September 23, 2014

Are apartments overbuilt here? Reports say no, they're filling up

Nearly 7,200 apartments opened in the region last year — the most since 1991 — and despite fears of overbuilding, new apartments are filling up and the vacancy rate is holding steady.

A new report from Dupre + Scott Apartment Advisors says the vacancy rate for King, Pierce, Snohomish, Kitsap and Thurston counties is 3.8 percent, an uptick from six months ago. But the gross vacancy rate, which takes into account new construction, actually dropped from 5 percent to 4.7 percent.

Occupancy has hovered between 94.5 percent and 95.4 percent since September 2010, the report says. From September 2010 to the end of this year, developers will have built almost 20,000 new apartments in the region. The report lists the current gross occupancy rate, which includes new construction, as 95.4 percent.

Tom Cain of Apartment Insights Washington reports that rents in King and Snohomish counties rose an average of $34 in the last quarter, a 2.5 percent increase. Cain reports rents have risen 8.1 percent over the last 12 months. Dupre + Scott puts the increase at 8.2 percent.

Dupre + Scott cautioned against reading too much into rent increases because there has been so much new construction, a concept they call “skew of the new.” Excluding new construction, rents are up 6.3 percent over the last year. Dupre + Scott says that is “still a significant increase, but we're just beginning to see the distortion that new construction will create.”

Dupre + Scott reports 75 percent of property owners said they planned to increase rents by 4 percent between March and September of this year. They raised rents 3.9 percent, excluding new construction. Dupre + Scott also reports about 75 percent of property owners plan to raise rents another 4 percent by next March.

Despite the boom in high-wage tech jobs, Cain said the greatest demand is for lower-rent units. SeaTac and Burien are two of only three submarkets with vacancy rates below 3 percent and are also two of the cheapest areas.

Cain said the only area with a vacancy rate above 6 percent is Ballard. “There are just too many units there with more to come,” he said in his report.

Because there is so much activity in Belltown and South Lake Union, Cain separated them from downtown in his survey this quarter. The smaller downtown submarket ranks as the most expensive in the region with an average rent of $2,171 per month. South Lake Union's rent average is $1,812, and Belltown is $1,669.

The Dupre + Scott report says despite all the new apartments, demand continues to slightly outpace supply. The area keeps adding jobs — about 48,200 in the last year, according to Conway Pedersen Economics.

Gail Duke, managing director at Madrona Ridge Residential, said all the new jobs help fill the new apartments, while units in older buildings remain occupied. Madrona Ridge is the property management and construction affiliate of Security Properties.

Madrona Ridge is managing an older building in Ballard that is near several new apartment projects, but Duke said renters aren't jumping to the new buildings.

“You would never know it was in a neighborhood that was introducing 1,500 new units,” Duke said.

Both Dupre + Scott and Cain suggest that things will slow down a bit next year. Dupre + Scott projects 8,700 units will open in the region this year — because construction delays pushed some openings into next year — and about 12,000 units will open in 2015.

Cain predicts that most but not all of the new apartments opening this year will be absorbed, a sign of slowing ahead.

“These numbers suggest that the market will weaken slightly through 2015,” Cain said. “Yet, if the current level of economic growth continues, the market will still be healthy next year.”