Rents fall most in the Amazon neighborhood, as new supply piles up.
In Metropolitan Seattle, there are currently 24,554 apartment units under construction and an additional 35,009 units in the development pipeline, counting only units in buildings with 50+ apartments, according to Apartment Insights. These are the towers that are sprouting like mushrooms. This does not include condos that are purchased by investors and then show up on the rental market. And it does not include units in smaller buildings.
This comes after nearly 12,000 units were completed in 2017. And according to Axiometrics, nearly 8,000 units are scheduled for completion in the first half of this year alone. This is the phenomenon that “crane counters” have been witnessing for a while.
In relative terms, how much of an onslaught is this, and how long might it take for renters to occupy these units (absorption)?
In 2017, in buildings with 50+ units, occupancy increased by 6,906 units. Anything completed in 2017 beyond that is vacant. The neighborhood of South Lake Union – think Amazon headquarters and biotech – has the largest share of this oncoming supply, according to Apartment Insights: 3,949 units under construction (16% of the total) and 3,521 units in planning stages. Redmond is number two, with 3,174 units under construction and 3,269 units in the planning stages.
So what does this onslaught of new supply – much of it in high-end high-rise buildings – mean for the rental market?
Vacancy rates:
Vacancies of “stabilized” apartment units – so called after the towers have been on the market long enough to have reached stable occupancy – “suffered,” as the report says aptly, an increase of 0.8%, pushing the stablized vacancy rate to 5.4% in the fourth quarter.
This stabilized vacancy rate excludes recently completed buildings scrambling to rent out their units.
Across 37 submarkets, 32 experienced increases in stabilized vacancy rates in Q4. Vacancy rates ranged from 3.2% in Des Moines to 7.3% in Everett/Mukilteo. Vacancies increased by 2.5% in South Lake Union, the largest increase of any area. This is also the neighborhood with the most new units under construction and in the pipeline. This is going to get interesting.
Absorption:
During Q4, occupancy in buildings with 50+ units increased by 908 units. In other words, 908 units were absorbed. But occupancy also decreased in some neighborhoods, with Kent losing the most (89).
For the year, occupancy increased by 6,906 in the Seattle Metro. South Lake Union experienced the largest increase, with 1,057 units absorbed during the year, but this is where 3,949 units are under construction and an additional 3,521 units are in planning stages, and it is already experiencing a jump in vacancies.
Rents:
Rents are high in that segment of the multi-family market but somewhat less high than they were. In Q4, the average monthly gross rent fell 2.9% from the prior quarter, to $1,647 ($2 per square foot). They ranged from $2,328 in Seattle Downtown to $1,212 in SeaTac.
The most expensive neighborhood, Seattle Downtown, experienced the steepest rent decline of 6.6% from the prior quarter, but was still up 4.5% from a year ago.
Apartment Insights converts these and other data points into five indices: absorption, vacancies stable, vacancies all, gross rents, and net rents. These indices show a rising slope in a chart when things go the way of developers and landlords (rents rise, vacancies drop, etc.) and a declining slope when they head the other way (falling rents, rising vacancies, etc.). This is the chart of the five indices over the past five quarters:
What I gather from this chart is a deterioration over the past two quarters – in a market that remains strong but where the onslaught of new supply is now showing some impact.
A week ago, I reported that the median “asking rent” across the Seattle Metro in all multifamily buildings, including just-completed new construction – a different measure than gross rent in 50+ unit stabilized buildings – was up about 1% from a year ago but was down from the peak , with the one-bedroom asking rent down 7% from its peak in August 2017, and the two-bedroom asking rent down 8% from its peak in April 2016.
What emerges from this data is the picture of a market where there is no “housing shortage.” There are plenty of move-in ready units available, and landlords are eager to rent them out. But there is a shortage of apartments that people who don’t work for Amazon or in biotech can afford. In this aspect, Seattle parallels other expensive cities, such as San Francisco, which has its own boom of high-end high-rise construction, putting plenty of units on the market, but not in a price category that the median wage earner in the City can afford. This factor will put downward pressure on rents across the spectrum.
