What’s new in 2013?

New year, new supply, new tenants

I wonder if all the great tenants are now going to the new buildings. It seems to me that the new stuff is renting up at such a quick pace and at such nice rents that any new tenant with a good job doesn’t even look at an older building anymore. I think there is a big shift in tenant profile and that it ends up with better restaurants, better services, better retail, all competing for the remaining money left after rent. Driving around Ballard, West Seattle, Capitol Hill, and even Interbay, I see lots of change and a lot of renewal and upgrading of entire neighborhoods. There is nothing like new paint to inspire the neighbors.

I recently heard a developer addressing a large group say that he does worry that the new tenants in the new places can move pretty easily since the apartments are so small it is impossible for them to accumulate much. I thought that comment may have more import than intended.

It will be an interesting year for sure.

Posted by Michael McQuaid

Who is buying today?

We just completed two deals in the Eastlake neighborhood that tell us a lot about the local apartment investment market today, I think.

The seller was an old school traditional type apartment owner who had been in the business for many decades yet sold the apartment investments to roll the proceeds into retail property. The thinking was that retail property is a better value for investment today since apartments are currying so much demand and price.

The buyer is a local first time apartment investor who makes his living in the technology business and sees apartment investing as a very secure investment relative to equities or even other types of real estate. In other words, the buyer isn’t trying to make a living off the investment but instead seeking a reasonable long term return that is in addition to what he earns in his profession. While these deals are big money, this is not the buyers primary source of income.

To the new investors a yield of 4-5% in the first year is perfectly acceptable and better than many alternatives when factoring in risk. The old school real estate guys required much higher returns just to live.

Posted by Michael McQuaid

Tax law changes making changes?

Someone asked me how much of an impact I thought a change in the capital gains tax would make to people who own apartment buildings, whether an increase in the tax on long term gains would discourage someone from selling.  My response was that the current capital gains rate is exceedingly low in perspective and that when it lowered to its current rate we didn’t see a flood of new sellers so I do not think the inverse of that will happen either.  I think that people invest in apartments for a very long time.  Many of the owners we talk with daily claim they intend to leave the buildings to their children when they die so clearly tax consequence is not a driving force in most owners decisions to sell, at least in my experience.
I think the tax changes will effect other investment types much more than real estate, a typically much longer term investment than most other options.  I think people sell their apartment buildings for many various reasons but rarely is it due to the tax code.  This time could be different but I have witnessed a few other changes in my nearly 30 years of being in this business.
Posted by Michael McQuaid

Excise Tax And The Amazon Deal

A recent article from the Puget Sound Business Journal published, “Washington state and the city of Seattle would both get tax windfalls if Amazon completes, as expected, its $1.16 billion purchase of its South Lake Union headquarters.” There are at least two issues this deal would impact.

  1. The sales price sets a new high on a per foot basis. Granted we don’t know the exact numbers of what rent was which means we don’t know what the CAP rate was. However in order to justify this price per foot at prevailing CAP rates, the rent would have to be very high which helps set a new standard in the market.
  2. The state of Washington has a tough time budgeting this kind of revenue event as it occurs long after the annual budget is completed. Events like this tend to be treated as windfall income to the state and city, and are likely to get spent accordingly. For example, finding a $20 bill in your pocket. Silly money.

I think over the next 12-24 months, the state and city are going to receive a lot of unexpected revenue from sales taxes. I can only hope there is someone in control saying the new found money needs to be guarded.

To read the full article on PSBJ, click on the following link.

Posted by Michael McQuaid

Institute of Real Estate Management (IREM) Forum

Yesterday, I spoke at the Institute of Real Estate Management (IREM) forum as a broker panelist. During this event, I commented on trends and changes I’ve seen in the market over the years in the Greater Puget Sound area. My key points included:

Change in investing and ownership. New buyers are investing in apartments for safety, not yield. People seeking apartments need to have significant capital in order to purchase; most of the buyers today have made their wealth doing something else and are chiefly interested in preserving it with growth of it as a secondary benefit.

The trend is moving away from suburban and towards urban areas. New tenants have less tolerance for traffic therefore an increased desire to be near metropolitan attractions. They seem to be drawn towards the Capitol Hill and Queen Anne sub-markets, including Ballard. In order to address this growing trend, developers are making the new urban buildings more stylish.

Public planning and social engineering at work. South Lake Union is a great example of “more gets more” really working. Interbay closely follows, but it is bisected by a wide street whereas S. Lake Union created great pedestrian pathways. Changes occurring in the land use code which strives to reduce car usage and make the city more biker-friendly, has done so without enhancing public transit. People are doing without cars, but also without great public transit, which is interesting.

New technologies in real estate?
Bike racks!

What are your thoughts?

Posted by Michael McQuaid

The Market

In summary it doesn’t get better than: 12 x gross rents, 4.8 CAP, new debt at 3.5%, and price per unit over $140k. That is the average of the last several deals we have closed here. Both buyers and sellers were very happy. This is a rare market indeed.

Posted by Michael McQuaid

If only…

I haven’t heard that phrase for a while now which causes me to think its coming around again. In 2000 if only I had sold my stocks. In 1986 if only I’d invested in Microsoft. In 2007 if only I had sold my home or other real estate. If only I hadn’t fixed my interest rate in 2006. If only I had sold in 2012 before the new stuff all opened up and/or interest rates skyrocketed. Most of this stuff all seemed so clear after it happened.

Posted by Michael McQuaid