Apartment Market Hot Now. But Is It Headed For a Bubble?

A friend was close to purchasing a large piece of property south of Seattle for a commercial venture when, at the last minute, the seller called to say he wasn’t gong through with the deal.

Why? A pension fund had swooped in and offered 15 percent more for the property. The fund couldn’t find investments that offered a good yield and was planning to build apartments to rent out. The fund was reportedly happy with the 4 percent return they expected on the apartments.

“That suggests to me that we are headed for a bubble,” says my friend. It might take three years, but you’re going to see an oversupply of apartments again.”

For the time being, the rental market is hot, as Eric Pryne reports in the Seattle Times today. Apartment vacancy rates in King County have fallen to 4.3 percent from 6.8 percent a year ago. Consequently, for the first time in years, average monthly rates have started to inch up.

That’s because the plunge in property values following the financial crisis put a virtual stop to construction. Total new apartment construction is close to a 40-year-low so few new apartments are coming on the market. Pundits are predicting rents will consequently keep climbing in coming years.

The prospects of higher rents have developers eager to tap the market. Dozens of new apartment projects are on the drawing boards. When they come onto the market in three-years or so look for another glut of oversupply.

Meanwhile, in housing, where prices have plunged, developers are beginning to shift their strategies to build smaller, cheaper homes. As Bill Virgin reports in the April issue, building permits are up and housing developers are beginning to buy up land with plans to build again.