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.

A New Point of View in Renton

A New Point of View in Renton

Southport corporate campus development seeks a high-end tenant to help polish the city's image.

A new corporate campus under construction on the south shore of Lake Washington could be a game changer for the city of Renton.

Occupying a prime stretch of waterfront near Boeing’s 737 manufacturing plant, Seco Development’s $570 million Southport is being designed to attract a major new employer, bringing to Renton thousands of employees to patronize local businesses and increase home sales. 

Who that employer might be is still open to enthusiastic conjecture, but the rush of California tech companies like Google, Facebook and Apple into the Seattle real estate market provides ample fodder for speculation. For such a scenario to unfold, Renton-based Seco must change Renton’s image as a blue-collar company town largely devoted to making airplanes. Economic Development Director Cliff Long is confident this new development, the first new Class A office space in years, will do just that.

“It is a spectacular site,” says Long. “I think this complex will have the ability to attract some nice new tenants to our community.” 

On a recent list of 185 tenants looking for office space in the region, only two listed Renton, a city with a population just under 100,000, as a desired location. The lion’s share of the prospective tenants wanted to locate in Bellevue or Seattle.

Partly, it’s because there’s not much Class A office space in the Renton/Tukwila submarket — just 792,441 square feet, according to a first-quarter report by the real estate services firm Jones Lang LaSalle. And most of that space is already leased; only 2 percent was available for immediate occupancy. Bellevue, meanwhile, has 7.6 million square feet of Class A office space, of which 10.5 percent is available.

When Southport opens in January 2018, the 17.5-acre mixed-use project will nearly double the amount of prime office space available in the Renton/Tukwila submarket, adding 730,000 square feet of Class A office space in three nine-story buildings.

The development will most closely resemble Kirkland’s tony Carillon Point waterfront office development. Like Carillon Point, the Southport project has easy access to waterfront amenities. Just east of Southport is the 57-acre Gene Coulon Memorial Beach Park, which has walking trails, beaches, boating facilities, restaurants, and volleyball and tennis courts.

The office project will include structured parking for more than 2,000 vehicles as well as special storage facilities for kayaks and bicycles.

And then there’s the development’s deepwater private dock — ideal for a corporate yacht. There’s also talk about adding a heliport. With about 30,000 square feet of retail space on the entire Southport site, there’s room for up to five restaurants.

Thanks in part to capacity developed for the nearby Boeing plant, Southport has access to an energy grid with extra backup power and fiber-optic connectivity offering data speeds up to 100 gigabytes per second.

Two high-end apartment buildings totaling 383 units, the Bristol I and Bristol II, which Seco built in 2002 and 2008, already occupy the site. A 12-story, 347-room Hyatt Regency is also under construction and scheduled for completion next year.

Seco Development Manager Greg Krape puts the value of the complete project, including apartments, office buildings and hotel, at about $1 billion. The posh office development represents a significant departure in a Renton/Tukwila submarket dominated by roughly 3 million square feet of Class B space featuring fair to good finishes and adequate but not state-of-the-art building systems.

While southport faces heavy competition from new office projects in Seattle and Bellevue, it has an advantage by offering rents in the low to mid $30-per-square-foot range net of expenses, about 25 percent less than rents for similar Class A office space in downtown Seattle and Bellevue. Additionally, housing is less expensive in Renton, with a median home value of $371,900 compared to a median value of $682,000 in Bellevue, according to Zillow Group.

Many companies want to be based in Seattle or Bellevue because of the downtown amenities available. But Southport offers “a unique alternative for people looking for a Class A headquarters office campus who do not want to take 25 stories in an office tower,” says Bret Jordan, managing director in the Bellevue office of the Seattle-based real estate services firm Colliers International. He says many companies prefer large, open floor plans that encourage collaboration among employees.

As for Southport’s private yacht dock, Jordan says cool offices have become a key competitive factor for attracting workers. “It’s a chance to create a corporate culture outside,” Jordan notes. “It’s the only place on the lake where people can pull up and take workers someplace on the water.”

Can Southport and its rapidly evolving neighborhood help change corporate perceptions about Renton?

Kip Spencer, director of leasing and marketing for Seco Development, believes Southport will be a gateway project that helps pull the Eastside and the south end together. Krape thinks so, too. “Kirkland was a biker bar town before Carillon changed that perception,” he says. With Southport’s stunning waterfront location and upgrades across the area, Krape adds, “Renton will get enough synergy that people will change their minds.” 

Turning Renton into a Class A destination
While Southport stands out from the more industrial nature of Renton, other parts of the city have also begun to focus more on office, retail and residential development, as well.

The Landing, a tenth of a mile south, was completed in 2008. The 21-acre, 600,000-square-foot open-air retail center is about 97 percent leased, according to the project’s website. The shopping center includes a mix of big-box retailers, a 14-screen Regal Cinemas, and smaller chain and independent restaurants and shops. A unit of the Boston-based investment fund AEW Global bought the development in 2013 for $165.4 million. Renton Economic Development Director Cliff Long calls it “a considerable driver to our economy.”

The area has also seen a steady increase in high-end residences. In addition to Southport’s Bristol apartments, Fairfield Residential operates 880 upscale apartments in  The Reserve and Sanctuary across from The Landing. 

Transit options have improved, with a RapidRide bus line now serving The Landing to connect the neighborhood around the retail center to downtown Renton, Westfield Southcenter mall, the region’s expanding light rail system and Sea-Tac Airport. 

The Seattle Seahawks’ training facility, which opened in 2008, is a few miles north of Southport, and several football players have units in the Bristol apartment complex, according to Kip Spencer, director of leasing and marketing for Seco Development.

Two more hotels are in the works near Southport — a 140-room Residence Inn by Marriott and a 110-room Hampton Inn. Additionally,  Ikea is rebuilding its Renton store and the city is offering a large city-owned parcel for additional development as part of a downtown revitalization project, Long says. The city is also doing a master plan for its  Piazza downtown park.

In all, more than a half-billion dollars in commercial construction is in the offing for Renton, Long says. The city has chipped in with capital improvements to help revitalize downtown, improve traffic flow, and support transit-oriented development and services. There is also talk of adding a major transit stop near Southport and of one day starting a regional water taxi service to better link communities on Lake Washington.