"Historic growth pricing people out of Snohomish County"

[Chris Newman]

"My interest is in the future because I am going to spend the rest of my life there." - Charles F. Kettering

Main Takeaway: Get out the shoehorn and bear grease!

A local Seattle TV station last night ran a great overview report on the real estate market in Snohomish County, WA, Seattle's neighbor to the north, and my home territory. I knew that this is a hot market, but this report was an eye-opener in describing the present trends that are going to strongly impact small investors for years to come. 

Of course, the best place to position any business is just out ahead of one or more major consumer trends, before it becomes obvious to the amateur competition, who then jump in, bid up prices and kill the profit margins. The early bird gets the fattest worms.

You can see the report here (the video contains far more information than the text): http://www.kiro7.com/news/local/historic-growth-pr...

Bottom line: New residents are flooding into the county, there are few new places being built for them to live and this trend is not going to change any time soon. That, in turn, has a strong bearing on the best investing strategies in today's market.

Some story highlights:

1. More people have moved to the Puget Sound region in 2015 than at any other time in history.

2. In the past 12 months, Snohomish county's population alone grew by 2%. With a population of about 700,000, that's 14,000 new people from higher price areas looking for a place to live. 

3. The current county rental vacancy rate is only 2.8%.

4. The fastest-growing city in the state is Marysville. (I still wouldn't want to live there, if only because traffic infrastructure is already a decade or more behind growth and planned improvements, including new freeway interchanges on I-5 won't even be breaking ground for several years. Getting to and from the freeway on the few east/west roads during rush hour is already a nightmare. The north/south at-grade railway line near the freeway already disrupts commuter traffic, sometimes causing backups onto the freeway. And this is before they've started running another 30 long oil trains/day on top of all the other rail traffic on this main line.)

5. SnoCo has now hit the tipping point where locals are being priced out of their apartments and also flowing to even cheaper areas. (Because of geography and regional growth management. the only open direction is north, with Arlington/Stanwood now on the bleeding edge of growth.)

Some more facts-ish:

County real estate prices have gone up about 10% in the past year, just behind Seattle's 12+% Average home price in Seattle is now $660,000, with Snohomish county, 30 minutes north of downtown, at about $350,000. That's a very short drive to save $300,000.

In my view, this fast-rising market is not a bubble, but a result of the national economy (via national tech companies of all sizes setting up Seattle branch offices as an economic move) focusing on Seattle with ten's of thousands of new relatively high-pay jobs/workers. Seattle also has its own strong and fast-growing tech and biotech sectors. 

National developers are still building mixed-use skyscrapers at a frenzied pace in Seattle, with another 20 projects on the boards for the South Lake Union area of Seattle in the next five years. These pros do serious market research to predict the future, so if they're still planning to build more, that's a clear signal to me that they don't see an end in sight.

I don't see an end in sight, either: Barring an SHTF-type occurrence, it's going to take a national economic downturn to pull back the reins on this fast growth and, even then, the tech sectors will be among the last to cut back. The current national job hiring rate is the highest that it's been for a long time, so the national economy arrow is still generally pointing up. If a downturn starts to happen, we should have plenty of warning to adjust our REI portfolios.

Snohomish county population has been projected to grow by 200,000 in the next 20 years. That means the need for about 5,000 new residential units per year for the next two decades. However, that figure was projected in 2007, long before the tech industry moved in so this projection is surely low. I haven't seen an updated projection, if there even is one, but a doubled rate wouldn't surprise me.

The construction of new housing, about 2,500 units last year, is running at only about half the rate needed just to keep pace with 2007-projected growth. Demand and Supply throughout the county are seriously out of whack.

So, what is the Snohomish county leadership doing about this in order to prepare for rapid growth and to protect local citizens from rent hike-driven economic calamity? Worse than nothing:

For brief background, state mandated growth planning for the entire Puget Sound region (Report title: "Vision 2040") calls for 95% of the growth to be channeled into the western urban cities and centers along I-5, with just 5% urban sprawl into the rural areas, which are intended to be permanently preserved as green spaces. 

