Successful apartment building investing is about knowing where and when to buy and when to sell. The apartment building investment cycle sends very clear signals to those paying attention and one of the biggest and clearest is when existing properties begin to sell for more than the cost of building new apartments. As I mentioned here this line was crossed about a year ago in the Seattle market and now we can see how the peak is formed, when every developer and their brother starts building new apartments.
From Bloomberg:
The biggest surge of Seattle-area apartment construction in a quarter century is threatening to undercut the growth in rents. Seattle went from “dead last” in rent increases three years ago to 13th out of 88 markets last year. “We went from almost a desert to a big pipeline” in two years, said David Young, the Seattle-based managing director who oversees western U.S. apartments for commercial broker Jones Lang LaSalle Inc.
Encouraged by hiring at local employers such as Amazon.com, Boeing and Nordstrom, developers are building almost 10,000 apartments in Washington state’s King and Snohomish counties, Three- quarters of the total are in Seattle, with 4,619 of those units in or near downtown.
Dupre + Scott Apartment Advisors Inc. said the building boom may last through 2016.
“If in fact we come to market when there’s excess supply, we’ll just have to be aggressive on rents,” said Matt Griffin, managing partner Pine Street Group.“That’s our downside. We expect the next few years to be the most aggressive development cycle we’ve seen in more than 20 years,” the firm said in a December report. “With the onslaught of new construction that will begin lease-up, particularly in 2013, the rate of rent growth will slow.” [Or reverse]
- Pine Street Group LLC, is building 654 units
- Goodman Real Estate Inc. and Harbor Urban LLC broke ground on 249 units.
- Holland Partners plans to build 386 units.
- R.D. Merrill Co. is helping finance about 700 units as part of a mixed use complex
- Laconia Development LLC plans to build about 323 units in a 30-story tower.
- That’s more than 1,200 units in just those five projects.
“I don’t think we’re anywhere near the top of the cycle,” Menzies said in a telephone interview. [Famous last words]
Pension funds, REITs and other institutions have flocked to buy or finance apartments in Seattle since 2010. Offices can sit empty for long stretches and condominiums go unsold, whereas apartment landlords are usually able to keep apartments filled by reducing rents, he said. While REITs including Equity Residential and AvalonBay Communities Inc. own apartments in and around Seattle, most of the area’s development is being undertaken by private developers. {Maybe that’s where the trouble starts?]
But some are thinking about the Apartment Building Investment Cycle
Some investors are reducing their holdings in the area amid concern about an apartment glut. Security Properties, owns a 268-unit apartment complex, and its partner Northwestern Mutual Life Insurance Co. are the sellers of the site near the Paramount Theater.
“You never know how strong job growth is going to be, how strong population growth is going to be,” said John Orehek, president and chief executive officer of Security Properties, which has built apartments in the Seattle area since 1969. While concern that an apartment bubble may develop “wasn’t the primary driver” behind the land sale, “it’s always in the back of your mind,” he said.
See the whole Bloomberg piece here: Seattle Signals Glut Risk as Apartment Construction Rises
It’s the considerable amount of time between when developers decide to build a new building and when lease-up starts that causes a glut of properties to come into the market at the peak. To learn how to decipher the apartment building investment cycle get my Special Report on what my mentor, Tom Barrack of Colony Capital says is The Most Important Thing in Real Estate Investing email me at giovanni@ashworthpartners.com with The Most Important Thing in the subject line.
