Seattle Apartment - Kidder Mathews

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timelines projected by Dupre+Scott. Overall, the regional apartment market vacancy is expected to be generally stable de
Real Estate Market Review King, Snohomish & Pierce Counties

2nd Quarter

2012

Seattle Apartment Market Trends Current 2Q 2012 Vacancy

4.7%

Est. 2012 5,744 Construction

units

2Q 2012 $1.21/sf Rental Rate Est. 2012 6,308 Net Absorption

units

The regional market vacancy rate is currently 4.7%, below the average 5.3% indicated over the past 20 years and reflective of a market in its ascendant phase. The regional vacancy rate last peaked at a rate of 7.2% in Fall 2009 then fell sharply through 2010 to a low of 4.6% in the Spring 2011 survey. Vacancy briefly increased 70 basis points to 5.3% in Fall 2011 due to normal seasonality plus new inventory hitting the market, but has since fallen to a current 4.7%. Rental rates have recovered to above pre-recession levels and both use and quantity of concessions have decreased resulting in increasing overall effective rents.

Highlights With new apartment construction currently feasible, developers have been scrambling to find sites that are entitled or with plans that can be quickly finalized because being early to market remains important in this phase of the real estate cycle. Looking forward, new construction is anticipated to peak in first quarter 2014 with developers working on nearly 9,021 units for delivery that year (3.5% of existing supply). As of July 2012, there have been 52 sales with a combined volume of $880 million in volume. n

Vacancy Trends According to the Spring 2012 Dupre+Scott Vacancy Survey, the regional (five county) vacancy rate is estimated at 4.7%. This is a measure of “market” vacancy that excludes units in lease-up and those undergoing significant renovation. Including these units, the “gross” market vacancy is 5.2%. Over the last 20 years, the regional market vacancy was as high as 7.5% in March 2003 and as low as 3.6% in September 1997. Historically, the regional vacancy has averaged about 5.3%. Projections are for moderate rent increases to continue over the next two years as the economy and job growth continues to recover. Our baseline forecast predicts the regional vacancy staying near frictional levels (5.0% +/-) through mid 2013 then increasing to around the 5.5% to 6.0% level in late 2014 based on the latest anticipated new unit delivery timelines projected by Dupre+Scott. Overall, the regional apartment market vacancy is expected to be generally stable despite a steady flow of new units forecast over the next three years.

Rent Rate Trends Within the region, the King-Seattle sub-region (All Ages) had the highest rent levels achieved estimated at an overall average $1.67/s.f./month. Continued, page 2

2nd Quarter 2012 | 1

Area Review Regional Apartment New Construction (Units/Year) Units

% 4.25

12K FORECAST

10K

3.4%

3.75

3.5% 9,021

2.8%

8K

2.8%

8,673

2.8%

3.0 2.4% 2.4%

2.2%

6K

5,986

6,171

1.3%

1.9%

6,310

1.8%

5,774

2.25

4,876

1.6%

4K

6,549

4,274

3,441

2,777

2,826

2K

1.2% 0.9% 2,104

1.0% 2,328

3,062

2,675

1.5

4,148

1.4% 1.2%

1.1% 0.7%

2,462

.75

1,580

0

0 YE97

YE98

Chart Legend:

YE99

YE00

YE01

YE02

YE03

n Regional New Construction

YE04

YE05

YE07

YE08

YE09

YE10

YE11

YE12

YE13

YE14

YE15

New as % of Existing

Concessions Over the past 24 months, the percentage of property managers anticipating increasing rent increased from 19.1% to 68.6% of those surveyed. At the same time, those properties offering concessions decreased from 60.2% to 25.7%. Regionally, the average giveaway is $469 (averaging about 1.7 weeks free rent).

