Apartment Seattle Real Estate 2009 - PDF by hvw39341

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									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

                                                                                           Market
 T
            he following is an overview summarizing the regional
            apartment market based on market survey results produced                        Forecast
            by Dupre+Scott Apartment Advisors, Inc. Although this data
            excludes projects smaller than 20 units, it provides a good                                       CURRENT      PROJECTION
                                                                                           OVERALL MARKET
  proxy of the overall apartment market. The regional apartment market
  is composed of King, Snohomish and Pierce Counties, which are divided
                                                                                           Vacancy             4.84%
  into 56 neighborhood markets.

                                                                                           Construction      2,620 Units
  MARKET OVERVIEW                                The previous three years were
  The apartment market is in the                 impressive with rental rates increasing
  beginning stages of the recessionary           from an average $0.99/s.f. to
  phase of the real estate cycle. Over the       $1.21/s.f. (growth of 22%). This was
  past year, the region’s market vacancy
  increased from 3.78% to 4.84%,
                                                 a function of minimal new apartment
                                                 construction and a loss of overall
                                                                                           Market
                                                                                              Up
                                                                                             Close
  ending three years of considerable rent        inventory resulting from condominium
  growth and decreasing vacancy. Long-           conversions that drove vacancy            • Expect apartment vacancy in most
  term frictional vacancy has averaged           down. So even though rents were             markets to continue to rise. This
  5.15% since 1997. Frictional vacancy           increasing at a steady clip, for sale       follows declines to historic lows.
  is defined as the point at which the           condominium units were appreciating         The forecast for vacancy is to start
  market is in balance or equilibrium            at an even faster rate, driving a slew      an upward trend through 2009 and
                                                 of new condominium construction             continue creeping up though 2010.
  where there is no upward or downward
  pressure on pricing.                           and conversion of apartments to
                                                                                           • Sales volume for apartment properties
                                                                                             was down significantly durin gthe
  3-COUNTY MEDIAN UNIT SALE PRICE AND CAP RATE                                               past year due to the credit market
                                                                                             upheval and the general downturn in
                                                                                             residential and commercial real estate
        $150,000                                                              8.0%
                                                                                             markets.


        $125,000                                                   $120,155   7.0%         • Condominium conversions have
                                                        $119,772
                       6.4%
                                                                                             stopped in most markets and some
                                            $109,120
                                                                                             projects previously purchased for
        $100,000                  $91,861                                     6.0%           conversion are being returned to the
                                                                    5.4%                     market as apartments. This trend is
                                  5.7%                                                       expected to continue and the loss
                     $76,002
        $75,000                             5.3%                              5.0%           of apartment supply will reverse
                                                          4.9%                               as projects previously intended as
                                                                                             condominiums are converted to
        $50,000                                                               4.0%           apartments and new apartment
                      2004          2005      2006         2007      2008                    projects are built. The additional
                                                                                             supply will place upward pressure on
            LEGEND    Average Price/Unit     Cap Rate                                        vacancy and market equilibrium.
VACANCY TRENDS
                                                                Vacancy                       Vacancy                             Avg. Rent       Avg. Rent
 SubRegion                                                                                                       % Change                                        % Change
                                                               3Q 2008                       3Q 2007                               3Q 2008         3Q 2007
 King - Seattle                                                      3.17%                       3.02%               0.15%            $1.62           $1.53           5.9%
 King - Eastside                                                     4.47%                      3.81%                0.66%            $1.42           $1.31           8.4%
 King - South                                                        5.86%                      4.29%                1.57%            $1.07           $0.98           9.2%
 King County                                                         4.70%                       3.81%               0.89%            $1.30           $1.21           7.4%
 Snohomish County                                                    5.77%                       3.95%               1.82%            $1.09           $1.03           5.8%
 Pierce County                                                       4.50%                       3.56%               0.94%            $0.99            $.92           7.6%
 Tri-County Totals                                                   4.84%                       3.78%               1.06%            $1.21           $1.12           8.0%


condominiums. This erased the flat to negative rent growth                                                      Fewer home buyers are able to qualify for loans, keeping
that occurred in the previous economic downturn from                                                            these households as renters or forcing them into rental
2001 through 2004, when vacancy was pushed above                                                                properties, whereas previously they would have purchased
frictional levels.                                                                                              housing.