Rents tank in the most expensive US metros. Even Seattle cools off, awash in new supply. But now there’s a twist. Read… Suddenly, US Rental Markets Diverge by Bedrooms
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How are these new apartment complexes financed? Are they short term or long term loans or are they purchased cash?
Are these buildings owned by the likes of Blackrock or something else?
I’m trying to sense how rational it was to build all these apartments in such a short period of time. I’ve heard the quality of life in Seattle has gone to the dogs.
It has indeed. It’s just too crowded relative to infrastructure, and housing is really expensive, so you have less discretionary income. It’s fine if you work in tech, but for the rest, not so much.
Hard to feel bad for real estate developers & speculators.
Please pass the popcorn…
I’m now retired and living in the Everett/Mukilteo area where the last of the open spaces are now slated for very large apt. complexes to take the overflow from Seattle. Last week I watched a coyote run past me in a panic because whatever little wooded patch it had been living is now a muddy spot waiting for the backhoes. Rents prices might be falling but construction is going apace and far afield from downtown Seattle and all of it high priced.. When we go into recession the bust here will be monumental dwarfing the Boeing bust of 1971 when wags put up a billboard asking the last person leaving town to please turn out the lights. This time will be different because even the armies of the homeless will find plenty of places to squat..
Hopefully the city is setting aside funds for demolishing the skeletons of half-completed buildings that’ll be left in the rain when it goes bust. Nothing sours a recovery like seeing a skeletal effigy of the breaking of the real-estate bubble!
All joking aside I would like to know as well. Imagine if you will that these things are being bought on credit, using loan-backed securities to ease the crushing weight of all of that debt. That’s a scary thought indeed.
The amount of apartment and high density housing construction here is Fremont is delusional. I remain fascinated by the established older apartments with “now leasing” signs clearly posted.
I hadn’t been to Freemont/Ballard for a couple of years until this summer. At times I didn’t where I was.
I always look for curtains or blinds when I see newer construction as a sign of occupancy, a real home. Lots of places even more than a year old look vacant but they must not be counted as such. I always wondered if some foreign buyer is keeping a place as an escape plan.. More likely, the new tenants can’t afford curtains..
Some other challenges. Amazon will be adding a second headquarters in another city where they plan to hire 50,000. Most of its hiring will occur there in the future, not Seattle. In Seattle, people have noticed the number of Amazon office job postings drop precipitously. This may have caught apartment developers by surprise.
In my discipline, I used to see 20-30 open jobs at Amazon on a regular basis. I checked last week and there were only 5-6.
The “fat lady” is warming up.
same in Stockholm sweden
I am waiting for the prices to go down in Seattle…
No drop so far .
Hopefully this will have an effect on home prices as they are going insane right now in Seattle. If it’s much cheaper to rent, it will hopefully bring those prices down a bit too.
In San Francisco the YIMBY (yes in my back yard) housing lobby is in the pocket of our interim mayor, moderate supervisors and the recently deceased mayor. Build baby build and complexes on every block (luxury). Like Wolf said, apartments nobody can afford. Whith the new tax scam coming into effect this year, it should be interesting to see how this plays out.
Seattle just imposed a soda tax which just about doubles the price of soda. This is another tax on the working class and the poor. The middle class will shop out of the city, just like in Philadelphia, and the economically challenged will get pissed off and not vote democratic. The soda tax in Philly was what changed the election in PA.
I drink tap water. It’s delicious, works great, has zero calories, and is essentially free (compared to the amount of water we’re using for all the other stuff). There are no plastic bottles involved and not bottle caps, and I don’t have to deal with buying it or putting the empties in the trash… It’s a real gift.
I recall a certain media mogul admitting he spends his extra cash on designer beers. Not mentioning any names…
Indeed. Said media mogul loves a glass of “designer” beer every now and then, and pays grudgingly for it, including sin taxes, thinking that such beer should be free as part of our human rights. But he drinks several quarts of tap water a day, so thank God there’s good water coming out of the tap. Said media mogul is physically active and needs a lot of water to replenish the body and stay alive. “Designer” beer is to replenish the spirit :-]
Petunia please do not let info like that go public california will jump all over that.