The Transfer of Development Rights program that's my particular niche (along with wetland mitigation banking) is a part of this smart growth planning, through the new ability to "clip off" existing development rights on cheap rural land and then move them to expensive urban centers, where they'll eventually buy 160% increased development density. i.e. Seven story mixed use buildings, up from three stories, with densities of 58 units per acre, up from 15. 

The rural Sending land has a conservation easement put on its title in the TDR process, so that it can never be used for residential development, although all other permitted uses remain, with new uses, such as farm breweries and distilleries being added. TDR allows the rural property owners to capture the future value of development in advance, instead of just losing it through arbitrary downzoning, which inevitably leads to lawsuits. 

On the Receiving new development side, it will take "cashing in" somehow-acquired TDR credits to receive high density permitting beyond base permitting values. But, the upzoning is also a simple and certain cut-and-dried process that eliminates the need for costly land use variances.

In short, the county council is dawdling about passing the final piece of land use legislation that's required to open up the county's SW Urban Growth Area between Everett and Lynnwood surrounding Paine Field, where there is enough relatively inexpensive undeveloped commercial land, especially along 3.5 miles of Hwy 99, to build 10,000 or more new apartments and condos. 

One critical piece of this new legislation is that many of the commercial zonings in the SWUGA that currently don't permit residential uses will automatically upzone to mixed uses, typically ground floor commercial with residential above. Likewise, high density residential zoning will automatically gain the permitting to add commercial space. Until this passes, though, the demand for the huge inventory of large commercial sites along 99 will continue to be mostly stagnant, with prices about 1/6 of comparable Seattle sites. 

In the meantime, the large national drug store chains, which also do their market research, are building brand new stores throughout this area. The small commercial sites are getting snapped up.

The passage of this long-planned high-density enabling bill was expected by everyone on the supporting side in early 2015, but in December after numerous delays, the council kicked it back down to the Planning level over a very thin reason that has now been addressed in some 2016 legislation. According to the county's TDR program manager, there is no work in the Planning department budget to get this bill back before the council before 2017. 

If you follow the money, it's unquestionable that it's the SnoKing Master Builders who are pulling the strings of the county councilmembers. I don't know which angers me more: That the council is selling us all to small special interests or that it's selling us out so cheaply. But, it is what it is and there is always the opportunity to creatively make a happy buck in any scenario.

Sooner or later, the Puget Sound Regional Council is going to send a warning shot across the bows of Snohomish county, as it recently did with some cities in Seattle's King county: http://www.seattletimes.com/seattle-news/eastside/...

As for local developers showing a little foresight and preparing for the future by locking in opportunities now, I don't see that happening. Perhaps it's because they know that their county council lobbyist is doing such an effective job of stalling urban density. 

So, how does this impact us as small(er) real estate investors?

Realistically, while this special-interest gridlock must inevitably be broken by the higher powers of the Puget Sound Regional Council and the state, I don't see how we're going to be seeing a lot of multi-hundred-unit new developments coming onto the market for at least a couple more years. Until then, I think that we can expect the current scenario to at least continue, if it doesn't accelerate. 

For myself and my unusual "resource land conservation credits" niche, I see a huge window of opportunity to pick up inexpensive rural TDR credits and the large commercial sites before the inevitable market demand starts running up prices. And, there's a ton of new infrastructure projects coming that will eat up $multi-million mitigation bank credits like popcorn, with only three suppliers (mitigation bank sponsors) in the entire state. Of course, this takes more working capital with a 1-2 year holding period than I have right now...

But, how does this clear ongoing scenario impact the strategies of the "regular" Bigger Pockets investors? 

For starters, I see that appreciation and frequent rent raises playing bigger roles than they have in the past, so that impacts the property acquisition analysis. 

/Likewise, the sellers of smaller multi-family buildings sometimes haven't kept up with market rents, even with nice buildings, so catching up to market rates is one way to quickly force some new equity that makes a big difference in the ROI.

How does the current Snohomish County real estate climate affect your planning? Or does it?

Please share your thoughts, and more facts, below and let's get some discussions started that will help guide us all into a profitable boss-free future.