Published July 2003

Apartment market may
be soft, but it’s resilient

When the hijacked airplanes flown by maniac terrorists hit the World Trade Center buildings in New York and the Pentagon in Washington, D.C., on Sept. 11, 2001, we all knew our world had changed.

But the impact of those events has been particularly evident in Snohomish County real estate. Apartment property owners — particularly in the south Everett area within close proximity to the Everett Boeing plant — know just what I’m talking about.

True economic vacancy rates in those markets range from 12 percent to 20 percent, some properties even greater. This compares to an average vacancy rate in the rest of the county that is closer to 8 percent to 10 percent. Two-bedroom units, which make up almost half of the inventory, have been hit hardest.

The reason for this vacancy bubble around the Boeing plant is simple: People are more likely to be dependent on employment at Boeing with addresses like Casino Road, 112th Street, Evergreen Way, 128th Street, etc. These are areas with a lot of apartment product, and they tend to compete with each other to attract tenants to fill their vacant units.

The direct hit airline carriers took because of the psychological effect the terrorist attacks had on their customer base — and the resulting drop in the airline manufacturing sector — are the reasons these markets have struggled a bit more than other areas of the county.

Low mortgage interest rates are having an even greater impact, of course, as tenants take advantage of affordable mortgage money to buy their first home and leave the rental pool altogether. But it’s safe to say that the high vacancy rate experienced by properties near the Everett Boeing plant is a direct result of the hijacking suicide team on Sept. 11.

But there’s another side to this story that, while operating performances are soft in these areas, actually makes the case for the resiliency of this market and support of property values.

Think back to the spring of 2001 when vacancy rates were in the more healthy range of 4 percent to 6 percent (a 5 percent vacancy rate is considered a market “equilibrium,” much the same way that the unemployment rate has a certain equilibrium level). At that time, we had just come off two of the strongest-performing years residential property investors had enjoyed in years.

In 1999 and 2000, rent rates increased an average of 11 percent both years, representing a 22 percent up-tick in rents over just two short years. So times were good at the beginning of 2001 even as the economy started to slow a bit.

If we were told then that the stock market would tumble, the technology bubble would burst, mortgage rates would reach all-time lows, some fanatical terrorists would ram airplanes into the World Trade Center and Pentagon, Boeing would lay off thousands in the region, and we would be at war in the Middle East, we would have imagined a far worse scenario today.

If asked the “what if” question back then about the result of all these variables, most of us in the income property business would have predicted vacancy rates over 20 percent.

Real vacancy rates, however, have not been so high, suggesting that when things got as bad as could be imagined, somehow the market didn’t go where it should have. Investors, therefore, concluded that investing in this region has a downside risk that is less than perhaps previously assumed. Property values, therefore, have been holding their own and should continue to despite the current soft operating performances.

We can’t lose the 7E7. We can’t lose the war on terrorism. We must have economic recovery. These things have to happen to get us out of the softest market we’ve seen in most of our investing lifetimes. But we have learned something from this experience. No matter how painful investing in residential income properties in Snohomish County can get, the bottom of this market may not be as low as we previously thought.

Tom Hoban is CEO of Everett-based Coast Real Estate Services, a property management and real estate advisory company specializing in multi-family and commercial investment properties. He can be contacted by phone at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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