Rental Supply Set to Skyrocket

Wasn’t it just a year ago that we were still being regaled with stories about how tight the housing supply was in the Seattle area, and how our population has been growing so fast that construction just couldn’t keep up, so of course high home prices and increasing rents are going to continue forever and ever?

It looks like reality is a little bit, shall we say… different.

More than 100 condo buildings in King, Snohomish and Pierce counties — many of them apartments originally — are becoming rentals again because the units haven’t sold well in this down market, said Greg Wendelken, vice president and regional manager for brokerage Marcus & Millichap.

That, in combination with rising unemployment, will push the regional apartment vacancy rate to about 7.7 percent, Wendelken said, up from 5.6 percent last year and 4.3 percent in 2007.

Jim Hebert, of Bellevue-based Hebert Research, forecast a smaller increase, from 4.1 percent last year to 4.8 percent this year.

Who could have guessed it

(Eric Pryne, Seattle Times, 02.05.2009)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.


  1. 1
    Sniglet says:

    Vacancies won’t rise much more than that unless the market is significantly overbuilt, he added.

    Hebert said rents should rise, in part because demand will increase as more people find buying or owning problematic.

    It baffles me how real-estate “experts” persistently misunderstand the elasticity of demand. You can’t just use a simple mathematical formula to calculate the demand for housing based on the population. The simple fact is that the amount of housing people desire or require can change. When people are concerned about their financial security they might decide to double-up, move in with parents, etc.

    I personally know of families who have decided to have kids share rooms so that they can remain in a smaller house, and reduce their housing expenses. I also have single colleagues who decided to let their appartment leases lapse and move into cheaper shared room-mate accomodations.

    The bit about rental demand increasing as the real-estate market tanks doesn’t hold water. Many other regions that have far more advanced real-estate downturns are seeing that rental demand keeps dropping at the SAME time that purchases are declining. Clearly, many people are choosing to occupy less square footage.

  2. 2
    Thomas B. says:

    As anecdotal evidence that rental rates are going down, I noticed that prices went way down on the eastside. Of course, while it makes it affordable for many to move there, the eastside has been hit with many job losses. So, there is really no reason to move to an area that has no jobs. I hope apartment prices continue to decline. It’s ridiculous the rates people pay for sub-standard housing.

  3. 3
    Ray Pepper says:

    Snig speaking for myself (18 rentals) and my group of investors(total of about 120) we continue to see high demand on our rentals and the vacancies are filled immediately. We own no condos and are properties are in all in North Tacoma, Graham, Port Orchard, Olympia, Albany Oregon, Salem Oregon, Fallon Nevada, and Dayton Nevada. All have one thing in common. Walking distance to either a military base, university, community college, or Walmart. Location of the GEMS and the price you pay is what ALWAYS counts!

  4. 4
    singliac says:

    Tim, don’t forget the mortgage rates that were supposed to start skyrocketing. That sure didn’t happen. Remember how often we’d hear, “You know, they’re not building any more land.” It seems like only yesterday that I was graduating from college and being offered a 300k mortgage with no work history. Ah, the good old days. Now all I have to show for it is a bank account with money in it.

  5. 5
    TheHulk says:

    Dont forget those skyrocketing hyperinflation rates like zimbabwe either!

  6. 6
    Slumlord says:

    Ray, I agree that the location and price are the most important part of finding rentals. Expanding on price, I would add that putting enough capital in upfront to provide immediate cash flow is necessary to survive the downturns.

    A third key to success is having happy tenants. As a rule of thumb, I rent to people spending less than 25% of their income on housing. Some find this baffling and a few have even suggested that this threshold borders on illegal. Plush housing is nice, but other things are more important and I feel like I can only trust someone who acts wisely with their money. (Along the same lines, I also don’t rent to people whose cars are worth more than half their annual income. People making 30k a year should not be driving new cars.)

  7. 7
    deejayoh says:

    Looking back at the last downturn (2001-2003) the region lost about 60k jobs (net) and rents went down about 2%.

    I think it is pretty clear that both figures will be worse this time.

