September 14, 2000

Real Estate Buzz

Top seller sees apartment deals dwindle

Dramatically fewer apartment buildings will sell this year in the Puget Sound area, and possibly nobody will feel the drop more than Kenny Dudunakis.

But we should still be so lucky to walk in Dudunakis' doubtlessly fine shoes.

Dudunakis reigned as the highest-selling apartment broker in the area's Marcus & Millichap office for each of the past five years. Last year, when apartment buildings were still changing hands faster than Mariner left fielders, Dudunakis arranged $130 million worth of deals, almost double his previous high of $75 million for the previous year.

The $130 million, in fact, placed Dudunakis second nationally among M&M's 550 brokers, behind only the perennial top producer.

Earlier this year Dudunakis took a better commission-split offer to leave M&M after 10 years and join Phoenix-based Hendricks & Partners' five-person Seattle office.

The 43-year-old broker figures he'll hit about $65 million in deals for this year.

Dupre + Scott Apartment Advisors' freshly issued September market report says the volume of apartment buildings sold in King, Pierce and Snohomish counties will continue sliding from 1998's record peak of $1.2 billion and last year's $880 million to about $600 million this year.

"That's not only below the peak, it is well below the almost $800 million average volume over the past five years," wrote Dupre + Scott. "Even if volume runs higher (by picking up for the remainder of this year), it is not likely to approach the record levels posted in the past three years. We doubt volume will even reach the region's five-year average."

The decrease stems from investors sensing that there's not as much profit to be had in buying apartments in today's market as there was two years ago, even though apartments remain attractive as investments, the firm said.

"We estimate buyers in 1995 were looking at overall yields between 15 and 17 percent," Dupre + Scott said. "Since then a number of factors conspired to lower returns. Using the same (3 percent) inflation rate, buyers this year are looking at yields of 12 to 15 percent."

The average price per unit has remained steady at last year's rate of $60,000 for the three counties, Dupre+Scott said. This masks the fact that most units are selling at higher prices this year, however, the firm said, because the percentage of units sold in King County dropped substantially. Buyers are going for more units in lower-priced sub-markets, at increased prices in those markets, the firm said.

Cap rate trends back up this scenario. The cap rate effectively is the rate of return the buyer predicts he'll receive based on projected rent revenue and expenses, in other words on operations. A low cap rate, say below 8 percent, means the seller received a strong price as the buyer settled for a lower yield. Vice versa, a higher cap rate, say above 9 percent, means the buyer paid a low-enough price to expect a fairly high yield.

"The average cap rate so far this year is 7.8 percent, down slightly from both 1998 and 1999, when cap rates averaged 7.9 percent," Dupre + Scott determined.

Prices in Seattle have risen about 9 percent so far this year to $82,000 per unit, the firm said.

That describes the market in which Dudunakis and other apartment brokers find themselves operating. Of his likely $65 million volume for this year, Dudunakis said, "I'm pretty comfortable with that based on what's going on out there. To date this year, about seven or eight deals have closed at more than $5 million in the three counties. I think it was probably 25 to 30 by this time last year."

Dudunakis said earlier this year it looked like low apartment vacancy rates would start easing up, as a large volume of newly built apartments came on the market, but now it looks like vacancies have tightened right back up because the economy has held strong.

"I think the trend is the rental market has tightened up from earlier this year," he said. "There's virtually no vacancies from Everett to Tacoma."

Targeted Genetics takes 75,000 sf

CarrAmerica Realty Corp. landed the Seattle biotech company Targeted Genetics as tenant for 75,000 square feet in Canyon Park in Bothell that had served as the temporary home of the new University of Washington's Bothell campus.

Targeted Genetics, which develops gene therapy drugs, intends to create a manufacturing facility in the space. The company leased all of what CarrAmerica refers to as Building A of the six-building Canyon Park East portion of the business park. The university moved out of the building this summer and into its new campus.

Clete Casper, Northwest managing director for Washington, D.C.-based CarrAmerica, said this deal keeps CarrAmerica's 1.5 million-square-foot Eastside office portfolio at 100 percent leased.

Broker Bob Mooney of Staubach Co. represented Targeted Genetics. Mike Schreck and Tim O'Keefe of Colliers International represented CarrAmerica.

Bedford sells in Eastgate

Bedford Property Investors sold its freshly re-tenanted Kenyon Center office building in Bellevue's Eastgate area to a group of local investors for $20.52 million, King County property records show.

The buyer is listed as Midas Way Property Co. Bedford regional vice president Phil Wood said Midas owners didn't want their names disclosed. Paul Jerue of Bellevue-based Broderick Group represented Midas while Bedford didn't use a broker.

Kenyon Center totals 89,899 rentable square feet, so the price equals a substantial $228 per square foot.

Bedford bought the 13-year-old building, on 6.29 acres, in September 1996 from developer Jim Kenyon for $12 million, or $133 per square foot. Boeing occupied the building then, but moved out at the end of last year.

Bedford replaced Boeing with Micron Electronics subsidiary HostPro, clothing seller Helly Hanson's headquarters and the telecom company SBC Telecommunications. The building's high selling price indicates rents jumped substantially from what Boeing paid.

Bedford didn't put the building, in the Bellevue Business Park, up for sale, but rather Midas approached Bedford, Wood said.

Nexus to build at Snoqualmie Ridge

Nexus Properties bought 8.5 acres in the young Snoqualmie Ridge business park on which it plans to quickly build 144,000 square feet of biotech-oriented office space on spec.

San Diego-based Nexus intends to construct two 72,000-square-foot buildings. Each will have 16-foot-high first-floor ceilings and strengthened floors on the second level, characteristics that appeal to biotech and telecom tenants.

Nexus paid Snoqualmie Ridge developer Quadrant Corp. $4.06 million for the land, King County property records show. That price equals $10.95 per square foot of land. The price comes to $27.70 per square foot of building Nexus would develop.

Broker Tom Erlandson of Seattle-based Alexander Commercial Real Estate represented Nexus. John Black and Jason Furr of Broderick Group represented Quadrant.

The land sale brings the total to 30.5 acres of the 89-acre business park sold, with another 4 acres close to selling, said Quadrant leasing and sales manager Debi Frausto.

Previous columns:

• Meydenbauer: Ritz out, Schnitzer in, 09-07-2000
• Real Estate Buzz, 08-31-2000
• Real Estate Buzz, 08-24-2000
• Real Estate Buzz, 08-17-2000
• Real Estate Buzz, 08-10-2000
• Real Estate Buzz, 08-03-2000
• Real Estate Buzz, 07-27-2000
• Real Estate Buzz, 07-20-2000