Demand for Higher End Apartments Grows

BY MIKE SCOTT
Dupre + Scott

The average apartment sales price in our area is just over $40,000 per unit. Newer properties have been selling for about $50,000 per unit though in some areas prices are higher. But even average Eastside prices, pushing $70,000, pale in comparison to some recent trends.

Around the country, high-end properties, dubbed "AA" or even "AAA" quality, have been selling for well over $80,000 per unit. In our region, Summerwalk at Klahanie sold for almost $90,000 per unit last summer. The 108-unit Heritage Park sale in Bellevue topped $100,000, upstaging the $96,000 record set one year earlier by the Heights at Bear Creek. Already this year at least one developer has turned down even more.

The Heights at Bear Creek: high-end renters becoming long-term residents.

Numbers like these should stimulate a lot of new construction. But that has not happened yet. This year will see close to 4,000 units open in the Tri-county market. That is, if they all get funded and sidestep the usual bureaucratic and construction delays.

Although that's more than last year, it's not far off our area's five-year average of 3,900 units. Also, we will likely lose 800 or more units again this year to conversion. That reduces the net increase closer to 3,000 units. Given the recent forecast by Conway Pedersen Economics for 30,000 new jobs in 1996, demand will likely exceed supply for one of the few times so far this decade.

High-end properties

The close-in Seattle market has seen a number of high-end apartment developments in the past few years, the most obvious and dramatic being Harbor Steps. Yet there have not been many high-end suburban apartment developments so far in the 1990s. The earliest was Carillon Heights; the latest is Aspen Creek. A few more are under construction, and more are on the drawing boards.

Features all of these properties have in common are quality, big units and high rents, with most units going for well over $1,000.

The biggest, best units command even more. In Kirkland, some of Aspen Creek's two-bedroom units fetch about $1,400 and three bedrooms $1,800 with no concessions. These rents approach $1.20 per foot. By comparison, Eastside rents in newer properties are $929 overall, with two- and three-bedroom units reaching $1,000 and $1,125 respectively.

Ron May, CCIM, a broker with Colliers International, put the Heritage Park sale together. "Three factors influenced the price," May said. "First, the location is unbeatable. It is close to Microsoft and next to a park. Second, you sense the quality of construction everywhere. It was put together by carpenters who paid attention to detail. Everything fits. Third, the $11.3 million price includes about $750,000 of value the buyer attributed to the financing." Backing that out, the complex still sold for a record $98,000 per unit.

Mike Sedwick, property manager, stresses the value of Heritage Park's location. He says, "Since we are off the main arterial and at the end of a street, the park next to us is almost like our own private sanctuary." Mike is with J.B. McLoughlin Company, the professional property manager for the complex. He adds, "The wooded buffer around the site gives it a very secluded feel."

Demand

The fact that there has been only a handful of high-end rentals built in the past five years is no indicator of the market demand.

Jim Hebert, president of Hebert Research, says, "There is definitely much more of a market than developers have tapped so far. The reasons for so little construction boil down to the difficulty in finding great sites and the battle to convince lenders and investors that the numbers are for real."

Hebert says the growing popularity of high-end rentals reflects a lifestyle decision and uncertainty about our economy. "Up until a couple of years ago," he adds, "it was typically a short-term rental market in high-end units. Renters were just marking time until they found a home to buy, or the house they were building was completed. That changed about two years ago. Today the high-end renter has become a longer-term resident."

Suzanne Britsch, president of Real Vision Research explains, "The market for high-end rentals is going to get deeper. In addition to lifestyle changes and concern over the economy, housing is expensive."

"For example, along the I-90 corridor in the Newcastle area the average price for a new home is $337,000." Even after putting $70,000 down, buyers must pay well over $2,000 a month including taxes. Many are opting to do other things with their money and time, Britsch said.

What about lenders

Even if rental demand is growing, these high-end properties are expensive to build. Rapidly rising land costs in the better locations put even more pressure on development feasibility. That makes getting money tougher.

Still, more lenders are looking to make construction loans. Many lenders recently surveyed are looking to make construction loans. Some are even requiring less cash equity than we've seen in years.

Herb Cutler, vice president of Intervest Mortgage, made the construction loan on Aspen Creek. The loan was shared between Sterling Savings of Spokane, and West One Bank.

"It makes you think hard when you are looking at lending 50 percent more per unit than you usually do," he said. "We had to convince ourselves the numbers worked. But that wasn't enough to assure funding. What gave us the comfort we needed was the very long-term relationship I had with the developer. Having financed other projects for him, I knew how carefully he focuses on quality and meeting the needs of his tenants. I also knew he stays within budget."

The developer's track record is the key. When U.S. Bank made the construction loan on Heights at Bear Creek it did not have any other new high-end properties to monitor. Dave Mullins said, "instead, we relied on the developer's reputation and financial strength."

"The deal was also structured as a two-phase development with significant equity in the first phase to minimize our capital exposure. That helps the lender, but phasing can cause problems for the developer if phase one does not go as well as planned. In this case it did, so the second phase was highly leveraged, which was a plus for the developer."

That elusive quality

Next to location, it is quality that produces success in the high-end rental market. Dwayne Kohler, head of Kohler Associates Architects & Planners, designed Aspen Creek. He attributes its success to a combination of factors. "First, everyone on the team focused on quality. There was a real effort to understand the market segment we were catering to and to give them features they wanted."

"One of the most important features is light. We maximized window space. We changed the typical position of units within a building so that four apartments in each building would be corner units, with windows at 90 degrees."

"For example, take the last two units on each side of an eight-unit building and flip them 90 degrees. Now your building has entrances on three sides instead of one. That's a benefit in itself."

"Rooms that have windows on two walls are much more pleasant. We also gave the buildings a traditional look with arched entries, columns, planter boxes, dark roof and light siding. All of these actions worked for this particular site and market area."

Continental Pacific, the developer of Aspen Creek, packed a lot of quality into the project. Claudio Guincher rattles off some of the features: "Large units, nine-foot ceilings, two-thirds townhomes, garages for 60 percent of the units, and condominium finishings. They all add significantly to cost and quality." Details include: wood molding, fireplace mantles, double-headed showers, tile entries, closet organizers, double sinks in bathrooms, and very large, walk-in closets.

The Heights at Bear Creek.

Walt Smith says, "These apartments cater to people who are apartment dwellers by choice." He should know. Smith is vice president of HSC Real Estate, Inc., a professional property management firm. He runs not only Aspen Creek, but also Heights at Bear Creek and Carillon Heights.

"The 150 units at Carillon Heights took a year to rent up when we began in the spring of 1991. It was a thinner market for high-end units. Last year's absorption at Aspen Creek was almost twice as fast." He adds, "The renters in these units are a little older than typical renters. Most have already owned a home. And we're finding somewhat lower turnover from this group as well."

One thing lenders and investors worry about is the wide gap between both prices and rents for these top-end new properties and other newer construction. Rents in newer properties average almost $200 per month more than the overall market. The high-end developments are even more expensive.

However, as our market tightens this year and next, rents and prices will rise in the overall market. Although the gap won't disappear, it will begin to narrow.

Mike Scott, CRE, is a principal of Dupre + Scott Apartment Advisors in Seattle and a Counselor of Real Estate (CRE). His company specializes in apartment counseling, appraisal and research in western Washington and reports on market trends.

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