Seattle Commercial Real Estate News of the Day

Monday, March 12, 2012

Seattle Times Daily Journal of Commerce Headline
Nordstrom Rack ready to open near downtown Seattle flagship

Economist says city has too many new apartments

Nordstrom Rack moves to Westlake Economist Matthew Gardner says developers should stop building apartments in and around downtown Seattle.

“We are building a lot, and I am concerned about it,” he said during a speech last week to Commercial Real Estate Women. “If you are not in the ground already, I highly suggest you don’t.”

Some other market observers remain bullish because of job growth projections.

Colliers International multi-family broker Dave Schumacher is among them, though he agrees there are reasons for concern. He said too many developers are building the same type of product, all targeting the 20- and 30-something demographic. Plus, many new units will hit the market at the same time about a year from now.

Dupre + Scott Apartment Advisors forecast last fall that nearly 5,400 new units would open in 2013 in the core areas of Seattle and Ballard. This is in addition to nearly 1,650 expected to open this year.

Here are the most active markets:

• Belltown, where 2,885 new units are expected this year and next

• Queen Anne with nearly 1,450 units

• Capitol Hill with just over 1,100 new units

Ballard is also in the midst of a building boom. Of the nearly 1,100 new units forecast for the neighborhood this year and next, about 970 will open in 2013. In the preceding 11 years combined, only 590 new units opened there.

“We are getting a little ahead of ourselves,” said Gardner, who warned of a “potential localized bubble.” To justify adding even more units to the market requires stronger growth in jobs and income, he said.

Gardner is less concerned about other submarkets, including the Eastside where far fewer apartments are being built. Last fall, Dupre + Scott forecast that only about 2,000 units will come to market this year and next on the Eastside. That compares to nearly 3,900 in 2009-10.

Vacancies up

Investors are pulling back from apartments nationwide, according to an article last week in The Wall Street Journal. The paper reported rent growth is slowing and yields are flattening in some markets. There’s concern that rents will flatten as new units hit the market.

The WSJ article named two markets facing a glut of new units: Washington, D.C., and Seattle. The paper cited a report by Seattle-based Apartment Insights Washington that showed the vacancy rate rose at the end of last year in King and Snohomish counties after eight quarters of declines.

Rising vacancies, falling rents and an uptick in the concessions needed to lure tenants all signaled the white-hot apartment market was starting to cool months ago. Tom Cain of Apartment Insights said when the report came out he hoped the new data would temper apartment developers’ enthusiasm.

It hasn’t. For example, Vulcan Real Estate last month started two projects in Belltown and South Lake Union that total 466 units. This suggests building apartments is still a good idea since developers as savvy as Vulcan tend to know what they’re doing.

Schumacher said he thinks the Seattle market will be overbuilt, but for only a short while. He predicts housing demand will pick up again because of job growth.

Conway Pedersen Economics forecast in December that the region will add nearly 171,000 jobs over the next five years, and a lot of them will be in Seattle, where Amazon.com has plans to build up to 3 million square feet of new office space.

Based on Conway Pedersen’s jobs forecast and other demographic data, Dupre + Scott sees demand for almost 27,000 new apartments over the next five years. At the end of last year, Dupre + Scott forecast that just over 26,500 new units will come to the market.

Dupre + Scott’s model shows rents will climb almost 6 percent this year. “With the onslaught of new construction that will begin lease-up, particularly in 2013, the rate of rent growth will slow,” the company said in a December report. Dupre + Scott projects rents will climb an average of 3 percent a year after 2012.

Mike Scott wrote in an email Friday that his company “has new info in the works,” but the numbers won’t be available until the analysis is complete.

Gardner said here’s another factor that should concern developers: monthly mortgage payments are now significantly less than rents.

Conversions?

Last fall, Dupre + Scott reported that the mortgage payment on the average house in King County was $1,520 compared to $1,930 to rent the same sort of dwelling. That was a difference of 21 percent. For condos, the difference was even greater: 35 percent. That’s big incentive to jump through all the hoops to buy, and people seem to be doing that.

Gardner told CREW members that tenants at The Olivian, a luxury high-rise apartment in downtown Seattle, are buying units at Olive 8, a hotel/condo project across the street. He said after the meeting that this was merely anecdotal evidence about the shift to home ownership.

But Seattle won’t see another new condo tower “for years and years and years,” Gardner said. First, apartments will be convert to condos.

From about 2004 to 2007, Seattle had almost 6,000 such conversions, causing a scramble among renters. State legislators responded by passing a law that requires landlords and developers to give tenants 120 days’ notice of conversion instead of 90 days.

Schumacher, who handles the sales of multi-family buildings, said his clients have always had “an eye toward” conversions, and that they’re now looking at the option more closely.

Conversions require a particular type of property. Schumacher said prime targets are buildings that have parking and the right style of units. Location in walkable neighborhoods is a big plus.

Schumacher thinks one good candidate would be Holland Partner Group’s 17-story Coppins Well at 1200 Madison St. that is scheduled to open later this year. The 237 market-rate units are one- and two-bedrooms, with high-end finishes and views.

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About CRE Northwest

Specialist in office & investment real estate in Seattle & the Eastside
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