APARTMENT

APARTMENT Market Review Seattle Real Estate K i n g , S n o h o m i s h a n d P i e r c e C o u n t i e s Year-End 2008 T he following is an overview summarizing the regional apartment market based on market survey results produced by Dupre+Scott Apartment Advisors, Inc. Although this data excludes projects smaller than 20 units, it provides a good proxy of the overall apartment market. The regional apartment market is composed of King, Snohomish and Pierce Counties, which are divided into 56 neighborhood markets. The previous three years were impressive with rental rates increasing from an average $0.99/s.f. to $1.21/s.f. (growth of 22%). This was a function of minimal new apartment construction and a loss of overall inventory resulting from condominium conversions that drove vacancy down. So even though rents were increasing at a steady clip, for sale condominium units were appreciating at an even faster rate, driving a slew of new condominium construction and conversion of apartments to Market Forecast OVERALL MARKET CURRENT PROJECTION Vacancy 4.84% MARKET OVERVIEW The apartment market is in the beginning stages of the recessionary phase of the real estate cycle. Over the past year, the region’s market vacancy increased from 3.78% to 4.84%, ending three years of considerable rent growth and decreasing vacancy. Longterm frictional vacancy has averaged 5.15% since 1997. Frictional vacancy is defined as the point at which the market is in balance or equilibrium where there is no upward or downward pressure on pricing. Construction 2,620 Units Change in Inventory 2,037 Units Market Up Close • Expect apartment vacancy in most markets to continue to rise. This follows declines to historic lows. The forecast for vacancy is to start an upward trend through 2009 and continue creeping up though 2010. Sales volume for apartment properties was down significantly durin gthe past year due to the credit market upheval and the general downturn in residential and commercial real estate markets. Condominium conversions have stopped in most markets and some projects previously purchased for conversion are being returned to the market as apartments. This trend is expected to continue and the loss of apartment supply will reverse as projects previously intended as condominiums are converted to apartments and new apartment projects are built. The additional supply will place upward pressure on vacancy and market equilibrium. 3-COUNTY MEDIAN UNIT SALE PRICE AND CAP RATE $150,000 8.0% • $125,000 6.4% $109,120 $119,772 $120,155 7.0% • $100,000 $76,002 $91,861 5.7% 5.4% 5.3% 4.9% 6.0% $75,000 5.0% $50,000 4.0% 2004 LEGEND 2005 2006 Cap Rate 2007 2008 Average Price/Unit VACANCY TRENDS SubRegion King - Seattle King - Eastside King - South King County Snohomish County Pierce County Tri-County Totals Vacancy 3Q 2008 3.17% 4.47% 5.86% 4.70% 5.77% 4.50% 4.84% Vacancy 3Q 2007 3.02% 3.81% 4.29% 3.81% 3.95% 3.56% 3.78% % Change 0.15% 0.66% 1.57% 0.89% 1.82% 0.94% 1.06% Avg. Rent 3Q 2008 $1.62 $1.42 $1.07 $1.30 $1.09 $0.99 $1.21 Avg. Rent 3Q 2007 $1.53 $1.31 $0.98 $1.21 $1.03 $.92 $1.12 % Change 5.9% 8.4% 9.2% 7.4% 5.8% 7.6% 8.0% condominiums. This erased the flat to negative rent growth that occurred in the previous economic downturn from 2001 through 2004, when vacancy was pushed above frictional levels. Fewer home buyers are able to qualify for loans, keeping these households as renters or forcing them into rental properties, whereas previously they would have purchased housing. VACANCY RATE TRENDS The region has a current vacancy rate 4.84%, just below the long-term frictional average of 5.15%. Regional economists are forecasting declining employment and economic growth for the next five quarters going into 2010. This recessionary cycle will pull the apartment market down along with it, and it is forecast for the regional vacancy rate to increase to between 6.5% and 7.5% over the next four to six quarters. This forecast will largely depend on the amount of inventory actually delivered along with how far employment growth decreases in 2009 and 2010. A phenomenon unique to this downturn that is benefitting the rental market is the increasingly stringent qualifying parameters required by lenders of prospective borrowers. RENT RATE TRENDS As vacancy rates