  8. 8
    jon says:

    The new data for Washington State drivers’ licenses is out:

    “During the month of January (December 27, 2008 to January 31, 2009), a total of 11,764 out-of-state drivers obtained a Washington driver license. This is 1,509 more than the 10,255 who obtained licenses in January of 2008 (December 29, 2007 to January 26, 2008). Net migration to Washington for January 2009 was 4,142 drivers, compared to 1,976 the same month last year.”

    People are definitely becoming more economical in regards to housing. People are doubling up and the few new houses that are being built these days have a smaller square footage that before.

  9. 9
    Cheapseats says:

    NM I misread that. This just shows DL’s who moved in, not those that moved out…

  10. 10
    ThomasB. says:

    “Walking distance to either a military base, university, community college, or Walmart. ”

    Not much pricing leverage there. College student’s don’t make much money unless mommy and daddy pays for it. As for military bases, I expect a pull back in the military budget and personnel numbers, so that’s not really a growth industry.

    While vacancy numbers are okay now, I doubt you will have much leverage to raise prices in the future. Especially, when there are cheaper and better alternatives within a reasonable distance.

  11. 11
    Mama says:

    and don’t forget that sometimes it takes people a while to change their license — we left WA last year but I still haven’t gotten around to spending a day at the DMV :). Looking at rates/fees in my current state, it looks like it might pay to pretend I’m still a WA resident :)

  12. 12
    Joel says:

    Additionally, some of those mommies and daddies have been borrowing against their house to fund tuition.

  13. 13
    b says:

    I would agree that there is likely a disconnect in this state between getting a license when arriving and dropping your license when you leave. Since WA is one of the few states without income tax, its very advantageous to immediately get citizenship when moving here, and be lax about changing citizenship when moving away.

  14. 14
    singliac says:

    I don’t think that your DL has anything to do with income tax. Doesn’t it depend on where you were employed during the year? I’ve got a friend who has had an out-of-state license for years, and he hasn’t paid income tax.

    I’d imagine, however, that you would need a WA drivers license if you wanted to apply for jobless benefits. Maybe that could explain the increase. Or the increase could reflect the fact that the situation is even worse in California (for now, at least). Double digit unemployment down there may have something to do with this.

  15. 15
    anony says:

    Actually, universities usually do well in a recession because some people who get laid off go back to school and people who graduate and don’t get jobs go to grad school. Its a good place to ride out a recession. Student loans are still there and there will still be plenty of students paying rent.

    Can you cite an instance of the military laying active duty people off? I was under the impression that military jobs were rock solid regardless of the economy. They may cut back a little in the reserves, but I wouldn’t count on rentals near a military base going empty anytime soon. Add to that some military people drank enough real estate cool aid to actually buy houses in the run up, even knowing they have to move around every few years. As they get slapped down you should see almost all active duty military going back to rentals.

  16. 16
    anony says:

    The opposite is true. You don’t have to pay the income tax for another state just because of your drivers license. If you keep the old license, not only do you not pay the other state’s income tax, you can show the license when you buy stuff and avoid paying WA sales tax.

  17. 17
    singliac says:

    That’s what I thought (about income tax). But that doesn’t sound right to me about showing a DL to avoid sales tax. I’ve never heard of somebody crossing a state line to avoid sales tax, except for states that have no sales tax like Oregon.

  18. 18
    Sean says:

    Speaking of burgeoning supply, has anyone taken a drive around downtown bellevue?

    is it me or are there enough condos going up down there to house the entire eastside? are there really taht many people that want to live in downtown bellevue.

    Anyone tracking this on a website somewhere?

  19. 19
    Cheapseats says:

    Sorry that I contributed earlier to the hijacking of this thread. Back to rentals; vacancies on Mercer Island are up significantly.. house rental prices are coming down and craigslist search for MI is dominated by the apartment offices here competing for the limited customers. My rent went down significantly in my last renewal.

