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Is This Going to Crush Rents in Seattle?

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by Wolf Richter

A phenomenal onslaught of the wrong kind of supply.

Crane-counters in the metropolitan area of Seattle have long had an exciting time as cranes keep popping up on new construction sites. Some are condo towers, others are apartment towers. Not counting condo towers, this is what’s coming:

  • Currently under construction: 25,164 apartments in buildings with over 50 units.
  • Planned but construction has not yet begun: 34,800 apartments in buildings with over 50 units.

This makes for a total of 60,000 apartment units, planned or under construction, just in buildings with more than 50 units, according to the Q2 report by multifamily property data provider Apartment Insights.

Among the submarkets with the most units:

  • South Lake Union: 3,384 units under construction; 3,561 units planned
  • Redmond: 3,188 units under construction; 1,730 units planned
  • Seattle Downtown: 2,696 units under construction; 9,390 units planned
  • Central/South Seattle: 2,618 units under construction; 4,665 units planned.

There are about 325 of these types of projects either under construction or planned, according to Apartment Insights.

Among the largest projects currently under construction:

  • 843 units at 120 John Street, Seattle. Construction began in November 2017, estimated to open in November 2019
  • 532 units at 2309 Jackson Street, Seattle. Construction began in March, estimated to open in June 2020
  • 461 units at 970 Denny Way, Seattle. Construction began January 2016, estimated to open in August
  • 436 units at 121 Boren Avenue N, Seattle. Construction began in April 2017, estimated to open in April 2019
  • 400 units at 600 Wall Street, Seattle. Construction began this month, estimated to open June 2020.

Among the largest planned projects where construction hasn’t started yet (including projects that have entered or satisfactorily completed the development/design review process):

  • 620 units at Redmond Square, Redmond. Construction to start later this year, estimated to open in March 2020
  • 1,096 units at 2300 6th Avenue, Seattle, no dates available yet.
  • 1,649 units at 1901 Minor Avenue, Seattle, with 943 units Building 1 and 706 units in Building 2, no dates available yet.

This comes after 10,500 units were delivered in 2017.

The vacancy rate for the counties of King and Snohomish combined, including apartments in newly opened buildings that are trying to find tenants, rose to 7.5% in Q1 (most recent data available) from 6% a year ago, according to Apartment Insights, cited by the Seattle Times. In newly opened buildings in the metro, about 40% of the units are vacant.

The vacancy rates by submarket in the list below include new construction that developers are now trying to fill:

  • Downtown Seattle: 25.7%
  • South Lake Union: 13.9%
  • Central/South Seattle: 11%
  • First Hill: 9.4%
  • Bellevue West: 9.3%
  • Fremont/Wallingford: 8.8%
  • Queen Anne/Magnolia: 8.7%
  • University District: 7.3%
  • Capitol Hill: 8.2%
  • Southwest Seattle 6.7%
  • Bellevue East 6.6%
  • North Seattle: 6.4%
  • Mercer Island/South Bellevue 5.4%
  • Kirkland: 2%

Cutting asking rents would be the obvious solution. But that is anathema to the industry. It would show that rents are declining, and it would engender price competition – a race to the bottom, so to speak – and potential tenants would hold out for even better deals, or negotiate harder, and existing tenants would ask for rent reductions or move at the end of their lease. And so landlords and developers layer on the deals to fill those units without having to cut asking rents.

In a review of for-rent ads posted in a 24-hour span, the Seattle Times found that 157 buildings in the city of Seattle offered “significant” concession – with one-month free being offered in 112 of those buildings – to lure potential tenants into the door:

Most of the freebies were in newer buildings that must fill up dozens or even hundreds of new apartments at the same time — including some buildings that haven’t even opened yet — but there were plenty of handouts at older buildings, as well.

Among the other common concessions were specials on deposits; free parking for up to the term of the lease; gift cards going up to $2,500; gym memberships, electronic gadgets, and Uber credits, or a combination.

At the moment, this strategy is still working, as developers would rather sit on empty units for now, than actually cut asking rents. At least it’s still working in the one-bedroom arena. According to Zumper, the median asking rent for a one-bedroom apartment in June matched the record in May of $1,990, up 4.2% from a year ago.

But in the pricier two-bedroom arena, resistance is being felt more strongly: median asking rent for a two-bedroom, at $2,530, was down 4.5% from the peak in April 2016.

So there is plenty of supply in the Seattle metro, thanks to this construction boom. But most of this supply is high end. And for many budgets, it’s the wrong kind of supply. This is a common thread in many cities with construction booms that generated loads of high-end supply that is out of reach for many households.

But eventually, if the market is allowed to do its jobs, the wrong kind of supply turns into oversupply, and landlord have to fill it or go broke. And when the banks end up with the building, they, or whoever they sell it to, will fill it, and cutting rents is standard procedure because their cost basis is lower. This is when push comes to shove. It puts pressure on rents in the entire market. But for now, hopes are high that it will never get to the point where push comes to shove though boom towns go through it inevitably.

Suddenly there are historic spikes in home prices in Seattle and other metros. But New York condos skid. Read… It Gets Spiky: The Most Splendid Housing Bubbles in America