On Wednesday, August 25th, we met with industry experts to discuss the current state of the Seattle apartment development pipeline. Included on the panel were Jack Beaudoin, Partner with Venture General Contracting; Matt Marr, Senior Vice President with Banner Bank; and Trent Mummery, a Principal with Trent Development. Throughout the discussion we covered the latest trends in construction, lending practices, emerging markets of interest and more.

Topics discussed include:

  • Where is demand?
  • Feasibility & Permitting
  • Construction Updates
  • Lending Market
  • COVID-19 Impacts

Where is demand?

Capital is out there for development, and it is looking for opportunities. Opportunity Zones (OZs) have been a big area of opportunity for developers, but as Trent Mummery points out, being located in an opportunity zone only “makes a good deal better.” Already focused on transit-oriented development (TOD) sites, developers narrowed their focus, and what emerged were projects funded because they were great deals, and coincidentally also located in opportunity zones—making them even more attractive. Mummery says that many projects undertaken in recent years may not have been realized were it not for location in OZs, despite investors having to place capital for at least ten years to reap those benefits.

In the last cycle, 2010-2020, developers built around 70K units, up to 75% of which were in the urban core. Since the pandemic, Matt Marr indicated that around 65%-75% of projects they’re funding for developers are outside of Seattle. That’s a major shift in the market.

A hot spot emerging for urban development is Tacoma – where there are great shops and restaurants, the atmosphere is vibrant, and the city “is like Seattle 30 years ago, it’s refreshing” says Jack Beaudoin. In other areas pushing outside of Seattle, east in Bellevue, or further north to Lynnwood and Mountlake Terrace, there are more suburban considerations driving demand and uses, such choices include average unit size and the density of parking.

Feasibility & Permitting

Within the urban core, the economic feasibility of development projects is much tighter than it used to be. Less expensive to construct projects, such as garden style projects in suburbs to the east, north and south of Seattle have become attractive to developers as they provide more flexibility. Developers have experienced advantages in permitting in outlying markets as well, where cities are very welcoming and friendly towards developers bringing new projects to their area.  Rounds of design revisions that would take months upon months in Seattle, Mummery said, have only taken weeks in Bellingham. The difference in municipalities and permitting timelines is absolutely striking.

Utilities in each city are different and work differently. Sometimes developers experience delays or code issues when working with various cities, and as projects have spread out into new markets and jurisdictions, developers have experienced more ease than expected with getting responses from necessary parties. It has been interesting to see municipalities like Snohomish looking to the City of Bellevue for code guidance. Other areas and municipalities have been very easy to work and communicate with. Work is getting done the correct way the first time around. The bottom line is that right now, developers are being very much welcomed into the new areas they’re exploring, and it’s easier to get the work done.

Construction Updates

Cross-laminated timber (CLT) is increasingly becoming part of the conversation as developers consider its aesthetic as additive to projects. It produces a warmer look to the building. A CLT podium instead of concrete can be exposed and have wood frame built above. However, it is a challenge to plan and prepare for, and requires far more planning upfront with architects and structural engineers. Despite some up-front challenges with timing that are still getting resolved, developers like Trent still plan to pursue more of this construction type in future projects.

Primarily, topography of a site is still what is going to drive construction style, meaning a concrete podium with wood frame on top is still going to be the most common construction typology, especially when a podium is required for subterranean parking. More CLT podiums are being designed as developers become more familiar with this product and its cost advantage.

Light gauge steel is a construction type still in consideration, yet still tends not to make sense from an economic standpoint. Light gauge framed buildings are being built by developers from California – mostly for storage facilities, but they have not made it into multifamily projects with much frequency – especially as the labor force for these type of projects are not located in Washington.

Recently, construction costs per unit have escalated to as much as $450K – $475k per unit for podiums with stick frame construction, and as high as $750K-$800K per unit for high rise apartments. During the pandemic alone, construction costs have risen around 12% (7% throughout 2020, and 5% YTD in 2021). In addition, global supply chain concerns will continue to impact development costs. Bottlenecks in production and delivery continue to make the market and costs for products extremely volatile. Delays in manufacturing and delivery for products typically produced on-demand– everything from drywall to glue—is likely to continue impacting development costs and timelines detrimentally.

Lending Market

Banks made a conscious decision to push south and north around three to four years ago, and that decision is more prevalent since the pandemic. What lenders have seen is a continued push from the urban core into outer areas. The projects returning to the urban core remain tighter when it comes to economics, resulting in garden court style projects in suburbs being more desirable to both developers and lenders.

Lenders are seeing a lot of volatility between initial term sheets and final construction budgets. During this time, costs for developers continue to increase, requiring lenders to be nimbler when structuring loans. The delta between construction costs during feasibility and final project budgets continues to be squeezed, concerning lenders. To make new projects work, developers are trending rents, a practices not favored by lenders.

Banks are seeing more CLT projects in the office asset class, but traditional wood frame and concrete buildings remain the norm for multifamily projects. While lenders see changes in construction styles by developers, this isn’t of particular concern to them, although it may be of substantial interest in terms of cost to the developer. What is of concern to the lender, is how each of these construction styles may impact cost and timelines for development. Projects incorporating CLT may require more upfront costs for a buy-out, and paying contractors and subcontractors earlier in the process requires open discussions earlier on with developers about the process.

Covid19 Impacts

Workforce shortages are one of the most substantial impacts of COVID-19 highlighted in the market right now. Having the right people to work efficiently on projects is always going to be a significant part of keeping projects on schedule and on budget. This is true at every stage of construction.

In terms of building changes related to COVID-19, developers had already begun trending towards touchless and contactless features and technology in buildings, features that are even more desirable since the pandemic. Other building systems such as HVAC and air handling haven’t seen major shifts related to the pandemic, simply because air isn’t comingled from unit-to-unit, meaning there isn’t a concern or necessity for major shifts in building design except for in common areas and especially elevators.

While lenders were preoccupied with worry at the beginning of the pandemic, that uncertainty has begun to dissipate and banks are far more open to lending than a year ago, and continue to open up as the situation settles.

While the economic impacts of COVID-19 continue to settle and logistic challenges have been tackled, both developers and lenders have begun to stabilize their processes and optimize. As Beaudoin points out, what development has always been about and is even more so now than ever, is to “work hard, and work with good people”, to build things as cost effectively as possible and solve the challenges that arise.

We hope you enjoy the video; to hold your attention – keep your eyes peeled for the office easter egg, a certain developer dancing in the background.


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