The Over-Saturation Trend of High-End Apartment Development in Seattle.

173 Pages·2013·5.54 MB·English

by  Adrien M. Renaud

Seattle Apartment Market Alignment Analysis
(2011-2016)

Adrien Renaud

A thesis
submitted in partial fulfillment of the
requirements for the degree of

Master of Urban Design and Planning

University of Washington

2013

Committee:

Chris Bitter
George Rolfe

Program Authorized to Offer Degrees:
College of the Built Environments
© Copyright 2013
Adrien Renaud
University of Washington

Abstract

Seattle Apartment Market Alignment Analysis
(2011-2016)

Adrien Renaud

Chair of the Supervisory Committee:
Assistant Professor Christopher Bitter
Department of Urban Design & Planning

This thesis will explore the alignment between demand and the supply of apartment pipeline
developed in the Seattle area through 2016. This topic specifically deals with the possibility of
overdevelopment or a bubble in the apartment market, which could result in lower returns for
investors. This threat to investor expectations necessitates the assessment of the alignment
between supply and demand as a matter of due diligence for any investor. This thesis will use a
Market Analysis method and Net Absorption Model technique to forecast through 2016. Tenure
and apartment capture ratio will be the specific focus of the analysis. The primary findings of the
research show that the boom portion of a possible bubble is already well underway. A bubble
effect is almost unavoidable, due to the use of contemporary financial instruments. Tenure and
Apartment Capture Ratios will need to be very elevated to avoid record high vacancy rates,
which is unsustainable for this elongated duration. The resulting misalignment of the market will
likely occur before 2016.Other factors will soften the impacts of overbuilding the apartment
stock, like apartment conversion into condominiums, financial market changes to apartment
investment volumes, and investors purchasing previously owned residential properties for rental
purposes, tight individual mortgage market credit, and Amazon.com’s continued aggressive

hiring in the center of Seattle.
i
Table of Contents
Abstract .......................................................................................................................................................... i
Table of Contents .......................................................................................................................................... ii
List of Figures ................................................................................................................................................ v
Graphs ....................................................................................................................................................... v
Maps ......................................................................................................................................................... v
Tables ........................................................................................................................................................ v
Abbreviations and Acronyms ....................................................................................................................... vi
Definitions ................................................................................................................................................... vii
Dedication & Acknowledgments................................................................................................................... x
Preface ......................................................................................................................................................... xi
Executive Summary ..................................................................................................................................... xii
Chapter 1: Introduction ................................................................................................................................ 1
A. Problem Statement and Thesis Question ......................................................................................... 1
B. Thesis Research Scope and Structure ............................................................................................... 2
C. Research Methodology ..................................................................................................................... 3
D. Findings ............................................................................................................................................. 5
E. Intended Audience ............................................................................................................................ 7
Chapter 2: Literature Review ........................................................................................................................ 8
A. Introduction to Literature Review .................................................................................................... 8
B. Methodology Literature .................................................................................................................. 10
I. Market Analysis Methodology .................................................................................................... 10
II. Housing Tenure Methodology .................................................................................................... 12
III. Capture Ratio Methodology .................................................................................................... 13
C. Demographic Demand Drivers of the Apartment Market .............................................................. 13
I. Housing Tenure Demographic Literature ................................................................................... 13
II. Households ................................................................................................................................. 14
III. Cohorts .................................................................................................................................... 15
D. The History and Trends of the Apartment Market Supply ............................................................. 15
Chapter 3: Market Context ......................................................................................................................... 21
A. Identifying Market Areas ................................................................................................................ 21
ii
B. Geography ....................................................................................................................................... 25
C. Transportation ................................................................................................................................ 26
D. Politics ............................................................................................................................................. 28
E. Economy .......................................................................................................................................... 28
