September 28, 2010

In Seattle today, apartments are the 'No. 1 property class'

Image courtesy of HAL Real Estate Investments [enlarge]

HAL wants to build 270 units in Columbia City on Rainier Avenue South. This is one of several new multi-family projects planned in Seattle.

After months of bullish banter about the Seattle area's apartment market, developers are gearing up to build some large projects in the city.

• Ed Hewson and Jon Breiner are planning a 122-unit project in Belltown. Hewson said, “God willing, we will break ground in 2010.”

• Harbor Properties plans to begin a 120-unit complex next spring in Columbia City.

• HAL Real Estate Investments President Dana Behar said his company will proceed “as quickly as possible” to secure a master-use permit for about 270 units in Columbia City when the landmarks review process is done. Harbor also may soon begin developing another project: the 185-unit Alto in Belltown.

These projects are in addition to at least one big project now under construction and another that's wrapping up. In June, AvalonBay Communities started construction of 204 units in the Uptown neighborhood, and Othello Partners is finishing the 351-unit Station at Othello Park next to a light-rail stop in Southeast Seattle.

All this activity shows how quickly the apartment market has tightened. A constrained supply of new units is expected to boost rental rates. Six months ago, Harbor Properties Chief Development Officer Denny Onslow said the Alto was on hold because rents didn't justify high-rise development. Now, he says, the company will announce construction plans within weeks.

Earlier this year, Dupre + Scott Apartment Advisors projected only about 1,275 apartments would open in 2011 in the four-county metro area, the lowest level in 40 years.

In King and Snohomish counties, nearly 1,780 units are under construction and, of those, almost two-thirds are in Seattle, according to another local company, Apartment Insights, that tracks the multi-family market.

“I definitely think the apartment market is going to have some legs going forward,” said Seattle economist Matthew Gardner, who called apartments “the No. 1 property class today.”

Apartment occupancy rates are stabilizing for several reasons. Would-be homebuyers — skittish that house prices will stay low — continue to rent. Gen Y — children of the mammoth baby boomer generation — are entering the housing market. “There's an awful lot of them, and they'll be renters for quite some time,” Gardner said.

In King and Snohomish counties, the vacancy rate dropped by almost half a percentage point to just over 5.5 percent during the third quarter, and average monthly rents jumped $10, according to Apartment Insights. If the economy holds, “we're going to see really a tight market the middle of next year and into 2012,” said Apartment Insights' Tom Cain, who said this points to significant increases in rents.

New construction faces financing and other challenges. Lenders' equity requirements remain steep, and the cost of institutional funding is expensive, said Gardner. Another issue is whether the owners of struggling condo projects will convert more units into apartments.

Why Seattle?

Development sites near jobs and transit are the hottest. Belltown is an easy walk to downtown, and Columbia City and Othello are stops on the new light rail line that runs from downtown to Sea-Tac Airport.

In addition to projects in Belltown and Columbia City, Harbor Properties is building a 200-unit complex called Link in West Seattle. It's on a Metro bus-rapid transit line to downtown scheduled to open in 2012. Hewson and Breiner either own or have tied up sites next to the planned light rail stops in Roosevelt and Northgate.

Neighborhood character also attracts developers to places such as Columbia City, which is known for small, locally owned businesses and cultural events, such as Beatwalk. One evening a month, patrons pay a single $7 cover charge to hear bands at several venues.

HAL President Behar said he grew up near the commercial core of Columbia City. His wife began going back to the neighborhood for the weekly farmers' market, and coaxed Behar to visit.

“I fell in love with the neighborhood again,” he said.

HAL owns a nearly 1.5-acre site at 4801 Rainier Ave. S. Public records show the company paid more than $6.6 million for the property. HAL plans apartments, a restaurant overlooking Columbia Park, a small grocery and other retail space.

Steve Orser, Harbor's director of development, said he and his colleagues like the energy of the neighborhood, but transit was the main driver behind the decision to buy just over an acre on South Hudson Street, off Rainier Avenue South, for $3.7 million.

Neighborhood character comes at a cost. Residents and city officials want to preserve it, so projects face time-consuming reviews by the landmarks board and architectural review panels. Portions of Harbor and HAL's sites are in the Columbia City Historic District.

Initially, HAL planned 306 units but after reviews that has been reduced. Behar, a former member of the Landmark Preservation Board, supports the process but finds it cumbersome. The next review board meeting will be the 15th for HAL's project, according to Behar, who said if the building gets further reduced in size the site may no longer be viable for development.

Weinstein A/U is designing HAL's project. Behar said it's too early for HAL to select a contractor and line up financing, but he said HAL could self-finance.

Harbor refined the new portion of its project so it's not in the historic district. The site does include the 1920s-era Columbia Motors Building, which is a city landmark. Onslow said Harbor “embraces the neighborhood's historic significance” and plans to preserve the building. Harbor is looking at a number of potential commercial uses for it, including a music venue.

GGLO is the project designer. Exxel Pacific is the general contractor. Onslow said financing is not yet in place.

Exxel Pacific is the general contractor for Hewson and Breiner's Belltown project. It was designed by Hewitt.