Given the depth of the national recession, it may have seemed like overbuilding, a frequent byproduct of the real estate cycle, had been forever banished. Indeed, it’s been a long while since the once-popular borrowed phrase “build it and they will come” was applied to American real estate. As noted in the previous Reis Observer on this market, however, the possibility of oversupply has been raised for the Seattle area apartment market. “Developers eager to cash in on [job and household] growth have swelled the construction pipeline,” reports Marcus & Millichap, “affirming a bullish outlook for rental unit demand in the long-term.” Whether overbuilding, a typical by-product of bullish outlooks, does or does not materialize, supply has become a new major focus.
By Reis’ mid-September count, more than 7,000 market-rate apartments were under construction metro wide in a large number of projects. To this sum may be added the 1,143 that completed year-to-date in 2012. The total for 2012 alone is projected at 2,422 units. And with additional projects expected to start in the coming term, Reis’ second quarter analysis calls for the completion of more than 6,500 market-rate apartments next year. Demand, meanwhile, has been very strong–albeit not as strong as in 2010, when the floodgates of pent-up demand first were opened and market-rate net absorption soared to nearly 7,300 units. Net absorption through the first half of 2012 ran well in advance of same-term new supply nonetheless. Indeed, as explained in Special Real Estate Factors, job growth across both high- and low-paying economic sectors has resulted in strength of demand across the board in the apartment market. Other factors contribute as well. A report by an Alliance Residential executive published in an August issue of Western Real Estate Business describes in detail the impact of the Generation Y demographic cohort on rental demand—both in fashionable urban submarkets as well as on apartment design itself.
No less encouraging to developers is the market’s high occupancy and strong rent growth. Reis put the second quarter vacancy rate at just 4.0%, down 20 basis points for the quarter, down 110 year-over-year. At $1,085 and $1,032 per month, second quarter average asking and effective rents were up 1.3% and 1.6% for the quarter alone and were up 2.3% and 3.0% since year-end—in the wake of respective increases of 2.5% and 2.7% in 2011. July’s 157 units of positive net absorption alongside 91 units of new supply lowered the vacancy rate to 3.9%. Gains of 0.5% are indicated for both average rents for the month. Again, however, concern over the potential dangers of new construction is given voice: “Many owners of smaller properties,” writes Marcus & Millichap, “fear that a potential building boom in the market will influence top-tier complexes to lower rents, posing a major threat to small-scale operators with less amenities and minimal room for incentives.” Among new major projects attracting industry attention is Holland Partner Group’s 40-story, 386-unit 815 Pine Street tower in downtown Seattle, according to the Seattle Times. The project broke ground in August; initial occupancy is planned for late 2014. A high rental rate of $3 psf is cited. A 350-unit project was announced in September by Weingarten Realty Investors and Lennar as a redevelopment of an old auto showroom complex in West Seattle, the Seattle Times reported at the time.
Demand should continue to outpace new supply in 2012 as the vacancy rate slips to 3.7% and mean asking and effective rents record gains of 4.4% and 5.4% for the year. In 2013, the supply issue becomes more prominent as new completions move ahead of absorption. With occupancy running very high, however, the anticipated increases in the vacancy rate are not likely to pose a significant threat to the market as a whole.