Published May 2003

Apartment market recovery depends on strong
aerospace industry

A recently released Dupre & Scott Apartment Advisor market report summarizes the 2002 market in one word: “Ouch!”

Somewhat predictably, the apartment market took a slide in 2002, according to Mike Scott, the report’s author. It’s important to dig a bit deeper into this important report to help us understand what might happen during the remainder of 2003.

Dupre & Scott is the largest market survey of its kind for the tri-county region that includes King, Snohomish and Pierce counties. Scott summarizes the year with some forbidding statistics: a 2.8 percent increase in vacancies, concessions and credit loss when compared to the year before.

“On top of that,” adds Scott, “operating and capital expenses climbed 4.3 percent in 2002, well above the rate of inflation.”

The operating-cost increases were centered on, according to the survey, increases in advertising and marketing, which jumped 44 percent, as properties adjusted to higher vacancy rates and more competition for renters.

Running a close second was insurance costs, which increased 15 percent in 2002. Shrinkage in the number of companies willing to underwrite apartment product in Washington state is a contributing factor to the insurance cost increases.

Apartment turnover costs — the costs to paint, clean and prepare a vacant unit for re-rent — increased 10 percent as the volume of tenants moving out to buy homes or relocate due to job loss increased marketwide.

Only management costs decreased as these costs float as a percentage of collected income.

Snohomish County took a particular beating in some submarkets. Others fared well, it seems.

You don’t need to study market reports to know that aerospace is soft, and markets that depend on this segment of the economy have been hit hardest. The submarkets that are doing better are those that seemed not to benefit from strength in this economic sector. They didn’t benefit much, so aren’t being hurt now that that sector is experiencing layoffs.

But this market condition is nothing new, even though the specific reasons might be unique. Markets peak and valley.

To put the current situation into perspective, operating expenses as a percentage of gross revenue — a benchmark that investors and managers of apartment product look to for measuring a market’s strength — have been at the current level twice in the past 15 years: once in 1989 and again in 1994. The lowest expense levels relative to incomes in this same time frame came during the strong markets of 1989-90 and 1998.

So the question on investors’ minds isn’t “why” this is happening. Most understand market cycles and, while painful, are predictable. Rather, the question seems to be “when” will this down cycle end.

With leading economic indicators showing some positive signs entering 2003, investors are hopeful that, while this year will likely be a repeat of 2002, we may be at the bottom and digging out of this cycle by the next year. Any recovery, though, has to come with an aerospace industry recovery for it to impact Snohomish County in a significant way.

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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