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August 2016

Researchers say easing risk for developers could spur affordable condos

Removing barriers to condo development could spur the creation of condominiums that are affordable to families earning the median household income and help ease the housing shortage, according to a new study funded by interest on Realtors' escrow accounts.

The 22-page report, "Incentivizing Condominium Development in Washington State: A Market and Legal Analysis," was released late last month by the University of Washington's Runstad Center for Real Estate Studies.  Researchers concluded the lack of affordable condos in the Seattle area is due to a combination of real estate, insurance and market forces, as well as geography, land use regulation and state legislation.

Peter Orser, Runstad Center director, said that if built in sufficient numbers and at less than high-rise densities, condos could provide an attractive option, "potentially affordable to families earning the median household income."

Researchers concluded both Seattle and Washington state could help foster the development of more affordable housing by easing the legal risk (or the appearance of risk) in condominium development, construction, liability and insurance.

Runstad researcher David Leon examined housing and condo availability data for Las Vegas, Los Angeles, Portland, Phoenix, San Diego, and San Francisco. His research showed Seattle's production of new condos over the past five years has been among the highest of major West Coast cities. For example, there were 304 new condos sold in Seattle last year versus only 111 in San Francisco.

While Seattle may be out-producing other West Coast cities, it is still not keeping up with demand. Moreover, Leon reported average prices are unaffordable to most area households. Prices jumped 84 percent between 2010 and 2015, far exceeding increases in household income.

As part of the study, researchers also looked at the law in British Columbia where more than 10,000 condos have been built each year since 2010. Notably, the province has a process to resolve disputes between developers and buyers. Only one percent of the 3,920 claims filed last year turned into lawsuits.

The study's author suggests removing some of the perceptions of risk and uncertainty imposed by the Washington Condominium Act could be beneficial. Among concerns he recommends for revision are:

  • clarifying the nature of a construction defect
  • incentivizing repairs rather than money damages as a remedy;
  • making arbitration mandatory and binding;
  • narrowing the standard of appeal from arbitration decisions, and
  • limiting attorneys' fees or adjusting them to a knowable schedule.

The report concluded developers have sufficient incentive to build condos in Seattle's downtown core where larger buildings that bring higher prices are allowed. "Because the potential economic returns of this type of large-scale development offsets the higher costs and any actual or perceived risks, the market has seen a preponderance of this higher end product," the report noted.

Lowering the regulatory costs and construction costs are subjects for another study, according to the Runstad Center's report. However, researchers believe it is clear that insurance costs and the risk of litigation are factors that, if mitigated, can contribute to tipping the scale toward the delivery of more affordable for-sale condominium product, as there is clearly a very strong demand."

The Runstad Center undertook the $50,000 study following the city of Seattle's July 2015 Housing and Livability Agenda (HALA) report, which suggested Seattle work with the center "to explore options to stimulate the condo development market, including revising the warranty scheme in the (Washington State Condominium Act)."

Orser said future research might include more study of other cities and states to determine best practices in condominium construction, insurance, financing and legal liability.