No on Rent Control

I attended my University District Rotary meeting yesterday, held in conjunction with the Ballard Rotary, in order to hear our speakers Seattle City Mayor Ed Murray and City Attorney Pete Holmes.

The Mayor spoke about the importance of housing affordability in the city of Seattle, and I asked him specifically for his thoughts on rent control.

No, he does not support rent control. He has come completely around on this topic, since he first introduced legislation in support of rent control fifteen years ago. He has done his homework on rent control, and learned that it is bad public policy. It has the exact opposite effect on housing affordability. Examples he cited were in San Francisco and New York City, two of the most expensive housing markets in the country.

Rent control does not work.

It does not increase housing affordability, and it drives investment elsewhere.

Karen T responded this way to my post on Facebook about this topic: " I wish that landlords would talk about ways to help low income renters build wealth. What about helping renters by selling units on a rent-to-own basis? A portion of each months rent goes into escrow to build up a down payment to actually buy the unit. First step to building lasting wealth. I am tired of talking about what I am against (rising rents). I want to have more discussions about ways we can all do better."

I agree, Karen. Let's talk. 

Happy Investing!

Seattle Apartment Market

Awesome. The word "awesome," used casually nowadays, can be used in its stricter original meaning when referring to the Seattle area apartment market. The numbers are remarkable. A total of 13,843 market-rate apartments completed construction over the two-year span 2013–2014, including 6,793 in 2014. 

Occupancy, high to begin with, barely flinched: with net absorption over the two-year span running at 12,106 units, the vacancy rate had added only 50 basis points since year-end 2012 to close 2014 at just 4.6%. The gain for 2014, amid 6,034 units of positive net absorption, was just 20 points. During the fourth quarter of 2014 alone, the completion of 1,548 units met with 1,261 units of net absorption while the vacancy rate added 10 basis points.

--as reported by REIS Report 04/24/2015 

Happy Investing!

More or Fewer Seattle Rentals?

The objective of the Seattle Rental Inspection Program was to provide more affordable and safe rental units for Seattle residents. As always, it is the few that cause problems for the vast majority of honest, hardworking property owners. The goal is laudable, but one could easily argue that the impact of this program may have the exact opposite effect.

My crystal ball forecast:
Expect to see rental prices increase dramatically and inventory of affordable rental units in Seattle decrease significantly in coming years.

Much of the new rental inventory coming online in Seattle is new construction. New construction is very expensive, and with construction costs rising up to 30% in just the last year alone, expect those costs to continue going up. For developers building apartments or rental housing, the rents will have to be significantly higher to cover their costs. For newcomers employed in the tech industry, this will not be a problem.

For the rest of Seattle, it will be.

For those who cannot afford to pay the high rents of new construction (over $3/sf in many of the most desirable neighborhoods in Seattle), they will be looking to rent older apartment units or houses. Many of these will be located in less desirable neighborhoods, and may have some functional obsolescence in their design features. Much of Seattle contains older housing stock in long-established neighborhoods outside of downtown. These units tend to have less insulation in walls, attics, basements, and windows. They have older appliances and are less energy-efficient. They require longer commutes to work. They may have obsolete floor plans with large living rooms and small bedrooms with tiny closets. They may have older plumbing, electrical wiring, and fixtures. They may not have enough outlets for today's heavy use of computers and electronics. This does not mean they are unsafe, but an inspection program would certainly find many issues that need upgrades, or compliance with today's codes.

The inspection itself costs a minimum of $175, and any repairs that an inspection might require will increase the costs to a property owner. This property owner will pass all costs along to the tenants. Or they will decide to get out of the rental business, and either remove their property from the inventory or decide to sell.
A new owner will spend the money to make the upgrades, and then, guess what? Pass the costs on to the new tenants.

So expect the price of rents to continue to rise in Seattle, not only for new construction, but for older units as well. Expect more older inventory to come on the market for sale, and expect to see tenants moving outside the City of Seattle in search of more affordable rents.

This may be a good opportunity for the professional investors and landlords remaining, as prices surge upward, forcing up both property values and rents.

What do you think? Me, I'm in for the long haul, as I expect my profits to go up!