VACANCY RATE TRENDS                                                                                             RENT RATE TRENDS
The region has a current vacancy rate 4.84%, just below the                                                     As vacancy rates decreased, rental rates increased – most
long-term frictional average of 5.15%. Regional economists                                                      on the order of 8% to 10% in 2007. Survey results for fall
are forecasting declining employment and economic growth                                                        2008 indicate annual rent growth on the order of 5% to
for the next five quarters going into 2010. This recessionary                                                   9%. Over the next four to six quarters, vacancy is projected
cycle will pull the apartment market down along with it,                                                        to increase to between 6.5% and 7.5%. This will limit rent
and it is forecast for the regional vacancy rate to increase to                                                 growth to near current levels until the economy recovers.
between 6.5% and 7.5% over the next four to six quarters.
This forecast will largely depend on the amount of inventory                                                    Over the past year, the percentage of property manager’s
actually delivered along with how far employment growth                                                         anticipating increasing rent decreased from 82.2% to
decreases in 2009 and 2010.                                                                                     68.3%. Correspondingly, those properties offering
                                                                                                                concessions increased from 9.8% to 15.9%, which mirrors
A phenomenon unique to this downturn that is benefitting                                                        the trend between the time units remain vacant and when
the rental market is the increasingly stringent qualifying                                                      they turn over.
parameters required by lenders of prospective borrowers.
                                                                                                                CURRENT INVENTORY/SUPPLY
HISTORIC VACANCY AND RENT TREND                                                                                 Since 1996, an average of 3,377 units per year are brought
(TRI-COUNTY REGION)                                                                                             to market. However, over the past six years this delivery
     $1.25                                                                                           9.0%       rate decreased to an average of 2,463 units per year.
                                                                                             $1.21
     $1.20                                                                                           8.0%
               7.41%   7.37%
                                                                                                                Countering new construction is the removal of apartment
                                                                                     $1.16
     $1.15
                                6.52%
                                                                                                     7.0%       units due to demolition or conversion to another use, such
                                                                             $1.12

     $1.10                                                                                           6.0%       as affordable housing or condominium ownership. Since
                                             5.29%                   $1.07

                                                                                             4.84% 5.0%
                                                                                                                1996, removals have averaged 2,278 units per year. From
     $1.05                                           4.68%   $1.03
                                                                     4.41%
                                                                                     4.12%                      2005 to 2007, this rate increased to an average of 5,724
                                                             4.73%
     $1.00                                           $0.99                                           4.0%
                                          $0.97                                                                 units per year, which decreased the overall inventory.
                                $0.95                                        3.78%
     $0.95     $0.94   $0.94                                                                         3.0%       This loss of units was primarily driven by condominium
     $0.90                                                                                           2.0%       conversions, which grew from about 30% of removals to
     $0.85                                                                                           1.0%
                                                                                                                more than 80% during this period. From 1996 to 2003,
                                                                                                                total inventory increased from 191,538 to 213,932 units.
     $0.80                                                                                           0.0%
              1Q04     3QO4     1Q05      3Q05     1Q06      3Q06    1Q07    3Q07    1Q08    3Q08               This was followed by a period of decline from 2004 to
     LEGEND      Average Rent           Vacancy Rate (%)
                                                                                                                2007, where 8,574 units were pulled out of the market.
                                                                                                                This reduced the overall apartment inventory in 2007 to

                                                                                                            2
                                    SEATTLE REAL ESTATE APARTMENT MARKET REVIEW YEAR-END 2008


levels existing in 2000/2001. In 2008, this trend reversed             ANNUAL NEW CONSTRUCTION AND REMOVALS
with most conversion projects repositioned back to a rental                                7,500

operation.                                                                                 6,750

                                                                                           6,000
PROJECTED DEMAND
                                                                                           5,250
In 2007, presales for new condominium projects came to
a virtual end. The slower absorption that followed was                                     4,500




                                                                          Units Per Year
really more in tune with a stabilized market, but the change                               3,750


seemed traumatic in comparison with the 100% pre-sales of                                  3,000

2005/2006. With construction costs increasing, sale prices                                 2,250

flattening, and difficulties in the mortgage market, feasibility                           1,500

for this product type quickly evaporated. New apartment                                     750
construction on the other hand became feasible in this
                                                                                              0
vacuum with rents increasing by 30-40% over the past four                                             2004            2005       2006   2007   2008

years, which spurred a number of proposed projects.                                    LEGEND      New Construction   Removals




