Study of why we have seen so few apartment transactions in 2013, yet sales figures remain high and price per unit are an all-time high

1. 12/5/13
Seattle DJC.com local business news and data - Real Estate - Lay of the Land: Apartments here are hot; why so few sales?
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Decem ber 5, 2 01 3
Lay of the Land: Apartments here are hot; why so few
sales?
By DYLAN P. SIMON
Special to the Journal
Resource Center
Tower cranes hov er ov er apartm ent dev elopm ent sites throughout
Seattle and Bellev ue.
Construction Bids
Contracting, IFB's,
Sub-Bids Requested,
RFP's, RFQ's, Rosters
More than 4 2 ,000 units are in the pipeline.
Year-ov er-y ear job growth is the env y of the nation.
Consultant
Services
Am azon.com is building 3 .3 m illion square feet of office space in the
heart of downtown Seattle.
A & E Bids,RFP's,
SOQ's,Rosters
And a whopping 2 9 apartm ent buildings with m ore than 50 units sold
this y ear.
Misc. Goods and
Services
Bids,RFP's,SOQ's,
Rosters
Wait … only 2 9 ?
We are quickly approaching the end of the y ear and fewer than 3 0
apartm ent buildings with m ore than 50 units hav e traded hands in
King County so far. In the height of the m arket in 2 005 m ore than
1 00 building sold. Near the m arket bottom in 2 01 0, 2 6 buildings of
that size were sold.
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Building Permits
With m ore apartm ent dev elopm ent than we hav e seen in 3 0 y ears and an econom y firing on m ore
cy linders than we thought it had, transaction v olum e lags prev ious m arket peaks by m ore than
7 0 percent. Why so few sales y ou ask?
Listings of building
permits from around
the Northwest
Significant structural and cy clical factors are causing substantially lower transaction v olum e, y et
m uch stronger ov erall sales v alues as well as higher prices on a per-unit basis. To what can we
credit this phenom enon?
Real Estate
Urbanism
RFP's, Sales,
Foreclosures,
Leases and Tenants,
RFP's
Business Licenses
There is no doubt that in this m ost recent m ultifam ily cy cle, urbanism has play ed a key role. Take
King County for exam ple: Generally 4 0 percent of new apartm ent construction occurs in Seattle,
roughly m irroring the percent allocation of King County housing stock located in Seattle. Yet in
this current cy cle, nearly 80 percent of apartm ent construction is slated for Seattle.
Complete Archives of
WA Business Licenses
Hav ing m ore urban apartm ent stock is certainly influencing sales m etrics. How?
Bankruptcies
Filings from:
Washington, Oregon,
and Alaska
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Urban apartm ent buildings are generally m ore expensiv e to construct, hav e a higher lev el of
finish and greater density . And recent sales are com prised of a newer v intage of building. As a
result, each trade results in a higher price per unit sold. Ev en in a y ear of sim ilar sales totals on a
unit basis, the result is a lower num ber of ov erall transactions. Urbanism , and the resultant
increase in urban apartm ent stock, is play ing a m anifest role in recent sales m etrics.
Flight t o qualit y
It com es as no surprise that capital is a key driv er of com m ercial real estate activ ity . Whether its
apartm ent dev elopm ent or inv estm ent, equity and debt decision m akers play a key role in what
gets built, bought or sold and — relev ant to this discussion — when and where. Since the Great
Recession, capital play ers hav e decided to stay close to m ajor m etros and place capital in larger,
institutional assets as well as high quality core assets. Sales m etrics in our region reflects these
strategies.
Whether we're looking at the $3 08 m illion sale of The Brav ern, or ev en sm all deals like The Gilbert
on Queen Anne, these sales m ark v ery high prices per unit, and ev en higher total sales prices.
Conv ersely , these ty pes of sales do not substantially contribute to high m arks in the total v olum e of
buildings sold, a num ber which rem ains relativ ely tem pered com pared to prev ious m arket peaks.
Additionally , the buy ers seeking high quality assets hav e access to cheaper capital and can av ail
them selv es of v ibrancy in the equity m arkets. In both cases, these buy ers are institutional in
nature. Both as an inv estm ent thesis and a desire for efficiencies of scale, these buy ers hav e sought
institutional-sized, high quality , core assets.
As a result, fewer trades can still accom plish both higher total sales figures and higher prices per
unit.
One final note is the desire of institutional m ultifam ily capital to enter the Puget Sound m arket. As
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Lay of t he Land:
Apart ment s here are
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2. 12/5/13
Seattle DJC.com local business news and data - Real Estate - Lay of the Land: Apartments here are hot; why so few sales?
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a relativ ely new “m ust” area for inv estm ent, Puget Sound has receiv ed substantial inv estm ent by
a new cadre of inv estors focused on core-located, institutional-grade m ultifam ily assets. In the
com petition for them , inv estors hav e both driv en up prices of institutional-quality assets and
pushed up the num ber of pre-sales, that is buildings being sold before occupancy . Again, the result
is high priced sales with ev en m ore im pressiv e price-per-unit m etrics, y et a sm aller influence on
total num ber of transactions.
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Regional fact ors
The econom ics of rent growth has also greatly influenced apartm ent sales. Like m any prev ious
cy cles, rent growth since the Great Recession has m ov ed out from Seattle in som ewhat concentric
rings, first to Bellev ue/Kirkland and then north toward Ly nnwood/Ev erett, east towards Bothell
and finally , as late as this y ear, south toward Renton and South King County .
The effects of the foregoing are two-fold. Prim arily , the desire of m ultifam ily inv estors to inv est in
“safe” m arkets that assure econom ic stability and growth is exhibited in trades occurring in
Seattle. Why Seattle? It doesn't take m uch econom ic analy sis to understand the econom ic v ibrancy
of Seattle right now. With sales occurring in Seattle, the patterns prev iously discussed perpetuate:
newer buildings of higher quality and larger, institutional size. The result is again fewer trades
producing higher sales prices as well as higher prices per unit.
On the other side of the coin are sellers reaping the rewards of rent growth and hav ing fewer
choices in alternativ e high-y ield inv estm ents. As a result, they hav e little incentiv e to sell. In
m any cases, despite historically low capitalization rates, long-term inv estors hav e chosen to hold
onto apartm ent buildings and bet on continued rent growth and plunging v acancy rates.
Conv ersely , m erchant builders, following the trend of building in core urban m arkets, are net
sellers. Sales of these recently built and often core-located buildings again follow the pattern of high
sales prices and price-per-unit v alue relativ e to the ov erall num ber of transactions.
Expect to see sales v alues and price per unit v alues rem ain high in 2 01 4 , but also expect
transaction v olum e to increase in 2 01 4 . We are already seeing rent growth propagate across King
and Snohom ish counties at a steadier pace in 2 01 3 than in the prev ious two y ears, which
ultim ately leads to sales. Additionally , pent-up acquisition dem and and the threat of ov er-supply
will influence m ore owners to sell in 2 01 4 .
Regardless of all prognostications, one result is certain: as our region continues to gain national
attention for its econom ic strength and desirable lifesty le, we will rem ain one of the strongest and
m ost watched apartm ent inv estm ent m arkets in the nation.
Dylan Simon is an investment sales broker at Colliers I nternational in Seattle and specializes in the
marketing and sales of apartment complexes and development opportunities in the region. He blogs at
www.nwmultifamily.com .
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