Multifamily market makes its big move

With apartment vacancy rates declining and job growth increasing, real-estate investors are snapping up properties in anticipation of a three-year boom in the multifamily market around Seattle.

Local investors are beefing up holdings, and out-of-state investors are buying large buildings, even as developers take more apartments off the rental market and convert them to condominiums.

Small investors, both local and out-of-state, are shopping around Puget Sound, looking for properties that can make money.

A number of factors are driving the busy market, real-estate brokers and researchers say.

Apartment buying closely tracks job growth, said Frank Bosl, a senior vice president at CB Richard Ellis, and Conway Pedersen Economics has predicted the region will add 140,000 new jobs from 2006 to 2009.

More jobs mean tighter vacancy rates, which mean fewer landlord concessions and, ultimately, rent increases.

Dupre + Scott Apartment Advisors, a research firm in Seattle, reports apartment vacancies were 4.6 percent as of April, down from 6.5 percent a year ago. This is the first time the rate has fallen below 5 percent since 2001, the firm said.

Starting next spring, rates are predicted to dip below 4 percent and stay there through the end of 2008. Dupre + Scott expects rents will rise about 5.2 percent a year.

Condo conversions play into the dipping vacancy rate, Bosl said.

He cited Dupre + Scott data that indicate that in 2005, more apartments were converted to condos and taken off the rental market than new apartments were built and added to the market.

"Seattle is a favorite of the investment community now," said Peter Larsen, a principal with Paragon Real Estate Advisors in Seattle, a firm that sells buildings with 10 to 100 units and typically priced from $1 million to $12 million. "People's expectation of rising rents is outpacing their fear of rising interest rates."

Larsen said mid-sized buildings his firm represents are selling faster, with some properties moving in only 30 days.

Recently, he's seen sellers list property with no asking price — an invitation for auction-style bidding. He's also seen sellers who anticipate multiple offers and include an "offer deadline" for bidders.

Strength "stunning"

Those techniques aren't new in the industry, but they are new for mid-sized apartment housing in Seattle, Larsen said. "It's stunning how strong this market is."

But anticipated rent increases, stronger employment and tightening vacancy numbers aren't the only reason investors want in. While Seattle has grown more expensive, it still compares favorably to more dramatic markets like Las Vegas, many parts of California, and other cities entering slowdowns.

Agents who sell multifamily say buyers from California and other increasingly risky out-of-state markets are shopping around Puget Sound, where the economy is expected to remain strong over the next three years.

Ed Ross, 44, a Florida resident, has invested in residential real estate for 20 years, once owning up to 400 single-family and apartment rentals. In recent years, he's reduced the size of his portfolio, so he's not trying to buy more buildings. But if he were looking, he says he'd shop in Seattle and its suburbs.

"Seattle would be my first choice," Ross says. "A lot of other investors are still stuck in the 'hot' markets."

Appreciation forecast

Ross recently launched a free Web-based tool for residential property owners and investors that can forecast a property's appreciation rate over the next three years. His Spill Zone Web site (www.thespillzone.com) can identify a property's projected price three years from now and whether or not the property is in what Ross calls a "spill zone," or appreciation growth area.

Based on Spill Zone's three-year forecasting, the Seattle-Bellevue-Everett area is the 12th-fastest-appreciating American market (among 290 metro areas), with 36 percent appreciation expected between August 2006 and August 2009.

That means out-of-state investors are coming, especially in 2008, Ross says.

"When a downturn starts [in some markets], it takes about two years for investors to decide to pull out," Ross says. "So Seattle has a two-year waiting period before people start coming here."

Larger investors are already here, buying buildings, renovating them and raising rents. Atherton-Newport Real Estate Investments in California is among five out-of-town companies that have snapped up more than one-third of the larger buildings sold here since the start of 2006, according to Dupre + Scott.

Ashish Khatana, a managing partner and co-founder of Atherton-Newport, said his company has 1,450 apartment units in the area and intends to add 2,000 or 3,000 more. With the job market improving and vacancy declining, Khatana said his firm saw more than a year ago that the timing was right to start buying here.