In 2009, 6,700 new units are expected to open, followed
by 4,121 in 2010 and 7,946 units in 2011. These                        doubled and prices (both per unit and per square foot)
figures include 8,794 units already under construction                 increased more than 55%, with some years reflecting more
and scheduled to open beginning in 2009. Most of the                   than 20% year-over-year increases. At the same time,
aforementioned units are expected to open. The remaining               capitalization rates decreased from the 7% to 8% range to
9,973 units are planned projects – most scheduled for 2011             rates less than 5%. This decrease in capitalization rates was
and beyond. Given the current recessionary market, it is               primarily a function of low mortgage rates and increased
likely that a good portion of these planned projects will be           demand from institutional investors.
delayed or eliminated.
                                                                       In the last few months, lenders have gotten more cautious
ESTIMATE OF FUTURE APARTMENT DEMAND                                    and are requiring greater participation by investors. This
The latest Puget Sound Economic Forecaster newsletter                  has reduced yields and begun to push prices downward and
figures indicate that the region has just begun a recessionary         capitalization rates upward. Sales activity continues but
phase that will likely last five quarters, before turning the          at a moderate pace, as buyers and lenders more carefully
corner in 2010. There are approximately 1.784 million jobs             examine the market and the product available.
in the region and 197,800 occupied apartment units based
on the latest survey figures. This translates into a demand
                                                                       FOR SALE OWNERSHIP MARKET SUMMARY
                                                                       One of the primary competitive pressures to rental
factor of one occupied apartment for every 9.02 jobs.
                                                                       apartments is the residential ownership market. For sale
occupied apartment units based on the latest survey figures.
                                                                       residential product is being absorbed at levels substantially
This translates into a demand factor of one occupied
                                                                       lower than activity from just a few years or even months ago.
apartment for every 9.02 jobs.
                                                                       The supply of unsold inventory is increasing and a backlog
The regional vacancy is forecast to peak in early 2010, at             of inventory is growing. This slowdown has been expected,
between 6.4% and 7.8% (7.1% considered most likely) and                mirroring trends nationwide. Even though the Puget Sound
decreasing to between 4.7% and 6.9% (6.2% considered                   has weathered the storm better than most areas of the
most likely) in 2011. In the short term, some submarkets               country, it is becoming a buyers’ market as inventories grow.
may take a while to absorb the new inventory. However,
once the market begins to correct itself in the next year or           UNITS SOLD
two absorption will increase, at which point new supply will           According to Northwest Multiple Listing Service data, the
be needed.                                                             number of units sold (year-to-date) in the Puget Sound is
                                                                       down in volume by 15,067 over 2007 figures reflecting a
INVESTMENT ACTIVITY                                                    change of -33.1%.
Sales activity in the Puget Sound region was brisk from
2004 through 2007. Over this period, sales volumes nearly


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SALES COMPARABLES
                                                             City                                           Sale Price                # Units                    Price/Unit                  Date Built               Cap Rate
  2900 On First Apartments                                   Seattle                                   $36,432,500                          135                   $269,870                            1989                5.25%
  The Park on Dashpoint                                      Federal Way                               $30,000,000                          280                   $107,143                            1988                5.70%
  Pacific Pointe Apartments                                  Kent                                      $14,400,000                          249                     $57,831                           1978                    N/A
  Brittany Park Apartments                                   Auburn                                    $13,171,500                          190                     $69,324                           1968                   8.20
  Meridian Manor                                             Seattle                                   $12,039,100                          109                   $110,450                            1979                    N/A
                                                             Carnas                                    $11,790,000                            28                  $421,071                            2006                    N/A
  Summer Walk Apartments                                     Kent                                      $10,000,000                          175                     $57,143                           1968                    N/A
  River's Edge                                               Auburn                                      $9,850,000                         120                     $82,083                           1976                6.10%
  Bronson Place                                              Mountlake Terrace                           $7,400,000                           70                  $105,714                            1988                5.10%
  Colina Square                                              Sammamish                                   $6,809,000                           36                  $189,139                            2000                    N/A
  Cavalier Apartments                                        Seattle                                     $6,397,000                           48                  $133,271                            1926                    N/A


MARKETING TIME                                                                                                        REGIONAL APARTMENT CONCLUSION
Marketing time for closed sales has increased from an                                                                 Over the next five quarters, the forecast is for a slowing
average of 72 days in 2007 to 82 days in 2008, an increase                                                            economy and population growth, combined with an
of 14% over this period.                                                                                              increasing inventory of new construction. This should
                                                                                                                      cause regional vacancy rates to push above the long-term
MEDIAN SALES PRICE TRENDS                                                                                             equilibrium of 5% and dampen rent growth. Risks to this
The YTD 2008 median sale price in the region reflects a                                                               forecast hinge on the depth and duration of the national
7.1% decrease over 2007 figures.                                                                                      and global recession, which has yet to find a bottom. The
                                                                                                                      general consensus is that once home prices stabilize, the
ABSORPTION
                                                                                                                      market can begin to recover. Regionally, the turnaround is
The available inventory in the Puget Sound for November
                                                                                                                      forecast to occur in early 2010.
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                    SAN FRANCISCO                  PORTLAND                    BELLEVUE                   SOUTH SEATTLE                   TACOMA                    SANTA CLARA                REDWOOD SHORES
206.296.9600               415.229.8888                   503.221.9900                425.454.7040               206.248.7300                    253.722.1400              408.970.9400               650.769.3600




CONTACT
                                                             The information in this report was composed by the
Jeffrey S. Lyon, CCIM, SIOR                                  GVA Kidder Mathews' Valuation Advisory Group.
Chairman & CEO                                               Contact Jeremy Streufert, Gary Klockenteger, MAI,
206.296.9600                                                 or Richard Briscoe, MAI at 206.296.9600.                                                                             www.gvakm.com
jlyon@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.


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