F. Apartment Market and Supply Side Context .................................................................................. 29
Chapter 4: Net Absorption Model (NAM) .................................................................................................. 33
A. NAM Methodology Theory and Assumptions ................................................................................. 33
B. Historic SMSA Demand NAM Methodology and Data .................................................................... 34
C. Focus of Thesis: NAM Methodology Forecast ................................................................................ 39
Chapter 5: NAM Tenure History and Forecast ............................................................................................ 41
A. Tenure: Demographic Demand Drivers and Economic Indicators .................................................. 41
B. Identifying Renter Tenure Indicators for Forecasting ..................................................................... 44
C. Forecasting Renter Tenure Rate ..................................................................................................... 47
Chapter 6: NAM Apartment Capture Ratio (ACR) ....................................................................................... 52
A. Subject Apartment Capture Rate Introduction ............................................................................... 52
B. ACR SMSA Market Level Analysis and Forecast .............................................................................. 52
C. ACR SKCA Submarket Level Analysis and Forecast ......................................................................... 54
Chapter 7: Sensitivity Testing...................................................................................................................... 59
A. High Scenario Sensitivity Test ......................................................................................................... 59
I. High Renter Tenure ..................................................................................................................... 59
II. High SMSA Market ACR ............................................................................................................... 61
III. High SKCA Submarket ACR ...................................................................................................... 62
B. Low Scenario sensitivity test ........................................................................................................... 64
I. Low Renter Tenure ...................................................................................................................... 64
II. Low SMSA Market ACR ............................................................................................................... 65
III. Low SKCA Submarket ACR ....................................................................................................... 66
Chapter 8: Conclusion ................................................................................................................................. 68
A. Conclusion ....................................................................................................................................... 68
B. Lessons Learned .............................................................................................................................. 69
C. Limitations....................................................................................................................................... 70
D. Topics for Future Exploration ......................................................................................................... 70
Appendix ..................................................................................................................................................... 76
iii
Appendix A1: None ................................................................................................................................. 76
Appendix A2: None ................................................................................................................................. 76
Appendix A3-1: Market Area MAPS ........................................................................................................ 77
Appendix A3-2: Amtrak Route MAPS and Seattle Topology Map .......................................................... 78
Appendix A3-3: Bus Route SMSA 2012 MAP .......................................................................................... 79
Appendix A3-4: National Economic Market Context .............................................................................. 80
Appendix A3-5: Chapter 3 - Construction Cost Chart ............................................................................. 85
Appendix A3-6: Inferential Supply Data .................................................................................................. 86
Appendix A3-7: SKCA Net Absorption 98-2012 .................................................................................... 100
Appendix A3-8: SKCA Development List ............................................................................................... 101
Appendix A3-9: Seattle (King North) Area (SKNA) Development List ................................................... 103
Appendix A3-10: The rest of the King County Area Development List ................................................. 104
Appendix A3-11: Peirce and Snohomish County, and Other, Development List .................................. 105
Appendix A4-1: Fundamental Demographic Demand Drivers .............................................................. 106
Appendix A4-2: Foreclosure data set .................................................................................................... 132
Appendix A4-3: Census-Bureau Tenure rates (1965-2012) .................................................................. 133
Appendix A4-4: Decennial-Census Tenure rates State of Wyoming (1900-2010) ................................ 136
Appendix A4-5: Decennial-Census-Bureau Tenure rates (1900-2010) ................................................. 138
Appendix A4-6: ESRI BAO Tapestry Segmentation Profiles of Seattle King Central Area ..................... 139
Appendix A4-7: Full Historic SMSA NAM .............................................................................................. 144
Appendix A6-1: Full Capture Rate table ACR-CCR................................................................................. 145
Appendix A6-2: Full Capture Rate table ACR Prorata Share ................................................................. 146
Appendix A7-1: 1980 SMSA Apartment Boom and Microsoft Case study ........................................... 147
Appendix A8: Alternative Methods....................................................................................................... 149
Bibliography .............................................................................................................................................. 150
End Notes .................................................................................................................................................. 157