Happy Investing!

Micro Apartments in Seattle

Today I met with developer and builder Daniel Stoner, founder of Cubix Apartments. Cubix is a type of micro-apartment designed for renters of modest incomes. These units average around 225sf and rent for $750, which includes wifi and all utilities.

They are larger and feel more spacious than typical Capitol Hill "apodments" which may be as small as 110-130sf and rent for more money. Here is a photo of a Cubix unit:

We are looking at a sink, vanity and cabinets, with a mirrored closet in the background. Floors are faux wood vinyl. The bathroom (behind the vanity) has a pocket door, a toilet and a shower stall, but no sink. There is a refrigerator, but no stove or oven in this unit. Now the City code requires kitchen facilities ensuite, but at the time these units were built, that was not a requirement.

Here is a photo of the shared kitchen facility, one for about every 4-6 units:

Cubix offers affordable living for single occupancy tenants in an attractive, energy-efficient apartment unit. Something to consider developing for the future, as Seattle's income inequality gap continues to widen.

Happy Investing!

Rents Up 7.9%

According to Tom Cain of Apartment Insights Washington, rents are up in the King County metro area by 7.9% over the past year, and now average $1284 per unit or $1.53 per square foot. The highest rental rates are in downtown Seattle at $2.43/sf.

Class C properties have the lowest vacancy rate (at 3.7%) and rent for an average of $908.

Vacancy rates are also down on average to 4.17%. Ballard has a relatively high vacancy rate of 8.6%, due to the overbuilding in this submarket. By the time the units under construction there are completed, it will have quadrupled the inventory of 50+ unit complexes in the past six years.

There are currently 16,135 units of new construction in the metro area, up 16.6% from a year ago. 59% of these units are in the City of Seattle.

Rents are still forecast to increase 4.5%-5.5% over the next several years, according to Reis. Cain finds it remarkable that the market continues to strengthen in the face of massive amounts of new units. The underlying strength of the economy is what contributes to this growth. According to the US Census, Seattle grew faster than any other major American city in the past year. Seattle also has the second best rate of small business creation in the country, according to recent data.

Had all of these new units not been built, then Seattle rents would be even higher. The rental market’s performance in the past year has been stellar, thanks to developers and lenders who have provided apartments to help meet the demand.

Happy Investing!

South Seattle Rent Comparables

In order to determine the profitability of our Van Gogh mixed-use commercial development at the Rainier Beach light rail station, we need to look at other rent comparables. We are still collecting data, but this is what we have thus far:

The first comparison is Eagle Ridge Plaza, located at 5333 15th Ave. S. in the Beacon Hill market northwest of the subject. Units in this complex are in a single building, three stories with elevator access to all floors. It was built in 2000, and has 25 units. These include one-bedroom and two-bedrooms with one and two-baths. Units feature gas fireplaces, dishwashers, microwaves, and washers and dryers. Under-building parking is provided and is included in the rent. The interesting thing about this property is that rents have hardly changed since it was built despite an improving market. This provides a strong indication that an adjustment for age is appropriate. When surveyed, there were no vacancies and no specials offered.

The next comparison is Station at Othello Park, located south of the subject at 4219 S. Othello St. in the Rainier Valley submarket. The project was completed in March 2011 with 351 units located at the southeast corner of Othello St. & MLK Way S. -- adjacent to Othello Station Light Rail stop. The property targeted LEED Silver certification and features a variety of floor plans ranging from studio, studio plus den, one-bedroom, one-bedroom plus den and two-bedroom/ two-bath plus den unit types. Overall, the unit mix is nearly 90% studio and one- bedroom units targeting one & two person households. Unit sizes are smaller than typically existing in the market with an overall average unit size of 671 sq ft.

Unit amenities include granite countertops, stainless steel appliances, washer/dryer, dishwasher, hard floor surfaces (select units) and other high end renewable finishes. More than 50% of the units have a private deck, patio or balcony. Building amenities include a 7,500 sq ft rooftop deck with hot tub, wet bar, barbeque, fire pit and private seating areas. Built to a density of 189 units/acre, the six-story building is elevator serviced with controlled security access, fitness center, extra storage, has 20 ft wide sidewalks with cafe seating and 17,600 sq ft of ground floor retail.

