Air Out of the Bubble

For the past decade, Seattle, Bellevue, and the ex-urban area surrounding these two cities have been dominated by hulking construction cranes. The whole Puget Sound region looked like one massive heron rookery. While a portion of this construction frenzy was residential glass skyscraper condominium projects (hello! Is there an original architect in this region?) a substantial portion of the new projects were commercial real estate.

Just this week, a local investment firm, seeking larger headquarters, left Tacoma and purchased the former Washington Mutual headquarters building in downtown Seattle for about 125 million, or $120 per square foot. The building had been recently appraised at $250 per square foot. Gulp. That is a huge huge reduction (the building is currently owned by JP Morgan Chase and/or the US taxpayers).

So it is not surprising in today's news a local developer filed for bankruptcy. A guy who has been in business for a long time. He now apparently has over $500 million in liabilities and around $200 million in assets (which, of course, are probably buildings that may actually be over appraised). While there are several banks holding onto liens secured with real estate, this developer also, apparently, borrowed heavily from "family and friends," and up until July of this year, paid them a consistent 9% return (does this sound vaguely similar to Bernie Madoff?). To add to this man's woes, the State of Washington has opened an investigation on him over the appeals made to the individual investors. He did not register the "sales" of the "investments" as stocks.

There are still dozens of cranes in the Puget Sound region horizon. The glut of residential housing, mostly in the form of condos, also brought commercial space. The chic thing in urban planning, now, is multi-use, so that ground floors on most condo projects are retail spaces. And just a drive-by assessment says much of that space remains unleased (making me wonder whether condominium homeowner associations are left holding the bag on the empty space?). All of this empty square footage portends another bubble about to burst. Despite the Federal Reserve's somewhat cherry outlook earlier this week, there is still an awful lot of air that has to be squeezed out of the bubble before the real estate markets, at least, begin to recover.

Hopefully the ever optimistic real estate agents, developers, and civic boosters will think long and hard before trying to "sell" us on an other unsustainable ride on the real estate roller coaster.