iv
List of Figures
Graphs
Graph 2D1: Commercial Real Estate Apartment Property Type Cycle Analysis Q2, 2012
Graph 2D2: Commercial Real Estate Apartment Property Type Cycle Analysis Q4, 2012
Graph 3F1: Seattle Metropolitan Statistical Area (SMSA)
Construction Volume Activity (1960-2016)
Graph 3F2: Seattle King Central Area (SKCA) Construction Volume Activity (1980-2016)
Graph 3F3: SKCA Net Absorption Rates (1998-2012)
Maps
Map 3A1: Seattle Area
Map 3A2: Seattle Metropolitan Statistical Area (SMSA) Geographic Delineation
Map 3A3: Seattle King Central Area (SKCA) Geographic Delineation
Map 3A4: SKCA Apartment Development Pipeline
Map 3B: City of Seattle Neighborhoods
Map 3C1: Current Sound Transit Link Light Rail
Map 3C2: City of Seattle South Lake Union Streetcar
Map 3C3: Unfunded Tentative Future Streetcar Plan Routes

Tables
Table 3B: Names of Seattle Neighborhoods
Table 4B1: Historic SMSA Net Absorption Model (NAM) (1990 & 1998-2011)
Table 4B2: Sample Census-Bureau Tenure Survey (Table 14) Quarterly Results (2011-2012)
Table 4C: Forecast SMSA NAM Population and Average Household Size (2006-2016)
Table 5C1: Historic Tenure Statistics (Mean, Standard Deviation, Minimum & Maximum)
Table 5C3: SMSA Net Absorption Model (NAM) Tenure Forecast (2006-2016)
Table 6B1: SMSA Market Apartment Capture Ratio (ACR) Current Capture Rate (CCR) Method
Table 6B2: SMSA ACR Prorata Share Method (2005-2012)
Table 6B3: SMSA ACR Results of 45% ACR (2012-2016)
Table 6B4: SMSA ACR Results implications for Vacancy Rate Forecast (2010-2016)
Table 6C1: Seattle King Central Area (SKCA) Submarket ACR-CCR Method (1998-2011)
Table 6C2: SKCA ACR-Prorata Share Method (1998-2012)
Table 6C3: SKCA ACR Result of 31.5% ACR (2012-2016)
v
Table 6C4: SKCA NAM ACR Forecast Vacancy Rate Forecast (2008-2016)
Table 7A1: SMSA Tenure High Scenario Sensitivity Test, assuming no change to ACR
Table 7A2: SMSA ACR High Scenario Sensitivity Results
Table 7A3: SMSA High Scenario Sensitivity Test Vacancy Rate Forecast
Table 7A4: SKCA ACR High Scenario Sensitivity Results
Table 7A5: SKCA High Scenario Sensitivity Test Vacancy Rate Forecast
Table 7A6: SMSA NAM High Scenario Sensitivity Test Results Summary
Table 7B1: SMSA Tenure Low Scenario Sensitivity Test, assuming no change to ACR
Table 7B2: SMSA ACR Low Scenario Sensitivity Results
Table 7B3: SMSA Low Scenario Sensitivity Test Vacancy Rate Forecast
Table 7B4: SKCA ACR Low Scenario Sensitivity Results
Table 7B5: SKCA Low Scenario Sensitivity Test Vacancy Rate Forecast
Table 7B6: SMSA NAM Low Scenario Sensitivity Test Results Summary

Abbreviations and Acronyms

ACR – Apartment Capture Ratio
ACS - American Communities Survey
AMI - Area Median Income
BAO – Business Analyst Online
CBD - Central Business District
CCR – Current Construction Rate
COMP’s - Competitive Properties
COO - Certificate Of Occupancy
D&S – Dupre & Scott Apartment Advisors
FFIEC - Federal Financial Institution Examination Council
HH - House Holds
HUD - U.S. Department of Housing and Urban Development
KC – King Central
KN – King North
M - Market
MSA - Metropolitan Statistical Area
vi
NAM - Net Absorption Model
PS - Prorata Share
RHH - Renter Households
RT - Renter Tenure
ROI - Return On Investment or Return Of Investment
SFH - Single Family Home
SKCA – Seattle King Central Area
SKEA - Seattle King East Area
SKNA - Seattle King North Area
SMSA – Seattle Metropolitan Statistical Area
SOV - Single Occupancy Vehicle

Definitions

Area Median Income (AMI):
1. Midpoint in the family-income range for a metropolitan statistical area or for the non-
metro parts of a state. The figure often is used as a basis to stratify incomes into low,
moderate and upper ranges. (FreddieMac)
2. Median income is the amount which divides the income distribution into two
equal groups, half having income above that amount, and half having income
below that amount. Mean income (average) is the amount obtained by dividing
the total aggregate income of a group by the number of units in that group. The
means and medians for households and families are based on all households and
families. Means and medians for people are based on people 15 years old and
over with income. (U.S. Census Bureau)
3. A measure of a population's ability to afford to purchase a particular item, such as a
house, indexed to the population's income. An affordability index uses the value of 100 to
represent the position of someone earning a population's median income, with values
above 100 indicating that an item is less likely to be affordable and values below 100
indicating that an item is more affordable. (Investopedia)
4. The median household income is commonly used to generate data about geographic
areas and divides households into two equal segments with the first half
of households earning less than the median household income and the other half earning
vii
more.[1] The median income is considered by many statisticians to be a better indicator
than the average household income, as it is not dramatically affected by unusually high or
low values. Household income is not to be confused with family or personal income.
Household income is often the combination of two income earners pooling the resources
and should therefore not be confused with an individual's earnings. Even though the term
family income may sometimes be used as a synonym for household income, the U.S.
Census Bureau defines the two differently. While household income takes all households
into account, family income only takes households with two or more persons related
through blood, marriage or adoption into account. (Wikipedia)

Boom: A period of time during which sales of a product or business activity increases very
rapidly (Investopedia).

Bubble:
1. An economic cycle characterized by rapid expansion followed by a contraction
(Investopedia).

2. A surge in equity prices, often more than warranted by the fundamentals and usually in
a particular sector, followed by a drastic drop in prices as a massive selloff occurs
(Investopedia).

3. A theory that security prices rise above their true value and will continue to do so until
prices go into free-fall and the bubble bursts (Investopedia).

Bust: A period of time during which economic growth decreases rapidly, (Investopedia).
Apartment Capture Ratio (ACR): The portion of the residential market that household demand
occupies.
Elevated: Referring to “Statistically Elevated” results. For the purposes of this thesis, only this
term refers specifically to a value that is between the standard deviation off of the mean and less
than the highest/lowest historic record value.
Mathematical: This term is used specifically in the context of an explanation of the calculation
of Average Household Size for a necessary distinction and adjustment from the Census Bureau’s
methodology. In this case, the term is used to label the adjusted figures as being
“mathematically” functional for the purposes of the NAM.
viii