Seattle Homeownership

I had dinner recently with four millennials, none of whom had any immediate plans to buy a house. Seattle's homeownership rate at 55.4% is well below the declining national average of 62.9%.

Absorption rates and demand for rental housing are very strong locally and nationally, supporting the need for more rental supply here in Seattle.

It is a good time to be looking at rental properties in Seattle.

Happy Investing!

Seattle Apartment Market Overview

Seattle Apartment Market Overview

This regional apartment overview is based on survey results produced by Dupre+Scott Apartment Advisors Inc, who publish the most comprehensive apartment survey in the Puget Sound region. Although this data excludes projects smaller than 20 units, it provides a good proxy of the overall apartment market.

The regional apartment market is composed of five counties including King, Snohomish, Pierce, Kitsap, and Thurston Counties.

Apartment rental demand is a function of many factors including demographics (i.e. population size & growth); employment, consumer/investor preference and price all play a role.

As of April 2011, the five-county Puget Sound region had a population of 3,969,750. This is a 14% increase over 2000. The Puget Sound Region contains 59% of the state population. King County grew at a slower relative pace than the other four counties. This outward growth is a function of the area’s maturation as new development moves toward areas of greater land availability. The area’s quality of life has always been an attraction and net in-migration has played a major part in the population growth.

In general, when the economy and employment are growing, the greater the demand for housing. The region lost some 121,200 jobs during the previous recession. Predictions are that it will take until early 2015 to recover the jobs lost since the region’s employment peaked in mid-2008.

The regional vacancy rate last peaked at a rate of 7.2% in Fall 2009 then fell substantially through 2013. Rental rates have now recovered to pre-recession levels and both use and quantity of concessions have decreased resulting in increasing overall effective rents. Current Seattle vacancy rate is below 4.5%.

The improvement over the past years is mostly attributed to a release of pent up demand as households that doubled up to cope with the recession disjoined along with a decrease in home-ownership rates, which increased the number of renter households.

Also benefitting the market was a record low number of new units added to the overall inventory. Looking forward however, employment growth is predicted to be the primary driver of demand.

Apartment rents in the Seattle area rose faster in the past year than in any of the 81 other major U.S. metros tracked by a leading property-research firm.

New York-based Reis, which sells data to the commercial real-estate industry, reports the average asking rent in the Seattle area climbed 6 percent in the past 12 months, outpacing increases in other bustling tech centers such as San Francisco, San Jose, Calif., or Boston.

Another firm’s data put Seattle’s rent increases at fourth-highest in the nation, up from sixth just three months earlier, but concurs with the 6 percent growth rate.

According to Reis, rents here grew more than twice as fast as the national average of 2.6 percent.

Across all apartment sizes, the Seattle area’s average asking rent in the second quarter was $1,150. (The area included in Reis’ surveys extends from King County up to North Marysville in Snohomish County.)

Currently there are an estimated 237,500 market rate units in complexes with 20 or more units in the five county region. King County has the largest proportion with 60.5% of all existing units.

Since 1990, new construction has averaged 4,294 units per year. From 2003 to 2008, this rate decreased to an average of 2,600 units per year before significantly increasing in 2009 and 2010 to 6,549 and 4,148 new units delivered respectively. While new construction is increasing, the past years saw new building estimated to be the lowest level in more than 30 years.

Offsetting new construction is the loss of apartment units that have been demolished or converted to another use. This loss of units was mostly driven by condominium conversions, which grew from about 30% of removals to more than 80% during the economic downturn.

With new apartment construction currently feasible, developers have been scrambling to find sites that are entitled or with plans that can be quickly finalized because being first to market is important in this phase of the real estate cycle. Looking forward, new construction potential is anticipated to grow to the highest level the market has seen since 1991.

While not all of these projects will be completed, we do expect upward pressure on vacancy rates as construction begins to ramp up.
Most planned new construction has been focused toward core metropolitan locations where jobs and existing infrastructure are present. Nearly 85% of the planned development projects are located in King County. Of these, about 75% are in or near the Seattle sub-region.

With future apartment demand mostly a function of employment and population growth, if the economy were to improve (even modestly) this would positively impact future demand projections.

The other item impacting future demand is the amount of inventory delivered. At this time, we can reasonably assume that most projects already under construction will be completed. The market continues to look favorable for new construction in the coming years.

Over the past years, the apartment market has benefited from a changing "rent" vs. "own" psychology. Following the bursting of the housing bubble and resulting recession, home ownership is now seen as a less secure financial investment as home values have decreased due to excess inventory brought on by the foreclosure crisis. Although home values have compressed and appear to have stabilized, the Puget Sound region still has a high cost of home ownership compared to other markets in the county. This results in a large price gap between owning and renting. This price gap, along with a return toward traditional lending practices with large down payment requirements has pushed and will likely keep a portion of the population as renter households.