  20. 20
    Slumlord says:

    I don’t know where to find the numbers on what is under construction, but most of those buildings got their financing during the boom and would never get a second look from a bankster today. As the market gets flooded with excess supply, Bellevue condos should become available for less than the cost of construction. When that happens, there will be some excellent buys.

  21. 21
    anony says:

    My sister lives in OR and whenever she is up here she just shows her license and the checkers wipe off the tax. I also know a coworker who kept her OR license for about a year just so she could avoid paying it. I think you have to be from a state with no sales tax like Oregon.

  22. 22
    anony says:

    I noticed on Craigslist there seemed to be some surprisingly affordable places on Mercer Is. I was wondering why.

  23. 23
    Snigliastic says:

    Actually, many federal programs for student loans are being eliminated, and public schools are reducing scholarships. I would think that this will temper matriculation.

  24. 24
    Ray Pepper says:

    Tom and Joel I must stress its always the Mom’s and Dad’s that pay the rent in addition to financial aid. They may be leveraged but I must confess in over a decade a a payment has never been missed on any of my students (but then again they are all grad students in the medical fields). One Craigs List ad yields a minimum of 20 calls. Rents started years ago at 750 and now they are 1100-1300 for SFH. Balances are about 100k with cash flow of about 350.00-500.00 per month. Most rentals locked at 7% on Int only loans.
    Military bases (in my case-Fallon Naval Base) are the best yet. All newer homes purchased at 139k, rent 990-1190 per month and the officers are all stationed on 3 year duty assignments.
    I’ll say it again, Universities, Military bases, and walking distances to Walmart, Safeways, and Albertsons are indeed GEMS.
    Slumlord, I used to place 20% down on homes but I find the current mkt yields itself to owner contracts now. Many older people need a nice fixed income since the banks will not pay squat. I seek these all the time.

  25. 25
    Flotown says:

    Yes, but the flow of cheap money encouraged people to buy homes instead of rent. An additional consideration.

  26. 26


    A lot of the youth move back into mom and dad’s basement. Californians get the hades out. Room mates become the norm, not the exception.

    I’ve also noticed less rush hour traffic lately, even in the pink pony downtown Seattle around 730-8AM too.

    Ahhh, its all my imagination….lol

    Have a great weekend fellow bloggers!!!

  27. 27
    Lake Hills Landlord says:

    Downtown Bellevue cracks me up! And you think Seattle is daydreaming about being “special” and a “world class city”. Bellevue dreams of being a “real city” like Seattle some day. Oh me, oh my.

  28. 28
    Thomas B. says:

    There is thing called the “RIF” in the military. It’s called reduction if force and is a stealth layoff. It happened in the 1990s, and now it’s happening to the Air Force and Navy to offset the growth of the Army. Once the mission in Iraq is reduced, there are going to be a lot of people sitting around pulling a paycheck for nothing.

    As for college kids, there was an article in the WSJ about the impending education loan bubble. I’ll look for it and see if I can link it.

  29. 29
    Brian in Seattle says:

    I’ve noticed less rush hour traffic as well. In fact, I asked three other people the same thing just to be sure it wasn’t my imagination. They all said the same thing.

  30. 30
    Bits_of_Real_Panther says:

    anony is out of control – any income earned in Oregon is taxable even if you are a non-resident, same with California. Furthermore Washington state businesses can choose for themselves whether or not to remove the sales tax on purhases by Oregonians and keep records for the state but it is not mandatory

  31. 31
    David Losh says:

    You’re presenting the perfect reasons why rents will be going down.

    The mukoh guy started me thinking about this a week ago, so bear with me here with a little number magic.

    From what I can read your group owns 120 units cash flowing at about $500 per month per unit for about $60K per month between 20 people that’s $3K per month per person, OK you make more as the lead.

    Those are 7% interst only loans and you have been buying for ten years.

    OK, Let’s say my group starts buying today. From what I hear there are about five million vacant housing units in the United States today. I mentioned this on the Seattle Real Estate Professionals site and Mack Mc Coy did the research and came up with the same number.

    When I start buying today I’ll be buying in a down market. I’ll peg my return on a down market and if I get more, that’s great. I’m also looking at a declining asset so my numbers are set to amortize the loan rather than hold.

