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June 26, 2014
“Are we overbuilt?”
The fear of an apartment bubble has been a constant topic of conversation almost since this hot development cycle began, and not everyone agrees on the answer.
There are two fundamental reasons, however, apartments in Seattle and the Puget Sound region are not overbuilt now or in the near future.
Steady job growth
The first reason apartments are not overbuilt is year-over-year steady regional job growth.
Seattle and the region are one of the few economies nationwide to regain all jobs lost since 2008. While most of the nation is still clawing out of the Great Recession, Seattle, Bellevue and most of the region are one of a handful of nationwide markets that aren’t just surviving, but thriving.
Our region added roughly 50,000 jobs annually between 2010 and 2013 and we’ll add another 50,000 or more this year. Much of this job growth is a result of pent-up demand from an economy that ground to a halt in 2007-08, as well as new economic drivers such as growth from Amazon, Microsoft, Boeing, Google and Starbucks. In addition, we benefit from the fantastic health of several economic sectors, from biotechnology and cloud computing to health-care and tourism.
This robust and diverse market growth especially in technology and business services is driving remarkably strong office market growth. According to commercial real estate services firm CBRE, office vacancy rates were down for the third straight quarter in the first quarter of 2014 and Seattle office vacancy rates are just under 10 percent (Central Business District vacancy is around 13 percent).
According to commercial real estate company Jones Lang LaSalle, Bellevue continues to dominate as one of the tightest office markets in the nation, with vacancies hovering around 3.9 percent.
It’s no wonder Forbes named Seattle the No. 1 city for tech jobs in 2013 and the Urban Land Institute last year ranked Seattle the No. 4 real estate investment market in the nation.
Adding more than 200,000 jobs to the region in just four years begs the quintessential question: Where do the jobs go at night?
The answer: They want to live as close to their jobs as possible, and rampant housing absorption in Seattle and Bellevue is proof of that. So is sub-market residential development and declining office vacancies, from Bothell and Mill Creek to Renton and Issaquah.
A safe bet
This leads us to the second reason apartments will continue to dominate in the foreseeable future: Apartments will continue to be king until a new ruler proves it can reign.
At almost every price range from low-income and workforce housing to high-end apartment homes the demand is high for one of our most basic needs: Shelter. Because of a lack of new home construction and condominium supply, apartments are predominantly fulfilling that need.
And until the market fundamentals shift and condominiums or single-family homes take the reins, apartments will continue to rule.
Although we’re starting to see new downtown Seattle condominiums being developed for the first time since 2007, they won’t be the matchstick that lights or sustains this housing market. Lenders and developers agree the risk is still too great. Capital isn’t flowing and banks still aren’t lending for this product type.
Until that changes, condos are mostly stuck. It’s possible, however, that we’ll see higher-end apartment buildings switch to condos when the market shifts and some developers are clearly building with that option in mind.
The trend toward the safe-bet apartment build is not just a Seattle fad, it’s booming nationwide. Apartment vacancy rates on a national scale are at their lowest in a decade, which is sending rents through the roof, while the inventory of single-family housing is also historically low.
Roughly 70 percent of Seattle is zoned for single-family homes and the likelihood of new product is pretty low, unless we start to rethink how we look at the edges of our single-family zones, for all types of housing.
And because another 15 percent of Seattle land is zoned industrial, it only leaves about 15 percent or less for mixed-use, dense development.
Density is a must if we are to keep rents from climbing and housing affordable to a range of incomes. This is especially true for commuter-friendly areas, where putting jobs and housing near transit is essential.
At the end of the day, Seattle, Bellevue and most of the region is land-locked not just by mountains and water, but by the Growth Management Act and Urban Growth Boundary and local land-use policies.
So for now, apartments are king. As long as the jobs and people keep coming, they must go somewhere at night.
The real question to ask isn’t if we’re facing an apartment bubble, but what are the range of creative tools we need to deploy that will keep urban housing affordable to a range of incomes.
As CEO and president of Goodman Real Estate, George Petrie drives the acquisition, renovation and disposition of more than $2 billion worth of commercial real estate in four countries. GRE is one of the few private developers in the region providing affordable housing to a variety of incomes.