Further, those households age 25 to 34 are expected to dominate growth over the next five years and this group is traditionally mostly renters. These factors point toward increased demand for apartment units over the next few years.

The regional apartment market is in the ascendant phase of the real estate cycle. Apartments are showing financial feasibility for new construction with most attention focused on the best, close in locations.

My next blog will focus on opportunities that exist in the South Seattle rental market.

Happy investing!

Seattle Rental Inspections

I attended a presentation by commercial real estate broker Marcus & Millichap yesterday, highlighting upcoming changes required by the new City of Seattle legislation on rental housing inspections. Here are my notes from that presentation:

Marcus and Millichap Rental Housing Registration and Inspection

Joel Deis, Regional Manager for M&M, oversees operations, broker for 15 years, professional property manager, has experienced all property types

M&M is the largest investment sales force in the US; real time property marketing systems;

Sara Marckx Russell, commercial multifamily broker, discussed the Seattle Municipal Code 22.214 mandate, currently a complaint-based system. The 2010 census revealed that 10% of the Seattle area rental housing has "moderate to severe" physical problems.

Registration begins January 1, 2014. Units more than ten per property must be registered by July 1, 2014. January 1, 2015 5-9 units must be registered. 2015-2016 deadlines for 1-4 units based on zip codes.

Registration fee is $175 per property with one unit plus $2 for every additional unit. Significant fees (over $10K per month) if not registered in time.

Inspection takes place after registration, with at least one inspection every ten years. Vacation rentals and rooms rented out of your home are not included.

Private inspectors must register and train to inspect units. DPD will also do inspections for $130 per unit plus $25 for each additional inspection.

If a unit fails, DPD has the right to inspect all other units.

Minimum floor, sanitation, heating, ventilation, escape windows, smoke and CO detectors, all building code standards will be terms for inspection.

Implications:
Added expenses
Tenant disruption
Hassle

What will they find? How will you respond? What can be done now to be proactive about this process?

Mitigation
Refinance for capital improvements
Discover and address anticipated violations

Opportunities for investors to pick up substandard value-add properties

Monetize your equity or trade into another asset class, tax-deferred exchange

Central Element Apartments, bought 36 unit for $3.7M, invested $1M, doubled rents and sold last month for $7.7M

35 units on First Hill, Alderview Apartments, invested into three Dollar General Stores, increased cash flow by $270%

Matthew Tyler Rose, Commercial Loan Analyst
Financing is instrumental in any major investment approach; M&M has relationships with national and regional lenders; professional team of lenders

Special financing programs for repositioning properties, all available through M&M

Ray Allen, Associate Director for Capital Markets
Many government lenders already require inspections.

Repositioning program funding is based on pro forma NOI and 4.4% qualifier; 1st disbursement based on current NOI and 4.4% qualifier, with 2nd disbursement when projected NOI is reached, 12-month window to execute

Mandatory Rental Inspection in Seattle

I attended two big property management conferences in Seattle this week: the Washington Landlord Association's Winter Conference on Lake Union on Saturday, Dec. 8 and the Trends NW Trade Show at the Convention Center on Tuesday, Dec. 11. I will report on the discussions from these conferences over the course of the next few blogs. One of the biggest news items at these conferences was the recent legislation by the City of Seattle to require mandatory inspection of rental units, beginning in 2014. Properties with 5 and more units are to register by 2014, and properties with less than five units must register with the City by December 31, 2016. The City will then require inspections of random units, until every unit has been inspected once or twice in ten years. Faith Lumsden, the new Seattle Code Compliance Director, stated that at this point the City has no ideas what the fees will be. The City Council directed that the inspection program be self-supporting, so fees have to cover the department's costs (which are unknown at this time). It is likely that the owner/landlord will pay to have their own inspection done, at around $300-400 per unit. The reason the City decided to require inspections was to deal with sub-standard housing units within the city limits. This may be only a small fraction of the total rental units, but the City could propose no other approach that would be equitable or fair to all rental property owners. Housing advocates say 5-10 percent of Seattle's 42,000 rental units are believed to be unsafe. The inspections will cover such items as minimum square footage, egress and ingress, provision of heat, water, weather-tight enclosure, etc. "I have great hopes that this program will improve the conditions of renters living in substandard housing. A similar program in Los Angeles has resulted in a $1.3 billion re-investment in the City's rental housing stock while costing tenants in LA less than $13 year," said Councilmember Nick Licata, Housing, Human Services, Health and Culture Committee Chair. Many landlords say those costs will be passed on to tenants.