    We will be competing for the same rental pool. I want good long term tenents who will amortize my loan. My rents may be the same as yours but my cost is lower. I will also be able to pick my purchases rather than be shopping.

    Long story short, if I start buying today I should be able to provide a better housing unit at the same rents as yours. My units may be better even , and the rents may be less.

    You will be having depreciating assets that you are stuck with. As the prices or rental income goes down you will be wanting to “get out” at a break even, before you start losing money.

    The cycle keeps going down until it starts to go up.

    I’m not making any claims about your business model. I’m just saying there is a difference today. As foreclosures push down the price of housing units they also push down rents.

  32. 32
    kfhoz says:

    For about 2 weeks I have noticed that commuter traffic has been way down on I-405 between downtown Renton and downtown Bellevue where I drive. I also checked with a colleague who drived from Tacoma to downtown Bellevue and she confirmed the same thing along her route, for about the same time.

    Is this from layoffs?

  33. 33
    Angie says:

    Yep, lots of condos coming on the market as rentals. I work in SLU and see more going up every day. Still, not all renters want to live in high density housing. Families, for instance.

  34. 34
    b says:

    Changing your DL is the easiest and most direct way to establish residency. You could keep residency in WA, but work in CA, and file as a non-resident in CA and get most (or all) of your taxes back. Its similar in other states with income tax, filing as a non-resident gets you out of most or all of it.

  35. 35
    anony says:

    What’s your point? We weren’t talking about income earned in Oregon. We were talking about people in Washington earning income in Washington who haven’t changed their driver’s licenses to Washington from Oregon yet.

  36. 36
    BanteringBear says:

    “From what I hear there are about five million vacant housing units in the United States today. I mentioned this on the Seattle Real Estate Professionals site and Mack Mc Coy did the research and came up with the same number.”

    I’ve been reading this blog for more than two years, and I have to be honest that I gloss over most of your posts. The reason? They are absolutely littered with errors and untruths. For somebody who is “in the industry”, your knowledge is underwhelming. Take this not as an insult, but as a challenge to better present yourself.

    I’ll help you out on this one:

    Washington Post
    Wednesday, February 4, 2009; Page D02
    Vacancy Rate Hits Record

    A record 19 million U.S. housing units stood empty at the end of 2008, including properties for sale and for rent, as banks seized homes faster than they could sell them and prices continued to fall.

  37. 37
    lurker says:

    perhaps he was off on the number of vacancies but that doesn’t change the point that he was trying to make, actually it seems to reinforce it.

  38. 38
    deejayoh says:

    I can’t get beyond referencing Mack McCoy as a “source” – but if you found a point, bravo.

  39. 39
    Markor says:

    Soylent green. I’ve seen a lot of big trucks lately.

  40. 40
    Jimmythev says:

    I live in Bellevue… just down the street from all those condo’s. Has anyone also noticed all the zero lot line townhomes/houses on Bellevue way? They’re asking $850k for them! What are these developers smoking?

    Also, on the subject of rents… type in “Reduced” in craigslist under apt’s and see how many results pop up… it’s a telling sign.

  41. 41
    Tozour says:

    Location should be what drives prices.
    The bubble was making people think that this fundamental rule had somehow changed…

  42. 42
    Jonny says:

    Yeah the rate of that search has increased about two orders of magnitude in the time I’ve been tracking that… from a handful to 600+

  43. 43
    Jonny says:

    Ah, I miss Phil Hartman

  44. 44
    David Losh says:

    Mack Mc Coy is a nay sayer, and yes the number is low, but it was a number he came up with also.

  45. 45
    Other Ben says:

    But that doesn’t sound right to me about showing a DL to avoid sales tax

    Yeah, it’s not right…but people still do it. =P

    Also, crossing the state line into OR to buy things with no sales tax is also illegal (you have to pay WA tax afterwards, but nobody does it)

  46. 46
    David Losh says:

    OK, where is the incentive?