"We think Puget Sound will be quite strong over the next few years," he said.

His business is investing roughly $10 million on improvements at nine buildings, an average $10,000 per apartment, to make structural as well as aesthetic changes. This could translate to rent increases ranging from $75 to $150 per month, he said.

"The beauty of the Seattle real-estate market is that it has seen consistent growth for the last four 10-year cycles," said Candice Chevaillier, in-city investment specialist with Marcus & Millichap in Seattle. "We see a run-up in value and then a leveling off, followed by another run.

"Contrast this with the boom-and-bust markets such as Texas, Nevada, Arizona and California, where market timing is much more critical."

Tim Marymee, an assistant vice president who oversees multifamily lending at Washington Federal Savings, says serious investors look at several factors before deciding whether to buy a property.

Many look at cash flow, or how much cash remains after the building owner pays all fees, including the mortgage, insurance, taxes and other operating expenses.

Others use a figure known as the "capitalization rate" or "cap rate," a calculation that factors in a property's net rental income and its market value to give buyers an idea of what kind of profit the purchase might generate.

The higher a property's capitalization rate, the better for the investor or owner.

Although cap rates are dropping in metro Seattle because rents are relatively low and properties are growing more expensive, they still beat other markets.

"I do see a significant amount of dollars coming in from California in particular, because the 4 percent cap rates we are seeing are attractive by comparison to some of the 3 percent caps now found in some California markets," Chevaillier said.

Nothing too small

Out-of-state buyers are even snapping up smaller properties with fewer than five units, which are generally considered risky for investors who have to manage them from afar.

Robert Carroll, an agent specializing in residential multifamily investment property at Re/Max Metro Realty, says 40 percent of the transactions he's handled in the past year come from out-of-state buyers, many from California, although he's quick to stress this may be high relative to other agents' experiences.

The buyers opt for traditionally stable areas — Green Lake, Fremont, Wallingford and Queen Anne, among others — where appreciation over time has been consistent and vacancy rates withstand downturns because the neighborhoods are popular.

"They're not dealing with a fourplex in Kent," Carroll said.

George Ghaby, a 37-year-old restaurant owner in Los Angeles, is among the individual investors eyeing smaller buildings in markets far from his home.

Among his holdings is a 33-unit apartment building in Longview that he bought in 2005.

Ghaby owns two rentals in notoriously speculative Las Vegas but says he won't buy there again because prices have "ballooned outside my comfort zone."

California prices were never in his comfort zone. That's why he's closing a deal in Phoenix and plans to return to Washington to seek more rentals.

I-5 allure

Dick Beeson, a broker with Windermere Real Estate/Commencement Associates in Tacoma, said out-of-state investors, especially from California, have been eyeing the entire Interstate 5 corridor for the past few years.

He believes investors' presence in the local market has helped contribute to home-price increases in the region of anywhere from 5 to 10 percent.

He knows of one eight-unit apartment building in Puyallup that sold to a California investor for $850,000 in May, nearly $100,000 more than the seller had expected to get. The seller bought the building in 2003 for $450,000.

"Out-of-state buyers still think we're a bargain," Beeson said. "This does have an impact."

Locals often beat out-of-state buyers to the best deals, Paragon's Larsen says, but that won't stop buyers from San Diego, San Francisco and Orange County from shopping here.

"That's who's coming up here," Carroll said. "It doesn't work in the opposite direction."

Jane Hodges (janehodges@hotmail.com) is a freelance business writer in Seattle.

Price appreciation in multifamily housing
The price of multifamily housing (buildings with two to four units) has risen in King, Pierce, and Snohomish County between 2005 and 2006. The following chart includes median prices during the first half of 2005 compared to median prices during the first half of 2006:
County	First half 2005	First half 2006	% Change
King	$449,000	$485,000	8%
Pierce	$290,000	$329,000	13.4%
Snohomish	$341,000	$395,000	15.8%
Source: Northwest Multiple Listing Service