributor to our report and we thank her for her contribution. Her discussion of the regions retail market suggests that our region continues to fare better than the nation as a whole and that vacancy rates for institutional quality retail space is contracting and that rental rates are stabilizing. It’s good to hear that consumers have not completely locked their check books away!

Alan Jut & Scott Beithan, also at CB Richard Ellis, discuss the regions lodging market and believe that we are in an upward trend relative to occupancy rates but this has come at the expense of room rates which are still in decline.

Unfortunately, new projects opening their doors will cause further erosion in rate and potentially, increasing vacancy rates. That being said, they do see a bottom forming and that the lodging market is in recovery, however it is at a snails’ pace.

I do enjoy Brett Manning’s commentary relative to the economy and this time he has called on my country’s very own James Bond to analogize the current state of the U.S. I will say no more other than suggest that you read this very amusing and informative piece.

Desiree Phair at the Washington Department of Employment Security confirms many suggestions that the Puget Sound employment situation is improving and that the trend of job losses appears to be firmly reversed. The rate of growth going forward; however, remains a crucial question that has no solid answer at this time.

Suzanne Davies Withers of the geography department at the University of Washington has penned an interesting piece relative to the economic crisis as it relates to Seattle’s housing market. In it she offers a split picture that suggests that, although housing affordability offers an unparalleled opportunity to buy, it will come at the expense of homeowners who are losing their homes to foreclosure.

Overall, this summer’s report suggests to me that we remain in a state of flux with some land uses faring better than others. The picture is far from pretty and there is still some concern that the light at the end of the tunnel is still only a glimmer.

That being said, hope remains and if the U.S. employment picture actually does start to improve, our region may benefit from it faster than the country as a whole. The second half of this year will be interesting indeed, and I look forward to discussing the committee’s year end findings in our next publication.

As usual, I wish to thank all the members of the committee for their time and effort in providing the invaluable data contained in this report. I stand firm in my belief that it represents the best information available to the reader.

Sincerely,
Matthew Gardner
Gardner Economics.