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The Over-Saturation Trend of High-End Apartment Development

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