Jansen Multifamily Team Blog – Insight and commentary on the Seattle/Puget Sound apartment market

At a time when apartment owners are seeking relief from the flagging rental market, development is poised to pick up for the first time since the market downturn.  According to the McGraw-Hill 2010 Construction Outlook Report, multifamily construction will increase 16% nationally in dollar volume and 14% nationally in units built next year, which is a sizable uptick after two straight years of significant dropoffs.  While increased building provides a boost for the construction industry, apartment investors faced with rising vacancy and falling rents will not be happy to see new supply come to the market.

The potential impact of new development on apartment owners is somewhat mixed.  On one hand, any new development projects beginning in 2010 would not likely be completed until the latter half of 2011, at the earliest.  This time lag will prevent additional downward pressure on already tenuous rents and occupancy in the short term.  On the other hand, if the rental market is still precarious in two years, any recovery over that time span could be wiped out by any additional supply.

At such a crossroads, Puget Sound apartment owners can take comfort in the knowledge that there are significant geographical and regulatory barriers to development in the region.  Seattle has not been subject to the endless suburban sprawl plaguing many cities nationwide, and, for the most part, the city has expanded responsibly and in all the right directions.  Nevertheless, King County and specifically, Seattle, saw its share of overbuilding relative to job growth from 2004 to 2009 in both the condominium and multifamily categories, which is contributing heavily to increasing vacancies and the culture of concessions evident in “core” King County markets; secondary markets, such as Snohomish County, built more responsibility relative to job growth over the same period.  The result: King County owners are competing with a “shadow market” of condo properties that are now rentals, thereby making it even more difficult to get a grasp on just how much apartment supply is currently available to prospective tenants.   Even in Snohomish County, where multifamily development was much less rampant than that of King County, it is evident that the return to stability in the apartment rental market will be slow and measured.

The October 2009 Apartment Development Report, published by Dupre & Scott Apartment Advisors, Inc., reports that a total of 13,064 apartment units were built in King County from 2004 to 2009, while approximately 31,000 jobs were added to the County over the same period (Dupre & Scott Apartment Advisors, Inc., The Apartment Advisor, August 2009). Compare that to the data listed for Snohomish County in the aforementioned reports: 1,145 new apartment units from 2004 to 2009 compared to job growth of approximately 35,000 over the same period.  The Apartment Development Report also forecasts that 3,952 apartment units will be added to the King County market in 2010 and 2011, while projecting just 82 new apartment units in Snohomish County over the same period.

So what does this mean for Puget Sound apartment investors?  Is it possible that we will see an inverse relationship between the King and Snohomish County rental markets?  Will short term vacancy rates in Snohomish County be lower than those in King County, fueling rent growth in secondary markets that outpaces any potential rent increases in primary markets?  The only thing certain in a volatile market such as this is “uncertainty” due to forces both real and perceived. But, for the opportunistic investor, a secondary market supply constrain might be all that is needed for one to confirm that today, whether buyer or selling, is a time for action.