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Financiers worry Seattle’s apartment boom is overdone
Apartment buildings are sprouting across Seattle at an unprecedented rate, but some experts say it’s too much, too fast.
Seattle Times business reporter
Developers will open more apartments in the Seattle area this year than they have in any of the previous 20.
They will repeat that feat in 2014, according to apartment research firm Dupre + Scott. And again in 2015.
And for the first time, about three-quarters of the new apartments will be in Seattle, most of them concentrated in downtown and close-in neighborhoods.
To some observers, it looks like a classic cycle of real-estate excess.
“I believe we’re on the cusp of a localized apartment bubble,” said Seattle land-use economist Matthew Gardner. “We are building a lot of units in downtown Seattle.”
Seattle Bank CEO Patrick Patrick is more blunt: “There are so many (apartment) projects under construction, it scares the heck out of me,” he said. “This is about as strong a bubble as I’ve seen.”
Many banks and others increased their financing for apartments in 2012. But some lenders now are being more cautious, aware that apartments that open when vacancy rates move higher may have to offer deeper discounts to lease up.
“I don’t want to be the last guy without a chair in that game called musical chairs,” said Patrick.
AmericanWest Bank in Spokane is financing deals to acquire Seattle-area apartments built more than a decade ago, but not for riskier new complexes where tenants aren’t already committed, said CEO Scott Kisting.
“The ones that get hurt the most are the ones who have put a lot of money into construction with a lot of features and need to charge a high rent to justify it,” Kisting said.
Seattle-based HomeStreet Bank eased back into lending for apartment construction last year with just $17 million in loans, after making no such loans here from 2009 to 2011. That’s still a trickle compared to the $112 million it loaned in 2008 for apartment construction.
While he’s not concerned yet about most parts of the metro area, said HomeStreet CEO Mark Mason, “conditions (for a bubble) are in place if building continues at the current pace and demand doesn’t continue to rise.”
Low vacancy rates
Of course, the region’s apartment construction wouldn’t be booming if it weren’t for the lowest vacancies in more than a decade, which have caused rents to rise rapidly.
The market vacancy rate is well below 5 percent — considered a tipping point in the balance of power between renters and landlords — and under 3 percent in some neighborhoods. Last month, the average one-bedroom rent was $1,229 in Seattle and $1,074 countywide, according to Dupre + Scott.
“I don’t think we’re creating a huge bubble, because we weren’t building up enough along the way,” said developer Mark Schuster, whose company plans to open the 132-unit Joseph Arnold Lofts in Belltown this fall. For one thing, he said, “banks are being much more cautious than during the housing boom.”
On both Seattle and the Eastside, demand for apartments is rising because of surging job growth, tighter home lending rules and the wave of Gen Y renters migrating here for the quality of life. People are paying rents that years ago would have caused them to go buy a house or condo instead.
Consider: A 752 square-foot apartment at the recently opened Via6 in downtown Seattle rents for roughly $2,250 a month. About half of the units are now leased.
With 654 units, Via6 is the largest apartment complex to open at one time in downtown Seattle — a sign of how much demand its investors believe exists for urban renting at premium prices.
Developers are targeting Gen Y renters like Rebecca Samuelson, an engineering graduate from Virginia Tech who’s moving to Seattle in May for a data-analyst job.
“As a twenty-something young professional, city living is something I’ve always wanted to do,” Samuelson said.
High rents, job growth
Apartment construction and rent growth in Seattle is more intense than in most of the nation, said Mark Obrinsky, chief economist for the D.C.-based National Multi Housing Council.
The Seattle area’s annual growth rate in 2012 for apartment building permits was more than twice the rate for the nation as a whole.
Average rent has risen 3.4 percent nationally over the past 12 months. Meanwhile, average rent in Seattle has jumped 10 percent — and in popular in-city neighborhoods such as Queen Anne, 17 percent — according to Dupre + Scott.
It now costs more, on average, to rent a studio in King County than to make monthly payments on a two-bedroom condo, said Mike Scott, co-owner of Dupre + Scott.
So why aren’t people buying those condos? Via6 developer Matt Griffin said a recent Zillow study concluded it takes buyers of a house or condo in Seattle more than four years to break even when the down payment, taxes, maintenance and other ownership costs are factored in.
