Commercial and residential rental rates have been strong in the Puget Sound region over the last year.
But can they continue in that trend? And what about Snohomish County in particular?
Brent Jackson, vice president of the brokerage group Jones Lang LaSalle in Seattle, works primarily in the industrial commercial lease and sale market. He knows the Snohomish County market, well, particularly those areas around Lynnwood and in the Seaway industrial zone in Everett.
“Over the last two to three years, the general trend for industrial space in the north end market has been in a positive direction,” Jackson said. “It has moved to lower vacancy rates and more demand and more deals getting done as well as the resultant increase in rental rates.”
Unless there is an unforeseen downturn in the aerospace market or the general economy, Jackson believes the Snohomish County industrial rental market is in pretty good shape for quite a while.
A key move in this industry occurred in April 2014 when Boeing signed leases on nearly 300,000 square feet of office space in Bothell in order to house those office workers displaced when old buildings were torn down to begin construction on Everett’s new wing plant.
“Obviously it was a great boon for Bothell,” Jackson said. “Most of those leases are for three to five years so there is a little bit of speculation as to what they might do at the end of those lease terms.”
Prior to Boeing’s move, there had been a number of spaces in the 20,000- to 50,000-square-foot range that had been sitting vacant on the market for quite a while. Suddenly the majority of those spaces were leased, creating an extremely tight local market from a vacancies standpoint.
“At the end of the third quarter, our metrics that we track indicate about 5.5 percent vacancy, which is very low,” Jackson said. “What we are seeing, going into 2015, is that people who want to lease space in that market are going to have a challenge in finding good quality, modern, reasonably priced space.”
The lack of alternatives may force tenants searching for properties in the Woodinville, Bothell, Lynnwood and Everett areas to look further north. That could be good news for north Snohomish County.
Jackson recently had a client looking in the Arlington area simply to get the square footage the company needed. The buildings on available properties in that zone aren’t usually as new or amenity-filled as those found in the Seaway area, he said, and the location not as desirable. But many tenants may be willing to compromise on their wish list in order to get housed.
Jackson has also noticed some speculative development taking place in the Seaway Center of Everett. Specifically he pointed to the Powder Mill Business Center being developed by Panatonni. The gamble seems to have paid off already for the company.
“They have signed a lease with HDI Landing Gear, which is a new company coming into the market from Montreal that is doing work for Boeing,” Jackson said.
HDI is scheduled to open next year in the 21,000-square-foot space. Many other potential tenants have also shown interest in the 36-acre industrial park.
Another area of the rental market that has been abuzz is the multifamily housing or apartment rental market. The recently reported apartment vacancy rate for the Puget Sound region is 3.8 percent, up only minimally from the 3.6 percent vacancy rate reported for spring 2014. Rents rose 4.7 percent over the past six months and are 8.2 percent higher than they were a year ago.
On the surface, these figures from the Apartment Vacancy Report appear to paint a rosy picture for the industry. But these rent averages are likely to be skewed. Online real estate database Zillow pointed out in a recent article that the increase in new construction has resulted in premium units that can be rented for a higher price.
Patty Dupre, a principal with Dupre + Scott, noted the same in a recent press release, referring to it as “the skew of the new.” New units simply rent for more money and this distorts overall rent trends.
To better understand the apartment market, it has to be examined in depth. Matthew Gardner, an economist and principal at Gardner Economics in Seattle, has been analyzing the actual stability of the market.
Apartments have been strong, he explained, because when the post-recession credit market began to thaw, the only asset class that banks would touch were apartments. This spurred on developers, especially in the urban areas that had a high demand for residential rental units.
“I think in general we are going to see some stress occurring in the greater Seattle market in the next couple of years purely because we are bringing on a lot of new product,” Gardner said.
He believes Snohomish County should not be significantly touched by such stress because it has a lower development rate. About 1,300 new units are scheduled to come online for Snohomish County in 2015. King County, by contrast, is seeing a projected number of more than 10,000 new units to open next year.
In all, Gardner thinks the apartment market is very buoyant. There are a lot of companies out there looking to develop and a lot of companies looking to acquire those apartment developments. He believes next year is going to be the same but with a tapering of the rapid growth in rents that has been seen over the last few years.
There is one segment of the residential rental market that is not tracked by any agency. For that reason, any facts or figures on the health of the single family residential rental market have to be anecdotal.
The sales inventory for single-family homes is still low, which could indicate that fewer people are able to buy homes to convert into residential rental properties. In fact, there may be a trend in the opposite direction.
“It’s an interesting dynamic right now,” said Everett attorney Rob Trickler, president of the Washington Rental Owners Association, All County Evictions and the Landlord Law Group.
He has seen a number of landlords sell their residential rental properties in response to the demand for single-family homes. Many were reluctant landlords to begin with, only renting the properties in order to hang on to them until they had recouped some of their pre-recession value.
These homes are likely to be converted back into primary residences rather than remain in the rental market. That is not to say that there are not buyers out there looking for an investment property.
“Folks who are buying up rentals are typically well-suited landlords that are now taking advantage of the market turning around to the point where they can get financing and they’re buying stuff that is relatively cheap or foreclosures,” Trickler said.
Nevertheless, Trickler is not seeing the kind of rental action he would expect in the county. It’s still financially challenging for many local landlords and some seem reluctant to pull the trigger on difficult tenants even with a low vacancy rate as a safety net.
He also is seeing a reaction in the underside of this market – a room rental trend. This can be people renting a single room in their homes to try and help with the bills, taking in a roommate or something even more complex.
“A lot of people are setting up rooming houses,” Trickler said. “Some legal, some not.”
As for the immediate future of the single-family home rental market, Trickler suggests keeping an eye on the coming legislative session where rent control is going to be a topic. He believes that if the proposal to take the state prohibition for rent control off the books is successful, it may impact the market negatively.
But short of a crystal ball, Snohomish County will have to wait and see what 2015 brings.
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