The last comparison is with the Claremont apartments in the Mount Baker neighborhood to the north of the subject property. The Claremont is a mixed-use development with retail, office, and rental apartments. Located on Rainier Avenue South at Waldon Street on the former Chubby & Tubby site, it was built green by South East Effective Development to revitalize the community and local business district.
It is located four blocks to the Light Rail station that travels downtown in 15 minutes.

The main five-story building on Rainier Avenue includes 58 mixed-income rental units with 10 townhouse units located in the back at Claremont Place. The roof garden has great views of downtown Seattle and Mount Rainier.

Eagle Ridge Plaza
Year built - 2000
Size of One Bedroom - 574
2011 rent -$855
Tenant paid utilities- garbage only
W/D in unit? - yes

Othello Station
Year built - 2011
Size of Studios - 464
2011 studio rent - $1016
Size of One Bedroom - 701
2011 rent - $1289
Tenant paid utilities- all
W/D in unit? - yes

Claremont -
Year built - 2011
Size of Studios - 484
Current studio rent -
Size of One Bedroom -
Current rent -
Tenant paid utilities-
W/D in unit? -

Van Gogh Apartments
Year built - 2015 (est)
Size of Studios - 661
Current studio rent -
Size of One Bedroom - 661
Current rent -
Tenant paid utilities- all
W/D in unit? - no, common laundry room

The subject is located in the Rainier Valley market area. Except for Station at Othello Park, the Claremont, and for a few units at Seattle Housing Authority's NewHolly redevelopment, no new market rate comparisons exist in the subject's Rainier Valley market. Station at Othello Park was used in the report, however those at NewHolly are vastly different in design and the comparisons were taken from neighboring markets. Eagle Ridge Plaza is located in the south portion of the Beacon Hill market. Both are considered superior to the Rainier Valley market based on Dupre + Scott rent survey information.

The subject is proposed new construction. The comparisons range from 2000 to 2011 properties. Brand new apartments tend to rent for more than properties that have had several cycles of unit turnover. According to the survey data reported by Dupre+Scott, newer apartment product (built since 2000) in the King Central subregion generally achieve about $0.20/sq ft more in rent compared to product built between 1990 and 1999. With support from these rental differences, an upward age adjustment of $0.20/sq ft/decade or $0.02/sq ft/year is applied to the comparisons based on their age difference from the subject (if built today) applied to their respective unit size rounded to the nearest $5.

Rental comparisons in the Rainier Valley market have studio units that range in size from 409 sq ft to 648 sq ft. Base rents for this type of unit range from $850 to $1,391/month. After adjustments, indicated rent for the subject’s studio units range from $923 to $1,336/month with a median of $1,167/month.  $1,085 is selected as a reasonable market rent.*

All of the comparisons selected with one-bedroom units ranged in size from 574 to 747 sq ft. Base rents for this type of unit range from $855 to $1,375/month. After adjustments, indicated rent for the subject’s one-bedroom units range from $993 to $1,145/month with a median of $1,107/month. For this analysis, most support is given to the middle portion of the adjusted range and $1,105 is selected as a reasonable market rent.*

*These were the figures in spring 2011; assuming 4% per year rent increase, the market rents in 2015 are assumed to be as follows:

Studio Market Rent -- $1,220/month
One-Bedroom Market Rent --$1,243/month

These rents seem reasonable, compared to this 2014 ad for a 427sf studio rental at the Hiawatha Lofts (an artist space project):

"Roof decks, stainless steel appliances, in-unit washer and dryers, free high speed internet and cable, storage units, amazing view of Mt Rainier and the Seattle skyline--all in a brand new apartment building, 999 Hiawatha Place, Seattle 98144. Studios through two bedrooms starting at just $1060 per month.

