[DJC]
[Commercial Marketplace]

Southend Apartment Market Finally Heats Up

BY DAIL QUAINTANCE-BODZIONY
Cain and Scott, Inc.

The South King County apartment market hasn't been kind to owners of apartment properties during the past five years. Too many units and not enough jobs contributed to a vacancy rate in excess of 6 percent.

Rental incentives have been a never-ending pattern for some since the late 1980s. Net income streams for many properties have deteriorated, with expenses outpacing the actual collected rents.

Many owners kept thinking that things just gotta get better next year, but they didn't, and they keep waiting. Others were less optimistic, less patient and perhaps less able to hold on. They bailed out last year.

There were some striking examples of value decline of major properties in this market last year. Liberty Real Estate in Boston unloaded four major complexes, two at sizeable losses. They sold Crown Pointe, 196 units in Renton, for $1,775,000, less than they paid 10 years earlier and Park Place by the Woods, 209 units in Tukwila, for $1,670,000, less than they paid in 1985. This represents a 22 percent loss of value.

A Dallas investment group sold the 382-unit, Court I and II, in Kent for $8 million after paying close to $10 million in 1980. The 124-unit, Garden Pointe, in White Center sold for $1.5 million, less than it sold for in 1991. This represented a 36 percent drop in value.

A couple of lenders ended up with properties that at one time commanded a premium. Balcor took over the 576-unit, Jonathan's Landing, for $20.5 million that had sold for $28.2 million at the top of the market in 1990. Aetna took back and resold Heatherwood, 368 units, for $12.5 million. The developer sold it new in 1985 for $15.4 million.

It's interesting that all of the investment groups that lost money on these deals were out-of-state. Last year's buyers on these deals were from California and two were from this area.

On the brighter side, there were a few examples of long term gains in this market. However, the terms were really long and the gains not too significant.

The California seller of Sunset Vista, 124 units in Renton, waited 12 years to realize $200,000 gross profit on his price of $3.5 million to a local investor. In another deal, a local seller realized a $400,000 value gain on a $4.6 million price after 15 years. This was the sale of the Fairwood, 176 units, also in Renton, to the King County Housing Authority. Actually, there was one quick turnaround sale that resulted in a handsome gain for a Canadian company. This was the Meridian Ridge, a 177-unit complex in Kent. It sold for $1.3 million more than the $3.6 million the buyer paid two years earlier.

We have provided a table showing how apartment values have declined over the five-year period ending in 1995. The group built in or after 1986 averaged nearly $50,000 per unit in 1991 and about $41,500 last year. The older age group dropped from $39,400 to $30,500 per unit in the same time period. The financial indicators substantiate the deterioration in income streams and increase in expenses.

The South King County rental market has shown a dramatic improvement in occupancy rates in the past few months. The frequency and value of rental concessions is declining. This is based on our analysis of recent operating statements on complexes in this market and conversations with owners and professional property managers.

This has been quite unexpected, especially during the winter months which are traditionally very slow. Growth in the light industrial market in the valley may account for some of this recent pressure on apartment rentals.

The expansion of light industrial business activity in the valley is just one positive in a picture that is becoming increasingly brighter. Boeing has reversed its layoff cycle with an announcement that it is hiring again. The Boeing Company headquarters is under construction at the old Longacres site as is the King County Criminal Justice Center in Kent. In Auburn, the racetrack is under construction and the recently completed Supermall of the Northwest continues to add to the employment base.

On the horizon, Burlington Northern plans to build a rail hub south of downtown Auburn. Matsushita Semiconductor Corporation plans to begin a $90 million expansion to its existing facility in Puyallup very soon. The third runway at SeaTac is closer to becoming a realty.

Many investors have been studiously avoiding the South King County apartment market in the 1990's. And they probably had good reason until recently. This is not a glamorous market, especially compared to its metropolitan neighbors to the north.

But there are just too many positive factors to ignore: per unit values about $10,000 less than five years ago; a tightening rental market; an expanding economy and virtually no new construction.

While it may not win many "most favorite area" awards among apartment investors, it should be on top of their "most underrated" lists for near-term appreciation potential.

Dail Quaintance-Bodziony is vice president and manager of the counseling and appraisal services for Cain and Scott Inc.

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Copyright © 1996 Seattle Daily Journal of Commerce.