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Hotter than a 787s lithium battery
Published March 29, 2013
The market vacancy rate in the Puget Sound region is 3.8%. That’s the lowest it has been since 2007. It doesn’t get that low very often. In fact, it has been that low just three other times in the past 30 years. Low vacancies give investors opportunity to increase rents. The “market” vacancy rate excludes vacancies in new properties in lease-up and properties going through major renovation.
Adding those results in a “gross” vacancy rate of 5.2%, down from 5.5% last fall. The gross vacancy rate is 8.0% in the in-city Seattle market right now because almost 2,300 new units opened in that market in the past six months and are still in lease-up.
Market vacancy rate for major market areas:
These are some of the findings of our survey of 20-unit and larger apartments in the Puget Sound region, published in the Apartment Vacancy Report. The survey ended on Friday, March 22nd. We proofed the data on Saturday and published the report online on Sunday. We survey the entire market and collect reliable information for 217,637 units in 2,147 properties. That’s 88% of the market. Our online Apartment Development Report tracks 34,457 units developers plan to open between 2013 and 2017. With development activity picking up, we are now updating the online report at least once a week.
As a result of lower vacancies, rents rose 5.5% in the past 12 months. Before you get too excited about that number, some of the increase was created by new units opening up in the past year. New construction rents for more. That distorts rent trends. Excluding the new units that opened in the past year, rents still posted a healthy 3.7% increase.
There were some big rent increases in a few neighborhoods. But a lot of the increase is due to new units opening there. If you exclude apartments that opened in the past year, here are a few examples showing what happens: Ballard’s 15.2% increase drops to 6.4%; First Hill drops from 15.6% to 7.3%; and Queen Anne drops from 17.1% to 8.2%. Even after kicking out the new construction, these are still very significant increases.
Apartment managers plan to raise rents another 2.8% over the next six months. That’s the most bullish they have been about rent increases since early 2008.
Now here’s a sign of strong rental demand: Both market and gross vacancy rates fell even though developers opened almost 7,000 units in the past 12 months. That’s more new units than we have seen in any calendar year since the early 1990s.
Developers are planning to open more than 34,000 units between 2013 and 2017. Right now, almost 15,000 units are under construction or completed, and developers plan to start another 5,000 units by the end of June. Developers are set to open more units this year than our market has seen in more than 20 years. And they plan to do it again next year and again in 2015.
At the beginning of this year, almost two-thirds of the existing apartment units in King, Pierce, and Snohomish counties were in King County. In the next five years, 89% of the development planned will be in King County.
But wait, there’s more. There are big changes in where the development is taking place within the county. Up until this year, the Seattle market area represented less than one-quarter of the units in the Tri-county market. Over the next five years, almost two-thirds of the new units will be in the Seattle market.
Some investors tell us they don’t believe all this new construction will happen. They think the gap between actual rents and what developers need to get is too great. That’s always been the problem developers face. A dozen years ago new construction rents were about one-third higher than existing properties. Now the gap has widened to almost 50%. And it’s even more compared to older properties. But developers somehow continue to build in new features and amenities to attract renters.
The average one bedroom rent for properties built in the late 1960s is $786. It jumps to $1,519 for properties built in the past five years. It jumps to $1,793 for newer properties in the in-city Seattle market, but it is just $1,051 for newer apartments in Pierce County and $899 in Thurston County.
Only 20% of the properties we surveyed last week offer rent concessions, averaging $480. That’s the fewest number of properties offering concessions since early 2008. Concessions are more common in new properties. It’s a standard marketing tool property managers use to fill new development quickly. Region-wide, almost two-thirds of the apartments built since the beginning of last year currently offer concessions. They average $1,024. Expect concessions to become more common again with all the new units scheduled to open over the next few years.
Charging residents for water, sewer, and garbage
Two-thirds of the properties we surveyed pass through water and sewer charges to residents, and 50% also pass through garbage costs. The average monthly water/sewer charge in the region ranges from $46 for studios to $70 for three-bedroom units. Adding garbage charges increases costs to $55 for studios and $90 for three bedroom units. Our March Apartment Expense Report found that utility charges paid by residents increased 50% between 2008 and 2012.
Parking is getting harder to find and more expensive
Fifty percent of the properties we surveyed include parking in the rent. That’s a significant change from last fall, when 60% included parking. Parking charges are highest in the in-city Seattle area, averaging about $80 for open spaces and carports and $118 for garages.
Garage parking averages $90 to $100 on the Eastside and in south King, Pierce, Snohomish, Kitsap, and Thurston counties. Open parking is more variable, ranging from free in Kitsap and Thurston counties, to about $20 in south King and Snohomish, and $30 in Pierce County.
Watch parking rates climb as new construction opens up with fewer parking spaces. Properties built in-city between 2000 and 2011 averaged 1.3 parking spaces per unit. Developments that opened in 2012 and early this year plus projects planned for 2013 to 2016 where we have parking information average just 0.8 parking spaces per unit.
Incomes support rent growth... but
Based on the close relationship between apartment rent and per capita income since 1980, there is potential for 18% rent growth in King County over the next five years.
It can’t all be good news for apartment investors. Where would the fun be in that? Mortgage payments for median priced condominiums are now 39% lower than the average 2-bedroom, 2-bath rent in King County. That’s the widest gap we have ever seen and marks a dramatic and major historical reversal in the relationship between renting and owning, at least from a monthly payment perspective. And it adds a new layer of risk for investors.
This slideshow contains all the charts above plus additional charts showing submarket trends.
Be sure to check back next week for a new discussion of current apartment trends for the Puget Sound region.
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December 9, 2013
Alan Dooley: "Dupre + Scott principals are very thoughtful and diligent researchers. As investors throughout the country, it is rare to find a service as comprehensive as that of Dupre + Scott. It is also very reassuring when spending tens of millions of dollars to have the benefit of their research which covers decades worth of trends. There are very few markets in the U.S. that are as well covered as Seattle from an apartment researchers perspective." (Alan is Senior Vice President of Heitman in Chicago.)