decreased, rental rates increased – most on the order of 8% to 10% in 2007. Survey results for fall 2008 indicate annual rent growth on the order of 5% to 9%. Over the next four to six quarters, vacancy is projected to increase to between 6.5% and 7.5%. This will limit rent growth to near current levels until the economy recovers. Over the past year, the percentage of property manager’s anticipating increasing rent decreased from 82.2% to 68.3%. Correspondingly, those properties offering concessions increased from 9.8% to 15.9%, which mirrors the trend between the time units remain vacant and when they turn over. CURRENT INVENTORY/SUPPLY Since 1996, an average of 3,377 units per year are brought to market. However, over the past six years this delivery rate decreased to an average of 2,463 units per year. Countering new construction is the removal of apartment units due to demolition or conversion to another use, such as affordable housing or condominium ownership. Since 1996, removals have averaged 2,278 units per year. From 2005 to 2007, this rate increased to an average of 5,724 units per year, which decreased the overall inventory. This loss of units was primarily driven by condominium conversions, which grew from about 30% of removals to more than 80% during this period. From 1996 to 2003, total inventory increased from 191,538 to 213,932 units. This was followed by a period of decline from 2004 to 2007, where 8,574 units were pulled out of the market. This reduced the overall apartment inventory in 2007 to 2 HISTORIC VACANCY AND RENT TREND (TRI-COUNTY REGION) $1.25 $1.20 $1.15 $1.10 5.29% $1.21 9.0% 8.0% 7.0% 6.0% 4.84% 5.0% 4.41% 4.12% 7.41% 7.37% $1.16 6.52% $1.12 $1.07 $1.05 $1.00 $0.97 4.68% $1.03 $0.99 $0.95 4.73% 3.78% 4.0% 3.0% 2.0% 1.0% 0.0% $0.95 $0.90 $0.85 $0.80 $0.94 $0.94 1Q04 LEGEND 3QO4 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 Average Rent Vacancy Rate (%) SEATTLE REAL ESTATE APARTMENT MARKET REVIEW YEAR-END 2008 levels existing in 2000/2001. In 2008, this trend reversed with most conversion projects repositioned back to a rental operation. ANNUAL NEW CONSTRUCTION AND REMOVALS 7,500 6,750 6,000 5,250 4,500 Units Per Year 3,750 3,000 3,000 2,250 1,500 750 0 PROJECTED DEMAND In 2007, presales for new condominium projects came to a virtual end. The slower absorption that followed was really more in tune with a stabilized market, but the change seemed traumatic in comparison with the 100% pre-sales of 2005/2006. With construction costs increasing, sale prices flattening, and difficulties in the mortgage market, feasibility for this product type quickly evaporated. New apartment construction on the other hand became feasible in this vacuum with rents increasing by 30-40% over the past four years, which spurred a number of proposed projects. In 2009, 6,700 new units are expected to open, followed by 4,121 in 2010 and 7,946 units in 2011. These figures include 8,794 units already under construction and scheduled to open beginning in 2009. Most of the aforementioned units are expected to open. The remaining 9,973 units are planned projects – most scheduled for 2011 and beyond. Given the current recessionary market, it is likely that a good portion of these planned projects will be delayed or eliminated. 2004 LEGEND New Construction 2005 Removals 2006 2007 2008 doubled and prices (both per unit and per square foot) increased more than 55%, with some years reflecting more than 20% year-over-year increases. At the same time, capitalization rates decreased from the 7% to 8% range to rates less than 5%. This decrease in capitalization rates was primarily a function of low mortgage rates and increased demand from institutional investors. In the last few months, lenders have gotten more cautious and are requiring greater participation by investors. This has reduced yields and begun to push prices downward and capitalization rates upward. Sales activity continues but at a moderate pace, as buyers and lenders more carefully examine the market and the product available. ESTIMATE OF FUTURE APARTMENT DEMAND The latest Puget Sound Economic Forecaster newsletter figures indicate that the region has just begun a recessionary phase that will likely last five quarters, before turning the corner in 2010. There are approximately 