This is a follow up post to Trying to Cheer Up an Economic Idiot. In that post I outlined my opinion of what was happening in the red hot rental market of my Seattle neighborhood of Ballard. Unlike my neighbor, I don’t see the situation in Ballard as dire as he does. He believes that builders are driving up rents. I see the builders as responding to pent up demand and although new construction holds a rent premium, the increase in supply is the very thing we need to stabilize rent increases.
I want to thank Capitol Hill Seattle Blog for alerting me to the blog post If this is the calm before the storm… by apartment industry analysts Dupre + Scott. I want to highlight a few things on this report.
The report explains that new construction typically gets a rent premium of 40%. And in normal markets when building isn’t as high, this doesn’t have as much impact in the aggregate numbers. But development is high, so this makes it appear as if all rents are on a tear. They aren’t. Non-new construction rent is increasing at 5% per year. Still higher than inflation, but this is before the new supply of units hit the market.
Here is what they are saying about Ballard:
Ballard’s market vacancy is a mere 2.8%. But its gross vacancy rate is the highest in the region, at 17.3%. Now that’s downright scary, isn’t it? Yes and no. If Ballard was a city with 100,000 rental units and it had a 17% vacancy rate, then yes that would be scary. But there are fewer than 2,500 units in Ballard. That means there are 423 vacant units right now. And since developers increased the total supply of rental housing by more than 50% in Ballard over the past 18 months, it’s doing pretty well.
And they continue to build in Ballard. And they continue to build throughout Seattle. Their survey says that developers will be adding 7,000 new units in the next 6 months! Bring it on. Every tech worker with a fat paycheck signing a lease at one of these new apartment complexes is one less person bidding up existing rentals.
A side note about Seattle. Tech workers tend to be young and single. They not only want to live near work, but they ideally would like to live in a fun neighborhood full of other young and single people. Capitol Hill, Belltown, Lower Queen Anne and South Lake Union all fit that bill. Ballard really doesn’t. We are a little too far from the young and hip. I love Ballard, but would I love it as much if I were 25 with a fat paycheck? Probably not.
In the post I did last week, I said this:
Supply has been lagging demand for a few years. I not only expect it to catch up, but during booms builders have this history of building too much. This is good for renters.
It appears this might be happening. Not only does the title of the report suggests the industry is concerned, but it says that although only 15% of new apartments are offering concessions, the amount is increasing. What do Dupre + Scott predict?
We expect the use and size of concessions will grow significantly over the next six to twelve months
Significantly? I like the sound of that. They also say:
It’s good to be optimistic, but investors will likely find it more challenging than normal to raise rents between April and September.
As a renter that makes me smile. I love negotiating lower rent. Finally, I want those that don’t share my optimism to look at the last chart on the report. You will see an inverse relationship between apartment vacancies and rent. When vacancies rise, rents drop.
Vacancy rates are at or near an all-time low in Seattle. Construction of new apartment units is at a 21 year high. Supply is about to meet demand head on. Grab some popcorn.
Mar 26, 2014 — 5:17 pm
It will be interesting to see if the developers over build on apartments in this current cycle, just like they over built condos during the boom. If they do it could make for some great rent incentives in the coming years. Or will some proposed apartments become condos?
Mar 26, 2014 — 6:11 pm
@Bill – I wouldn’t be surprised. Highly paid young people don’t stay in apartments for too long. Many become home buyers. If the apartment owners can flip them into condos, they will. They did before. And the cycle repeats.
Mar 26, 2014 — 7:08 pm
Yes, many will become homebuyers. One interesting factor will be how these young people react to rising interest rates, which will happen. They have no perspective on just how incredibly low the current rates are. Suggest a 6.5% interest rate isn’t high, historically speaking, and someone under 30 thinks it is crazy high.
Mar 27, 2014 — 7:21 am
@Bill – The other economic misstep I see people in their 30s and 40s making is using the low interest rates as a reason to purchase a home. They fail to see that asset prices and interest rates are inversely correlated and that an increase in rates will result in lower home prices, which could put them under water quickly if their down payment is low. I might do a post on this topic.