Bremerton, which is across the sound from Seattle, just put in a new “fast” ferry for walk-on passengers only. It drops you in downtown Seattle and crosses in 20-30 mins, depending on weather, water traffic, etc. This is a shorter commute than driving a car from Kent or Everett, so now Bremerton is a newly viable bedroom community. (I personally know a Bremerton resident who commutes to Microsoft, door-to-door in ~45 mins, without a car.)
There is now talk of a fast ferry from Tacoma to Seattle. Downtown Tacoma has nothing but space to build high rises.
The silver lining could be that the lack of Seattle real estate, and places to put expanded highways, like California, will force a large number of commuters onto the waterways.
Same in South Korea. Expecting a worldwide housing bust followed by a depression in short order.
Wolf: I suspect (and hope) you keep an eye on developments in the US Treasury market for hints about what may lie ahead for extended markets everywhere including high priced West Coast real estate. I live in a pricey East Coast suburb where for the first time EVER (slight exaggeration but makes the point) home value appraisals did not increase in ’07 as T bill yields quadrupled. I’m old enough to still believe that ultimately all markets are priced off US T bills, FRB craziness notwithstanding.
Could just be another head fake, but sooner or later……..
Lived in Seattle 7 years till early last year.. apt buildings springing up like mushrooms.. growth rate seemed out of line with jobs that would enable workers to afford them .., State has utterly failed with highway construction so it’s a mess … now in Dallas … again housing market gone crazy and apt Bldg construction going on everywhere … again other than very well paying job apt are unaffordable … I know ppl working full time jobs at the low end of the pay scales and they can barely make ends meet in the cheapest apts around.., highways are fairly well designed though and quite a matrix … I just don’t see true balance between wage rates and housing … ppl telling me they want to buy a house but increases in median costs pushed them straight out of the market … I saw the exact same thing in Portland or 17 years ago … my $169k home is now a $550k home in Portland in 15 years though I left after the dot com implosion… it is not sustainable …
re: “I know ppl working full time jobs at the low end of the pay scales and they can barely make ends meet in the cheapest apts around..”
It sounds beyond depressing….barely getting by with a suspect future, no retirement options, and the price of everything ggoing up.
I read last week that the vacancy rate in Abbotsford BC, a nightmare commute into Vancouver BC, is just .5%,
Actually, just confirmed it and here is a quote. “The region’s vacancy rate of 0.5 per cent – down from 0.6 per cent last year – is tied with Victoria for the lowest among major Canadian centres.”
and a sister city Mission: “While Abbotsford’s vacancy rate already didn’t have much room to drop, Mission’s vacancy rate was a comparably high 3.2 per cent in 2015. Over the past year, though, that figure has dropped significantly, to just 1.2 per cent.”
People are leaving the Province because of it. I would imagine the same thing will happen in any unaffordable market. Builders will chase the market, (Can’t lose..no available rentals), buy land and develop at THE PEAK of all development costs (fees/permits, wages, land prices, building materials), and overbuild just in time for a collapse. Ouch.
Wake me up when rents drops 20% or more otherwise this is just the noise I have lived with these last 40 years.
When things are this inflated, you have to pay attention to the inflection points if you plan to sell near the top. Anybody with an inflated house has to decide whether they want to sell this Spring or next Spring. The difference could be 20% or more in sales price, plus lots of time on market.
Once you see a few months in a row of small price drops, the landslide starts and things accelerate. This bubble is bigger than the 00 and 07 bubbles.
Here in Redmond rents and prices are falling as we speak.
Gettenschaller, where have you seen this? Not doubting, just curious. What about single family homes versus apartments? Thanks!
I work right in the middle of the South Lake Union Amazon mess. The Amazon Sphere buildings look completed now. Looks like a giant greenhouse/jungle inside. I am hearing from more people wanting to leave the Seattle area. I had some friends head to eastern WA & got a lot more bang for their buck. Thinking of it myself now…