February 6, 2014

5 predictions for apartments in 2014

Simon

We may be the Emerald [Green] City, yet it is the rest of the nation who should be green with envy in 2014. Let's take a quick stock:

• Nation-leading rent growth in 2013 at over 6.5 percent

• Nearly 50,000 jobs added in each of 2012 and 2013

• The 2013 holiday season was the best in Amazon.com's history: 426 items were sold every second and shipped to 185 countries!

• Boeing inks a deal with machinists securing our place as the global center of aerospace for years to come.

• Not to mention the Seahawks' sweet Super Bowl victory. Take that post-recession economy!

Here are five trends apartment investors should look out for in 2014.

1. Greater transaction volume

Expect many more apartment sales in 2014, much greater than in 2013. Last year we only saw 52 sales of apartment buildings with 50 or more units in the tri-county region. This volume is a 34 percent decline from 2013 and a 56 percent decline from the peak year — 2005 — when 117 buildings sold.

Given expectations of slower rent growth in 2014 and increased competition due to the development pipeline, more owners in 2014 will succumb to historically low capitalization rates and investor demand. Additionally, the window for buyers to take advantage of low interest rates will soon start to close as we hit the Federal Open Market Committee's target of 6 percent national unemployment. Expect to see a pronounced increase in sales volume in 2014.

2. Going beyond the core

Since coming out of the doldrums of 2008/09, institutional investors have focused predominantly on core investments. The foregoing resulted in cap rate compression that barely eased despite a 100 basis point increase in treasuries by mid-2013. Although secondary and tertiary strategies were discussed and in some cases announced in 2013, in 2014 we will see institutional investors execute on these strategies and chase yield on deals outside of the core.

3. Wait, there's more development

Outlandish as it may seem, continued apartment development is on our horizon. Many factors are influencing developers to keep planning projects and breaking ground. Here are the most salient:

Jobs. We have had a great run of job growth and it is forecast to continue. We added nearly 52,000 jobs in 2013 and are increasing employment at a pace nearly double that of the national economy, 2.9 percent to 1.7 percent, respectively. Conway & Pederson forecast the region will add another 52,000 jobs in 2014 and 322,500 jobs in the next decade.

The Boeing machinist contract alone is forecast to add 20,000 jobs to the region.

Demographic shifts. Nationally, another 4.5 million people will join the prime renter demographic in the next five years and a “shadow-market” of another 3 million renters remain shacked up with family. The Puget Sound region is no exception to growth in the prime renter age set, and is expected to add more than 70,000 people in this age bracket over the next four years.

Re-urbanization. As we continue the great re-urbanization of America, Seattle is very much the benefactor of a focus on urban development. The vibrancy of our urban technology sector, demographic shifts mentioned above and the dearth of urban residential development over past decades will all lead to sustained demand.

Capital. Since emerging from the depths of the Great Recession, equity sources and commercial real estate lenders have remained active in the Seattle construction lending market for apartments and, although possibly tempered, the appetite to deploy capital in Seattle remains strong. A lack of development of speculative office and retail will result in lenders again choosing apartments.

4. Condos are coming

They are coming, and in fact, they are already among us! For the last several years “condo” was a five-letter dirty word. Regardless of overall sentiment, this will be the year condominium development rises from the metaphoric ashes. Here's why:

Demand. Currently there are about 100 condos available in the entire Seattle market and not a single new available unit in Seattle is priced under $1.5 million. Historic supply levels in Seattle are somewhere near 300 units.

Developer desire. Currently, four condominium developments are publicly underway, three by Canadian developers and one by a Swedish pension fund. The Insignia, at 707 units, is already about 10 percent presold, even though the opening is more than a year away. Solo Lofts in Ballard is near opening and more are assuredly coming.

Financing. HomeStreet announced a condo lending program in 2013, and other lenders surely will follow. On the take-out lending side, pent-up demand will lead to willingness for greater down payments and the buying of presales, helping solve this issue.

There is a saying in our industry that cycles are long and memories are short. Appetite for condo development will again follow this adage.

5. Fundamentals are strong

In every previous apartment cycle, oscillations between peaks and troughs were demonstrable and on the downslope, painful. The tri-county region currently has more than 42,000 units in the apartment development pipeline. We have not seen such great supply since the late 1980s and the absorption was painful for years.

Yet, despite such an ominous pipeline of deliveries, any trough we experience will be unlike those of previous cycles. The fundamentals of our market, as set forth above, illustrate the capacity to absorb many more units than in previous cycles and any trough will be minimal and short. Although we will see concessions and a gradual modulation of rent growth, our apartment market will remain in balance.

We are set for a great 2014 and apartment investors will assuredly benefit from the national and global desire to place capital in our market, our amazing and finally diverse employer base, and the talented and sought-after pool of people filling our apartment buildings.

Dylan Simon is an investment sales broker in Colliers International's Seattle office, and specializes in apartments and land, with a focus on urban strategies. He blogs at http://www.dylansimon.com.