Apartment Market Hot Now. But Is It Headed For a Bubble?

 
 

 

A friend was close to purchasing a large piece of property south of Seattle for a commercial venture when, at the last minute, the seller called to say he wasn't gong through with the deal.

Why? A pension fund had swooped in and offered 15 percent more for the property. The fund couldn't find investments that offered a good yield and was planning to build apartments to rent out. The fund was reportedly happy with the 4 percent return they expected on the apartments.

"That suggests to me that we are headed for a bubble," says my friend. It might take three years, but you're going to see an oversupply of apartments again."

For the time being, the rental market is hot, as Eric Pryne reports in the Seattle Times today. Apartment vacancy rates in King County have fallen to 4.3 percent from 6.8 percent a year ago. Consequently, for the first time in years, average monthly rates have started to inch up.

That's because the plunge in property values following the financial crisis put a virtual stop to construction. Total new apartment construction is close to a 40-year-low so few new apartments are coming on the market. Pundits are predicting rents will consequently keep climbing in coming years.

The prospects of higher rents have developers eager to tap the market. Dozens of new apartment projects are on the drawing boards. When they come onto the market in three-years or so look for another glut of oversupply.

Meanwhile, in housing, where prices have plunged, developers are beginning to shift their strategies to build smaller, cheaper homes. As Bill Virgin reports in the April issue, building permits are up and housing developers are beginning to buy up land with plans to build again.

Rental Market May Finally Be Cooling Down in Greater Seattle. Still Hot in Tacoma.

Rental Market May Finally Be Cooling Down in Greater Seattle. Still Hot in Tacoma.

With new units on the market and occupancy down, rents are growing more slowly.
 
 
Rent growth is accelerating in Tacoma while slowing in Seattle

In a sign of what could be the beginning of the end for the hot rental market, average rents are no longer growing at a torrid pace. While average monthly rents increased by 5.6 percent to $1,777 in the Seattle/Bellevue/Everett area in September from the year before, average rents actually declined slightly from the previous month.

“Seattle is still among the top-performing metros in the nation, but deliveries of new units accelerated in the third quarter and the pace is expected to quicken through the second quarter of 2017,” says Jay Denton, senior vice president of analytics for Axiometrics, a market research firm. Denton says the new supply is weakening the ability of landlords to boost rents as much as they have in the past. That's good news for tenants, but landlords may not be as excited.

By contrast, rents in Tacoma continue to soar. Check out the story we published on Tacoma's hot market earlier this year. The average rate of growth for rent in the Tacoma metropolitanTacoma increased for the 11th straight month in September, climbing to $1,266, up 9.6 percent from the year before and far outpacing Seattle. Occupancy is also higher in Tacoma — at 96.7 percent in September compared to 95.4 percent in the Seattle area. 

Rents in both Seattle and Tacoma increased faster than the nation, where they grew by just 2.6 percent to $1,290 in September from the year before.

 

Seattle-Bellevue-Everett                                     Sept 2016                  Aug 2016                  Sept 2015

Average Rent

$1,777

$1,799

$1,683

Annual Effective Rent Growth

5.6%

6.6%

8.0%

Occupancy

95.4%

95.5%

95.3%

Tacoma-Lakewood

Average Rent

$1,266

$1,256

$1,155

Annual Effective Rent Growth

9.6%

9.3%

8.5%

Occupancy

96.7%

96.4%

96.0%

National

Average Rent

$1,290

$1,293

$1,258

Annual Effective Rent Growth

2.6%

2.9%

5.2%

Occupancy

95.1%

95.2%

95.3%