Apartment Amenities
● GE Stainless Steel Appliances
● Washer Dryer
● Dishwasher with Disposal
● Frost Free Refrigerator with Icemaker
● Free High Speed WAVE Internet
● Free Cable
● Self Cleaning Oven and Microwave
● Energy Saving Appliances
● Large Light-Filled Windows
● Pet-Friendly

Building Amenities
● Two Roof Decks with lush landscaping and views of Mt. Rainier and Downtown Seattle
● Interior Garden Courtyard
● Free Bicycle Storage
● Free Battery Charging for Electric Cars
● Storage Lockers
● Secure Parking
● Easy access to I-5 and I-90
● Steps to bus line
● Surrounded by 5 parks

Studios start at $1060/month
One bedrooms start at $1310/month
One bedroom + den start at $1360/month
Two bedrooms start at $1750 per month"

Assuming average market rent of $1225 per month, what kind of income can we expect from the 4354 S. Henderson project?

$1225/mo X 33 units = average monthly income of $40,425.
Annual rental income of $485,100 (we will ignore any income from laundry units for right now).

Rents from commercial units might be $1.50/sf per month, or 1900 sf X $1.50 = $2850 per month, annual revenue of $34,200.

Total annual gross revenue is estimated to be $519,300. Assuming expenses at roughly 30%, net revenue would be approximately $363,510.

Bonus question for our readers: If we build out 40,000sf, how profitable will this project be? A $25 Starbucks gift card to the winning answer.

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 Market is Hot! Hot! Hot!

This link was sent to me by my financial adviser David Donhoff, and I am happy to pass it along. If you are looking for rental income, then NOW might be the best time to jump into the Seattle market.

Seattle rental market increasingly competitive and expensive – Local News – Seattle, WA | NBC News

Good!
http://www.nbcnews.com/id/52168425/ns/local_news-seattle_wa/

There’s a huge influx of people relocating for corporate jobs at places like Amazon, Microsoft, Nordstrom and Starbucks and looking for a place to live, according to Seattle Rental Group.

“As the inventory is shrinking a lot of the private rentals owners are choosing to actually sell instead of continuing to lease out the property. So that’s also taking away from the inventory too,” said Ashley Hayes, with Seattle Rental Group.

According to Mike Scott of Dupre + Scott Apartment Advisors Inc., the average rent for a one bedroom apartment in Seattle is $1,223 this Spring. Plus, rental rates are higher compared to last year. Rates are going for $2.50 to $3 a square foot around Seattle for a one bedroom, one bath, nice view and building. Last year, the rental rate was in the low $2.00 range, according to Hayes.

The trend is your friend…. do *NOT* miss out on the trend!

Hot Real Estate Markets

“Whatever mix you deem prudent, I believe it's time to reevaluate your exposure to the real-estate sector. In my view, real estate belongs in every diversified investment portfolio. It's not highly correlated to equities or fixed income, and it offers income opportunities as well as a potential hedge against inflation. I've been keeping some cash on hand designated for real estate, and I've concluded it's time to put some of it to work.”

—James B. Stewart, as reported in the Wall Street Journal 4/9/2010. Stewart is a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy.

According to the Center on Housing Policy, the five most expensive homeownership markets in the country posted gains in 2009 median home prices as compared to the previous year. And virtually all California cities on the top 20 list of expensive housing markets posted gains in 2009 median home prices as compared to the previous year.

Seattle dropped in the list from #14 in 2008 to #20 in 2009, with a median home price of $303,000 in 2009 as compared to $335,000 in 2008.

The NY research firm Reis tracks vacancies and rents in the top 79 U.S. markets, and rents rose in 60 of them, led by Miami, Seattle and New York—all cities that had notched big rental declines in the past year. Median rents for a two bedroom apartment, edged up in Seattle from $976 in 2008 to $1056 in 2009, making it the 47th most expensive rental market in the survey by the Center on Housing Policy.

Interestingly, 2009 rents in Bremerton, WA were comparable to rents in Dallax, TX at $894 for that same two bedroom (#82 on the list). Tacoma rents ranked #60 at $968, just above Santa Fe, NM. And Olympia was #86 on the list with rents of $876.

Meanwhile, difficulty in financing new apartment construction has limited the supply of new multifamily units that will be added in the coming years. This news has landlords and investors excited about the potential for rents to increase once the economy recovers.