A wealth of condos sets stage for renters

Apartments have been the poor stepchild to condominium towers over the past few years in downtown Seattle. They're back in vogue now, but the national housing storm may dampen their return to prominence.

"Isn't it always this way?" Seattle's Dupre + Scott Apartment Advisors asked in a December report on the apartment market. "Apartment development picks up just as our economy slows down."

The Olivian, under construction at 8th Avenue and Olive Way, will be a 27-story building with 224 luxury apartments. (Courtesy of The Hanover Company)

Los Angeles developer Urban Partners announced Monday that it had broken ground on Aspira, a 37-story apartment tower on a former church parking lot at the southwest corner of Stewart Street and Terry Avenue. The Hanover Co., of Houston, is already building the Olivian, a 27-story luxury apartment building at Eighth Avenue and Olive Way, and several other towers are in the works.

Aspira was originally slated for condos. Julie Benezet, managing director of the Urban Partners' Seattle office, attributed the change to a glut of announced condominium projects, skittishness among the investors who fund condo towers because of condo speculation in other parts of the country, an apartment supply that has shrunk because of a lack of new construction since the dot-com meltdown in 2001 and conversion of existing apartments to condos in recent years.

"There just didn't seem to be a product there for the person who did not want a condo, who wanted to be able to rent," she said.

Downtown lacks the kind of high-end apartments Hanover builds, said Eric Kenney, managing partner of the company's Western division. "There's nothing in our segment of the market."

Seattle actually had more than 5 percent fewer total apartments this fall than a year earlier, according to Dupre + Scott. Meanwhile, the vacancy rate plunged from more than 7 percent in 2002 to 2.8 percent this spring, before ticking up to 3 percent in the fall, and the average rent this fall was up 11 percent from a year ago.

Apartments remain somewhat of a bargain, Mike Scott, of Dupre + Scott, said in an Aspira news release. "Even though rents have increased significantly, there is still room for more increases because rents have not kept pace with consumer incomes."

Seattle's economy has continued to create jobs, drawing new residents to the area. That includes 55,000 jobs and net migration (the number of people moving in minus those leaving) of 48,000 people this year, according to Conway Pedersen Economics' Puget Sound Economic Forecaster.

"What drives our business is job growth and job growth over the last four years really has been exceptional in Seattle," Kenney said.

Benezet pointed to companies like Microsoft and, reportedly, Amazon planning to open downtown offices, adding that many of the new employees would want to rent.

"They're on the move, they're traveling a lot and they may or may not settle here permanently," she said.

Matthew Gardner, a Seattle land-use economist, said he's seen apartments as the best investment in Seattle real estate for more than a year. But he also cautioned that apartments might swing back into oversupply in the next few years, as more projects come on line and the economy softens.

Conway Pedersen Economics predicts growth will slow to 34,000 new jobs next year, 28,000 in 2009 and 26,000 in 2010. This would slow net migration to an average of 25,000 in each of the next three years.

Dupre + Scott predict purchases of apartment buildings for condo conversion "should come to an almost complete stop for at least a year," with apartment development in King, Pierce and Snohomish counties slowing from nearly 2,600 units in buildings with 20 or more units over this year to 2,100 apartments next year, before jumping to about 4,500 in each of the following two years.

The area's vacancy rate should rise from about 3.5 percent through 2008 to 4.5 percent in 2009 and just over 5 percent in 2010.

Rents should continue to climb 6 percent a year for the next three years -- a little more than the past three years, but less than the 9 percent jump over the past year, Dupre + Scott predicted.

High construction costs mean developers are gambling on rents continuing to rise, Gardner wrote in a recent commentary on the rental market. "This has been a common practice for many years and one that required more than a little optimism on the part of the developer."

WHAT'S GOING UP?

The Olivian, a 27-story luxury apartment building at Eighth Avenue and Olive Way.

Aspira, a 37-story apartment tower on a former church parking lot at the southwest corner of Stewart Street and Terry Avenue.