Current Inventory Supply Currently there are an estimated 237,500 market rate units in complexes with 20 or more units in the five county region. King County has the largest proportion with 60.5% of all existing units, followed by Pierce County with 18.1% and Snohomish with 13.8%. The smallest subregion is Kitsap County with 3.1% of the regional supply. Since 1990, new construction has averaged 4,286 units per year. From 2003 to 2008, this rate decreased to an average of 2,604 units per year before significantly increasing in 2009 and 2010 to 6,549 and 4,148 new units delivered respectively. In 2011, 1,580 were delivered by year end (reflecting an addition of 0.7% to the existing housing stock) as illustrated in the above table. This is estimated to be the lowest level in more than 30 years. Offsetting new construction is the loss of apartment

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units that have been demolished or converted to another use. Since 1990, these have averaged 1,431 units per year. From 2005 to 2007, this rate spiked to an average 5,410 units per year, which had the effect of decreasing the overall apartment inventory. This loss of units was mostly driven by condominium conversions, which grew from about 30% of removals to more than 80% during this period. From 2005 to 2007, more than 16,200 units were pulled out of the market. This reduced the overall apartment inventory in 2007 to levels existing in 2000. In 2008, this trend reversed with nearly all conversion projects repositioned back to a rental operation.

Projected Future Supply The latest counts show 2,205 units were completed region wide through the second quarter 2012. With new apartment construction feasible, developers have been scrambling to find sites that are entitled or with plans that can be quickly finalized because being first to market is important in this phase of the real estate cycle. Looking forward, new construction potential is anticipated to peak in the first quarter 2014 with developers working on 9,021 units for delivery that year (3.5% of existing supply). While not all of these projects will be completed, we do expect

some moderate upward pressure on market vacancy as the rate of construction increases going into 2013.

out are typically off “20-40%” or more. Our forecast applies baseline, optimistic and pessimistic assumptions to the projected apartment completions. Our baseline forecast applies a 80% completion to planned projects; our pessimistic forecast applies 70% completion rate and our optimistic forecast applies 90%. Units that are already under construction are assumed to be completed and added to the existing stock. Based on current demand factors along with anticipated employment projections, our forecast predicts baseline vacancy peaking in 2014 at about the 5.5% to 6.0% range then gradually decreasing through 2015 as these new units make their way through the system.

Most planned new construction has been focused toward core metropolitan locations where jobs and existing infrastructure are present. Of the more than 29,700 potential units planned over the next four years, 81.7% (24,312 units) are located in King County. Of these, 18,177 units (74.8%) are in or near the Seattle sub-region.

Estimate of Future Apartment Demand The latest employment figures for the greater Puget Sound region by the Puget Sound Economic Forecaster and the Thurston Regional Planning Council report that there are approximately 1.85 million jobs in the region and about 225,700 occupied apartment units based on the latest survey figures. This translates into a demand factor of one occupied apartment for every 8.2 jobs.

Risks to Forecast Our forecast is a function of both the timing and magnitude of the economy principally relating to employment growth. With future apartment demand primarily a function of employment and population growth, if the economy were to slump below current forecasts (even modestly) this would negatively impact future demand projections. The other item impacting future demand is the amount of inventory delivered. At this time, we can reasonably assume that projects already under construction will be completed. Timing and completion of planned projects in 2013 and beyond

The chart below illustrates our estimated vacancy and absorption forecast based on these latest employment & population trends and projected future supply. It is very difficult to handicap which proposed projects in future years will be completed. Mike Scott of Dupre+Scott has been quoted that their projections for one year are “pretty accurate” because most of these units are already under construction. However, projections two to three years

