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YOUR BUSINESS JOURNAL.

















Published May 2006

Future looking brighter
for rental properties

My dad tells this great story about visiting a tarot-card reader in New York while he was in the armed services who accurately predicted the name of his sisterís firstborn. Debbie. He views it as a curiosity, not magic. But when he tells the story today, you can see in his eyes that he wonders how she could have gotten that right.

Predicting markets and economies is much like tarot-card reading. Fortunately, we have more cues and facts to work with than the tarot-card reader. But thereís still a component of it that is more gut than facts.

The gut, right now, says that the apartment market in Snohomish County is fully in recovery. Fortunately, the facts say the same things.

Battered by low mortgage interest rates pulling renters into homeownership in record numbers and the post 9/11 economic slump that hit aerospace particularly hard, itís really remarkable that the bottom wasnít worse than the 15 percent vacancy rates lodged in December 2002 in many areas of the county.

Still, it has been five straight years of flat rents and weak occupancy while expenses have continued to increase. Vacancy rates are closing in on the magic 5 percent number now, considered a healthy level. In fact, according to the Dupre + Scott Apartment Advisor Report for December 2005, most apartment owners and managers say they are planning on increasing rents anywhere from 2 percent to 5 percent. The market hasnít even considered across-the-board rent increases since 2001.

Contrary to normal investment principles, values of apartment properties increased in the past few years despite the anemic net cash flows. The reason is that itís still relatively expensive to build a standard garden-style apartment building in most of Snohomish County when compared to the rents it would take to pencil the costs. Itís also a risky prospect. As a result, investors compete to position themselves in the market by buying existing product so that they are poised to benefit when the market turns around. Itís expensive to buy in, goes the investment theory. But once youíre in, youíre in.

In most markets, you would expect a supply surge in reaction to demand. But that is not likely to come, as apartment property owners need some time to get rents caught up before they consider development. The cost to construct and the rents you need to pencil still donít work yet, except in the higher-end product.

There will be some increase in supply, but not much for 2006. Whatever new construction does come along will have to first offset the contraction of some product out of the supply pool altogether as developers buy up apartment buildings and convert to condos.

With rent increases now in play and the prospect of the cash-on-cash returns improving, the recovery is real. Only a boom in condo development or a drop in single-family home prices might threaten an otherwise improved condition for rentals. That isnít likely. The tarot cards ó and the facts ó indicate, for the first time this decade, something good in the rental property ownerís future.

Tom Hoban is CEO of Coast Real Estate Services, a commercial sales, leasing, investment and property management company with offices in Everett, Tacoma, Spokane, and Boise, Idaho. He can be reached at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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