Moreover, younger workers often find that “if you want to be able to change jobs, a house ends up being the anchor that doesn’t let you take the best alternative,” Griffin said.
The construction boom means Seattle’s apartment stock could grow by 37 percent in just three years, some 6,700 new units a year, based on developer plans tracked by Dupre + Scott.
But Tom Parsons, chief operating officer for Holland Partner Group’s Pacific Northwest division, said he expects developers will build 3,000 to 5,000 units a year because financing will get difficult. “The big question is how much of what is scheduled to start construction this year and next year will actually start,” he said.
At the moment, apartment developers are swarming to the Seattle area’s strong job-growth projections.
High-wage sectors like aerospace manufacturing, construction and technology are fueling the region’s economic recovery. Amazon.com’s expansion of its South Lake Union campus has builders seeing visions of thousands of well-paid engineers wanting to live nearby.
Supply is still catching up to the housing demand, observers say, because the development pipeline all but shut down during the Great Recession.
Developers added only 546 market-rate units to the city’s supply in 2011, according to Dupre + Scott. Over the past decade, the apartment supply grew, on average, by more than 1,200 units annually.
But the lull in 2011 was followed by a flood of new apartments: 2,786 the next year and an estimated 6,267 this year, reports Dupre + Scott.
Industry economist Obrinsky said he doesn’t see a bubble developing as long as banks don’t lend loosely. But, he says, “it may be that new construction will reduce that rapid rent rise you’ve been seeing in Seattle, which is much higher than we’ve been seeing nationally.”
Given Amazon.com’s hiring boom, it’s no surprise that many of the new apartment projects ring South Lake Union and extend to Belltown and other neighborhoods popular with techies.
• Holland is delivering 670 units in three new buildings along Dexter Avenue this year and next and a 131-unit building in the Cascade neighborhood. The developer also will open a 40-story apartment tower at 815 Pine late next year.
• Equity Residential, one of the nation’s largest apartment owners, is building in Ballard the 287-unit Market Street Landing and has filed plans to build another 1,190 units in Ballard, South Lake Union and downtown.
• National apartment developer Wood Partners is building a 27-story tower with almost 300 units in Belltown.
“When you have a multitude of other projects being built, developers have to be really, really sharp about what they’re offering,” said Steven Yoon, a Northwest vice president for Atlanta-based Wood Partners. “If everyone is offering the same thing, then by default it’s nothing special.”
• Harbor Urban, with backing from The Carlyle Group, one of the world’s largest private equity firms, is developing two apartment buildings for $75 million in Fremont that are slated to finish in late 2014 and early 2015.
But the apartment boom is happening in farther-out neighborhoods too: Developers plan to deliver about 1,600 new apartments in West Seattle — a 54 percent increase over current stock — by the end of 2015. And North Seattle could see another 1,154 units.
Jim Atkins, managing director of Harbor Urban, said the question of overbuilding is more relevant at the neighborhood level, not citywide. Ballard, for example, might be overbuilt because it’s not seeing as much job growth as South Lake Union or Fremont, nor is it oriented to many transit lines, he said.
The steep rent increases are worrisome, Atkins said.
“We want those young creative people to move to Seattle when they’re looking at West Coast cities,” Atkins said. “Keeping it affordable is in Seattle’s best interest.”
Virginia Tech senior Samuelson, 22, said she chose Seattle over San Francisco because she got a higher offer here and also because some of her favorite musical artists live here.
“That’s the one thing in the city I’m really excited about,” said Samuelson.
She’s not excited about what it will cost for a place on Queen Anne that’s a short walk to her new job.
She admits she wasn’t prepared for Seattle’s rents — or the extra $100 a month for parking.
“Blacksburg, Virginia, is pretty cheap,” she said. “I live in the nicest apartment (building) in town and pay only $600 a month.”
Developers of new towers are betting that despite the proliferation of competing projects, residents will pay for the location and lifestyle. Among the amenities at Via6: Free Wi-Fi, bike storage and, soon, Tom Douglas restaurants.
Griffin, managing partner of Pine Street Group, Via6’s developer, said the apartments’ proximity to transit hubs and major employers makes them a good fit for urban dwellers who don’t need a car or vast living rooms.
“It’s not how much space. It’s whether you have the right space,” he said.
Sanjay Bhatt: 206-464-3103 or firstname.lastname@example.org
On Twitter @sbhatt