Historic Absorption and Forecast Units

% Vacant

8,000

10.0% 9.0%

7,000 6,000

7.2%

7.4%

8.0%

7.3%

6.9%

5,000

6.5% 5.8%

4,000 3,000

4.6%

5.0%

4.4%

2,000

4.1% 4.1% 4.1%

5.3%

6.5%

6.0% 5.6%

7.0% 6.0%

5.9% 5.2%

5.0% 4.0%

4.0%

3.9%

1,000

5.6%

5.6%

4.7%

4.6%

5.6%

3.0% 2.0%

0

1.0%

-1,000 FORECAST

-2,000

0.0%

-3,000

-1.0%

-4,000

-2.0%

-5,000

-3.0%

-6,000

-4.0%

YE99

Chart Legend:

kiddermathews.com

YE00

YE01

YE02

n Net Absorption

YE03

YE04

YE05

n Change in Inventory

YE06

YE07

YE08

Baseline Vacancy

YE09

YE10

YE11

Pessimistic

YE12

YE13

YE14

YE15

Optimistic

2nd Quarter 2012 | 3

are less certain and carry a higher degree of risk. Other risks beside overbuilding and changes to the economy include demographic shifts such a swing toward ownership when that market eventually recovers.

Other Trends The ongoing favorable market performance in the apartment sector has been attributed to several demand factors including: •

Changing “rent” vs. “own” psychology, where more potential homebuyers are remaining in rental properties due to longer term lack of confidence in home market brought on by the foreclosure crisis.



Return to traditional lending regulations with large down payment requirements has pushed and will likely keep a portion of the population as renter households.



Recession has required many qualified households to use their savings, pushing off home affordability.



Many younger households prefer the mobility of renting, especially in a slow home sales market.



Households age 25 to 34 are expected to dominate growth over the next five years and this group is traditionally mostly renters.

These factors point toward continued demand for apartment units over the next few years, especially better quality apartments given renters are looking at longer stays, justifying a flight to quality.

Investment Activity Sales velocity peaked in the Puget Sound Region in 2005 with 268 sales ($2.65 billion in volume). The pace moderated in 2007, although the price per unit increased and economic indicators were flat. In 2008, the number of sales swiftly dropped, and by 2009, the region ended the year with 53 sales reflecting a combined sales volume of about $333 million. This compares to the $1.53 billion

Institutional investors returned to the market in 2010 with over a dozen major sales and capitalization rates back to the 5.0% range for close-in newer vintage properties. Buyers and sellers have come much closer, and sales volume for 2011 ended with 86 sales of 20 unit & larger properties reflecting a combined sales volume of $1.23 billion transacted. As of the second quarter of 2012 there have been 52 sales reflecting $880.6 million in volume.

Conclusion The regional apartment market is in the ascendant phase of the real estate cycle and the general long-term outlook for the Puget Sound region continues to be better than most markets nationwide. Vacancy rates have decreased to below frictional levels and the anticipation is that vacancies will continue to decrease and rents to continue increasing through 2013 as the economy and job growth continues to recover providing confidence to the market. Currently, there are more than 9,400 units under construction with some 6,800 +/- units expected over the next 12 months. When compared against the upward revised employment forecasts, demand should be sufficient to readily absorb these units keeping rates near frictional levels (5.0% +/-) through 2013. Based on the latest anticipated new unit delivery timelines projected by Dupre+Scott, our forecast predicts the regional vacancy increasing to around the 5.5% to 6.0% level in late 2014. Overall, the regional apartment market vacancy is expected to be generally stable despite a steady flow of new units forecast over the next three years.

Offices

Contact Jeffrey S. Lyon, CCIM, SIOR Chairman and CEO 206.296.9600 [email protected]

in sales in 2008 (107 sales) reflecting a decrease in transactional volume of 78% over this period. This was a result of difficulties in attaining financing as well as reaching a middle ground between buyers and sellers.

The information in this report was composed by the Kidder Mathews Valuation Advisory Group.

Seattle 206.296.9600

South Seattle 206.248.7300

Olympia 360.705.2800

San Francisco 415.229.8888

Jeremy Streufert and Gary Klockenteger, MAI

Bellevue 425.454.7040

Tacoma 253.722.1400

Portland 503.221.9900

Silicon Valley 408.970.9400

206.296.9600

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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