November 24, 2015

Is apartment market here getting softer?

Seattle's rental market seems to be softening a bit as all those new units under construction start to have an impact.

Billy Pettit, senior vice president at Pillar Properties, said at a Bisnow event at the Hyatt Olive 8 on Monday that he's seeing signs that demand is slowing down.

Market analysts are still reporting 95 to 97 percent occupancy rates for Seattle properties, he said, “but when we call (the properties) they're more like 92 to 94 percent on the high end.”

Pettit was part of a panel discussing multifamily trends in the Puget Sound area.

“The next 12 months will be really telling,” said fellow panelist Chris Rossman, vice president at Wolff Co. “We'll see how deep demand really is.”

But large employers such as Amazon.com keep fueling job growth, and the region's low cost of living compared with the Bay Area continues to attract employers and workers from that area.

Claudio Guincher, president of Continental Properties, noted that the local rental market tends to swoon this time of year, so we shouldn't read too much into the higher vacancies.

State and regional agencies expect Seattle to add 70,000 housing units and 115,000 jobs over the next 20 years, according to a report from the Seattle Department of Planning and Development. So demand for more housing is expected to continue for a long time.

Also, the real estate site Zumper recently issued a report saying median rent for a one-bedroom apartment in Seattle climbed 6.9 percent in the past year to $1,710.

Owners of existing apartment buildings can take a bit of solace in the fact that local planning departments are overwhelmed, slowing down the pace of entitlements.

“If you're involved in multifamily and you own existing real estate, that's pretty good,” said Matt Griffin, principal of Pine Street Group.

Guincher added that locals know how to get through the development process here, giving them a leg up on out-of-towners. Out-of-towners tend to come in, endure a development cycle, and then leave and not come back, he said.

The panelists noted that apartment projects have become more upscale, which is a reflection of the high development cost and competition to attract renters.

Pettit wondered aloud what developers can do to compete on amenities, particularly since different renters want different things.

“Tastes for 25-year-olds are different than for 60-year-olds,” he said.

The city's new linkage fee could also add a few million dollars to the cost of a project, driving up rents but adding affordable housing, Pettit said.

Developers looking to accommodate mid-market renters are going to secondary markets such as south Snohomish County and outlying areas on the Eastside, Rossman said.

Construction costs in those areas aren't much different from Seattle's but land is cheaper, Pettit said. He also noted that it takes less time to bus from downtown Burien to downtown Seattle than from West Seattle to downtown.

Panelists said there's one product we won't see much of anytime soon from local developers: condos. Guincher said he's sold 88 of the 117 condos in Vik, a complex in Ballard that will be done in January.

Guincher said he chose to do condos because Ballard was “awash with apartments.”

The units have been selling for $550 a foot, he said, and demand has been shallow.

“Young workers don't want to get bogged down with a condo if they switch jobs,” Guincher said.

First-time buyers were slow to come forward during the first six to seven months of construction because they wouldn't be able to move in for more than a year, but they're showing more interest now.

Condo developers from places like Vancouver, B.C., Miami and California are more eager to build here.

“There's just a totally different cultural demand elsewhere” Guincher said. “I think as you're seeing, condos will be done by outsiders for the foreseeable future. Locals see the risk-reward differently.”

The Bisnow event had two other panels, including a discussion of Seattle's “grand bargain” with developers over linkage fees, and a panel on financing. Greg Piantanida, president of GP Realty, said banks are being stifled by the regulatory environment, but they will get more pressure from stockholders to make more income-generating loans.