1.784 million jobs in the region and 197,800 occupied apartment units based on the latest survey figures. This translates into a demand factor of one occupied apartment for every 9.02 jobs. occupied apartment units based on the latest survey figures. This translates into a demand factor of one occupied apartment for every 9.02 jobs. The regional vacancy is forecast to peak in early 2010, at between 6.4% and 7.8% (7.1% considered most likely) and decreasing to between 4.7% and 6.9% (6.2% considered most likely) in 2011. In the short term, some submarkets may take a while to absorb the new inventory. However, once the market begins to correct itself in the next year or two absorption will increase, at which point new supply will be needed. FOR SALE OWNERSHIP MARKET SUMMARY One of the primary competitive pressures to rental apartments is the residential ownership market. For sale residential product is being absorbed at levels substantially lower than activity from just a few years or even months ago. The supply of unsold inventory is increasing and a backlog of inventory is growing. This slowdown has been expected, mirroring trends nationwide. Even though the Puget Sound has weathered the storm better than most areas of the country, it is becoming a buyers’ market as inventories grow. UNITS SOLD According to Northwest Multiple Listing Service data, the number of units sold (year-to-date) in the Puget Sound is down in volume by 15,067 over 2007 figures reflecting a change of -33.1%. INVESTMENT ACTIVITY Sales activity in the Puget Sound region was brisk from 2004 through 2007. Over this period, sales volumes nearly 3 SALES COMPARABLES City 2900 On First Apartments The Park on Dashpoint Pacific Pointe Apartments Brittany Park Apartments Meridian Manor Summer Walk Apartments River's Edge Bronson Place Colina Square Cavalier Apartments Seattle Federal Way Kent Auburn Seattle Carnas Kent Auburn Mountlake Terrace Sammamish Seattle Sale Price $36,432,500 $30,000,000 $14,400,000 $13,171,500 $12,039,100 $11,790,000 $10,000,000 $9,850,000 $7,400,000 $6,809,000 $6,397,000 # Units 135 280 249 190 109 28 175 120 70 36 48 Price/Unit $269,870 $107,143 $57,831 $69,324 $110,450 $421,071 $57,143 $82,083 $105,714 $189,139 $133,271 Date Built 1989 1988 1978 1968 1979 2006 1968 1976 1988 2000 1926 Cap Rate 5.25% 5.70% N/A 8.20 N/A N/A N/A 6.10% 5.10% N/A N/A MARKETING TIME Marketing time for closed sales has increased from an average of 72 days in 2007 to 82 days in 2008, an increase of 24% over this period. REGIONAL APARTMENT CONCLUSION Over the next five quarters, the forecast is for a slowing economy and population growth, combined with an increasing inventory of new construction. This should cause regional vacancy rates to push above the long-term equilibrium of 5% and dampen rent growth. Risks to this forecast hinge on the depth and duration of the national and global recession, which has yet to find a bottom. The general consensus is that once home prices stabilize, the market can begin to recover. Regionally, the turnaround is forecast to occur in early 2010. MEDIAN SALES PRICE TRENDS The YTD 2008 median sale price in the region reflects a 7.1% decrease over 2007 figures. ABSORPTION The available inventory in the Puget Sound for November 2008 totaled 23,680. During this month, closed sales totaled 1,758, reflecting a 12.5 month supply of inventory based on the current sales rate. A market that is in equilibrium (favoring neither the buyer nor seller) is generally represented as a six month remaining supply. The housing market is currently oversupplied and the absorption rate reflects a market that favors the buyer. This slowdown in the for sale housing market should create some additional demand for rental housing. LOCAL OFFICES SEATTLE 206.296.9600 SAN FRANCISCO 415.229.8888 PORTLAND 503.221.9900 BELLEVUE 425.454.7040 SOUTH SEATTLE 206.248.7300 TACOMA 253.722.1400 SANTA CLARA 408.970.9400 REDWOOD SHORES 650.769.3600 CONTACT Jeffrey S. Lyon, CCIM, SIOR Chairman & CEO 206.296.9600 jlyon@gvakm.com The information in this report was composed by the GVA Kidder Mathews' Valuation Advisory Group. Contact Jeremy Streufert, Gary Klockenteger, MAI, or Richard Briscoe, MAI at 206.296.9600. www.gvakm.com This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR. 4