    So you would like me to agree with you? You want me to tell you what you want to hear. You want me to reinforce all the things you have learned about the Real Estate Industry and the hype that goes along with it.

    The reality is that Real Estate, and the Real Estate Industry is a manufactured commodity that has become sold to the public like cars with over priced stickers.

    Whatever you believed last year is over. We have a saying, “there is a sucker born every minute,” but aside from that every person should look at housing as a portion of thier income expense.

    If you want to own a property, which I think most people should, you should know you own it to pay it off. Many people are renters and that’s fine. As land lords you should have a responsibility to your tenents to keep them. Why rent from a slum lord any longer? We have plenty of housing units. It’s over, and back to basics.

    The basics are that the price of housing is tied to the Consumer Price index. Properties are sold on thirty year fixed mortgages so they can amortize. Owning property is dirty, stinky work, with rewards. Owning property is not for every one.

  47. 47 says:


    Free 1 month rent – For all apartment rentals close to Microsoft.

    Location,Location, Location guys! Imagine the fate of apartments which are few miles away from Microsoft.


  48. 48
    bethm says:

    I was told once that there is a law that can get renters out of paying fees for breaking a lease to buy a home?? Does anyone know if this is true?

  49. 49
    Angie says:

    Bethm–highly unlikely.

  50. 50
    Teanaway says:

    Haven’t commented on any articles yet but this one sucked me in. Usually, The Tim seems to view things through a fairly objective lens and this is why I will continue to make repeat visits. However, to state that rentals will “Skyrocket” when one analyst projects a significant increase while another predicts a fairly small increase suggests a fairly biased viewing of the information.

    Having said that, I own rentals, and things are softer than most pencil jockeys sitting in an office crunching numbers are aware of. There is a glut of product on the market and to compound it, the shift in people’s spending with regard to rentals is nothing short of stunning. Of course, rentals have to adjust in order to remain a viable alternative to owning. But it is the shift in behaviors that has shocked me most. One drive through the University District will show you. Scads of “For Rent” signs during their peak rental season.

    It’s going to be an interesting 2-5 years for everyone. And objective sources of information will become paramount for those of us trying to wade through the corporate bs being pumped out by the usual suspects.

  51. 51
    explorer says:

    It’s one thing to look at rental vacancies and prices for the higher-end communites and the Eastside, and quite another to look at them in-city. I have to question the 5.7 vacancy rate last year on that one. Where I am, it was far lower than that. Under 2 percent in the North End of Seattle. That may now be going up, based upon anecdotal observations, but it will be interesting to see the Spring numbers.

    Rents for the apartments and small houses that were avaialble to rent– very few within a 30-40 minute bus ride of downtown, were still climbing as late as October. No one was moving out of a reasonable place.

    I would love to see them come back down to earth, but the other edge of the sword is that may be an aftereffect of more foreclosures and bankuptcies.

  52. 52
    explorer says:

    For some reason, my post above showed up as anonymous, even though my info was in the comment boxes.

    I’m not shy about my psedonymn: Explorer

  53. 53
    Braxtan says:

    Prices at some condo projects have dropped so low that the monthly cost of ownership is comparable to rents in the area. For example, Alki’s Lighthouse Point condominium has homes available as low as $170K with monthly dues at $143. The highest price in the building is only $299K, and you can see the lighthouse, the Olympics and the Sound from almost every unit. The finishes are nice, too.

    If you guessed that I’m the listing agent for Lighthouse Point, you’re right. But it’s true that we’ve brought prices down so low that the cost of ownership is comparable to the cost of renting, and Lighthouse Point is not the only project that has done that. We also have a lease/option purchase plan that helps people pay the initial costs associated with purchasing a home. This will certainly put downward pressure on rents.

  54. 54
    explorer says:

    Just checked the Lighthouse point site. The price list shows ONE unit at 175K on the first floor. The rest are $200-300+ K

    Although concrete is much preferred, this is an apartment conversion, and the reluctance to state square footage usually means these are crackerboxes.

    Sorry, I don’t see those as being comparable, yet, to apartments with low square footage space.

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