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Rental market & development trends
Published September 23, 2013
Hmmm... Apartment vacancies rose. But they actually fell. I'm down with that. But I have to ask, "What's up with that." The gross vacancy rate in the Puget Sound region (King, Pierce, Snohomish, Kitsap, and Thurston counties) fell from 5.5% a year ago to 5.2% in March and 4.7% currently. That includes vacancies in new properties in lease-up.
You can thank the in-city Seattle market (stadiums to Ship Canal and Lake Washington to Puget Sound) for that trend. Even though close to half of all the new development in the past 12 months opened in this market area, the gross vacancy rate fell from 8% in March to just 5% today.
Vacancies fell even though developers opened more than 7,000 units in the past 12 months in King, Pierce, and Snohomish counties. That’s more new units than we have seen in any year since the early 1990s.
If you exclude vacancies in the new projects still in lease-up, the market vacancy rate rose slightly, from 3.8% to 4.0%. That increase means new construction has lured some renters out of existing properties.
But there is some price resistance out there. That’s evidenced by vacancies at or below 3% in older properties, where the average rent is under $1,000 a month. That’s cheap compared to the $1,635 average in properties built in the past half dozen years.
Editor's note: If you subscribe to The Apartment Vacancy Report or participated in this September's survey, log in to your account to download the report and create detailed custom reports. You will find these links once you log in on your "Personal my account page" in the right column under "Subscriber resources" or "Participant resources."
Supply & demand
Demand has outpaced new supply lately. Even though developers opened 7,200 new units in the past 12 months, vacancies fell. That’s because the region added demand for almost 8,200 units in the same period.
That’s partly due to job growth. Conway Pedersen Economics just reported our region added 49,900 jobs since the third quarter of last year. A rough rule-of-thumb says it takes about 8 new jobs to create demand for one new unit. That suggests demand for 6,200 new units. Demand was stronger because more consumers than normal chose renting. That trend has been around for a few years and it still hasn’t disappeared.
Rents rose 4% in the past six months and 6.6% in the past 12 months. But that’s a little misleading because developers opened a lot of new units in that same period. New construction typically commands a significant rent premium. So when you exclude the new properties that opened last year and so far this year, rents climbed 3.8% and 5.0% in the past six and 12 months respectively.
Overall, including the addition of new construction over the past year, rents climbed the most in the in-city Seattle market, up 8.3% since September 2012. Excluding the new units added last year and so far this year, rents rose 5.1%. That’s still a significant increase. And it is at least partly due to investors renovating older properties adding as many new amenities as they can afford. So at least some of the rent increase for a lot of properties was the result of renters getting a better quality place to live.
The average in-city rent is $1,459, but that includes all unit types. The average one bedroom apartment is $1,417 and two bedroom two bath apartments average $2,210. Both of these averages are pumped up some by addition of new units. Rents in in-city properties built in the past half dozen years average $1,802 and $2,676 for one bedroom and two bedroom two bath apartments respectively.
Last March investors and property managers told us they planned to increase rents 2.7% by September. They did better than that. Now they are telling us they plan to raise rents another 2.7% by next March.
Developers plan to open 42,000 units between 2013 and 2017. No, that’s not a typo. Over 21,000 units are under construction or completed, and another 4,100 units should start by the end of the year. More units will open this year, next year, and in 2015 than our market has seen in more than 20 years. Some projects will probably not materialize. And some will be delayed. Even so, a tremendous amount of new units will open up in the next few years.
Only 15% of the properties we surveyed last week offer concessions, averaging just $460. That’s the fewest number of properties offering concessions since early 2008 and the smallest amount of concession we’ve seen since early 2007. This is particularly surprising because of all the new construction that has opened in the past year. We do expect more properties to offer concessions, and more generous ones too. That should probably start happening in the next few months.
Mortgage payments and rent
Strong apartment demand shows a continued consumer preference for rental housing. Higher prices and mortgage rates are helping consumers make that choice today. The Northwest Multiple Listing Service reports that the median condominium sale price in King County jumped from $194,750 in August 2012 to $255,000 last month. On top of that, Freddie Mac’s website shows mortgage rates for 30 year loans have jumped from about 3.5% to 4.5% in the past 12 months. As a result of these increases, mortgage payments for median priced condominiums are now just 20% lower than the average 2-bedroom, 2-bath rent in King County. Just six months ago the condo mortgage payment was 39% lower.
Charges residents for water, sewer, and garbage
Two-thirds of the properties surveyed pass through water and sewer charges to residents, and 54% also pass through garbage costs. The average monthly water/sewer charge in the region ranges from $51 for studios to $67 for three-bedroom units. Adding garbage charges increases costs to $57 for studios and $93 for three bedroom units. Our annual 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
Parking charges average $83 for open spaces and carports and $124 for garages in the in-city Seattle market. Garage parking averages close to $100 elsewhere. Open parking typically ranging from $20 to $35.
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 this year plus projects planned to open by the end of 2016 where we have parking information average less than 1 parking space per unit.
More trends and forecasts
Our October Apartment Advisor newsletter will analyze rental market and development trends in a lot more detail. It will also include an update of our forecast for rents, vacancies, net income, price, and other trends. Expect it in about two weeks.
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 on September 22nd. We surveyed the entire market and collected reliable information for 219,163 units in 2,156 properties. That’s 88% of the market.
How current is this research?
The survey ended on Friday September 20th. We proofed the data on Saturday and published the report online on Sunday for participants and subscribers. Our online Apartment Development Report tracks 42,267 units developers plan to open between 2013 and 2017 and is updated almost weekly.
The slide show contains the charts from this presentation
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More videos and articles
Be sure to check back every Friday for a new video and discussion of current apartment trends for the Puget Sound region. Here are some other recent articles you may find interesting:
Editor's note: This is the complete article.
Today's subscriber comment
October 31, 2014
Ken Bellamy: "We have subscribed to your research for many years to assist us in our underwriting of acquisitions. Dupre + Scott research gives us timely information on market rents, operating expenses, cap rates, in and a knowledgeable perspective on trends." (Ken is Managing Director of TriMet Development LLC, a Seattle investment company.)