Revising My Seattle Rent Outlook

In May I posted Ballard Rents – Don’t Believe the Hype! in which I gave my thoughts about the rent situation in Seattle. Although I am still confident that the near vertical increase in rents is about to come to an end, it might just be a brief pause before rents continue to gradually rise.

Seattle is between Vancouver, BC and San Francisco, CA. Two cities where the rents are higher. I don’t know much about Vancouver, but the cost of living in the Bay Area are very high compared to Seattle. Seattle like the Bay Area is a technology hub. Not every city is a tech magnet, but those that are will have a higher demand for housing from those with high salaries.

The problem with Canada and California is not only the high cost of living, but the taxes. Washington has no state income tax. This has and will continue to be a reason tech companies will migrate to Seattle. There are other states with no income taxes, but none that host a true tech city. Some say Austin has a growing tech presence, but it is not in the same league as Seattle. Plus it is friggin hot.

seattle-downtown

Seattle 

When I look at a map of the United States and I try to pick out tech cities that don’t have a high cost of living or onerous taxes and with temperate weather, only Seattle remains. Throw in the University of Washington which is graduating more and more skilled computer engineers every year and you can see that Seattle might be undervalued, which means rents may very well rise even after the current demand shortage is met.

Average Is Over: Powering America Beyond the Age of the Great Stagnation
Average Is Over: Powering America Beyond the Age of the Great Stagnation by Tyler Cowen

In the book Average is Over, economist Tyler Cowen made a prediction that certain cities where highly skilled workers live would become much more expensive and that there would be an economic migration where those not highly paid would move away. So much migration that in a generation, it might be seen as odd for someone with a low income to still reside in an expensive city.

The prediction made sense to me, because lower skilled labor will increasingly be replaced via automation, computers and eventually robotics. We’ve already got robots that can flip burgers and machines that dispense burritos in 1 minute. This trend will not only continue, but accelerate.

What I didn’t consider was just fast it would start to happen. The economic migration has already begun. The article Affordable Housing Draws Middle Class to Inland Cities goes into detail how the fastest growing cities in America are not the ones with most job opportunities for high wage earners, but places where the cost of living is low and housing inexpensive.

What Cowen articulates in his book is how the most important factor in deciding where to live is how much you have left in your paycheck once your bills are paid. Those with higher incomes will migrate to cities with other people with high incomes and enjoy the culture and entertainment opportunities it brings. Those without will move mostly South where their lower salaries go a lot further.

Seeing Seattle in this light, I now believe it will be one of those cities where the cost of living will be high.

UPDATE August 19, 2014: TechCrunch has an article supporting my view that Seattle is the non-Silicon Valley tech city.

Leaving Seattle For a Few Months

Last fall I mentioned that I would be forced to move in mid 2014 due to the evictions. Well that time has arrived. The builders will start work on my apartment building on Tuesday. This means it is time for me to leave. The problem with moving now is that rents in Seattle are sky high due to strong demand and lagging supply.

In the next six months, 7,000 new rental units will hit the market in the most desirable neighborhoods of Seattle. And they are still building like mad. Low interest rates are like crack to builders. I expect at minimum they will build enough to match current demand, but more likely, if history is any guidance, they will overbuild and the upward trend of rents will correct and reverse. I cover my thoughts in the post Ballard Rents – Don’t Believe the Hype!

Because of all this, I think this is a good time to get out of town for a while.

While I was researching my next move, I got an offer to stay with friends in Silicon Valley for free. They have an extra room for 6 months and they know and trust me. They both have stressful jobs with high time commitments. Having someone to help out with household tasks is a plus for them and a sweet deal for me. Since I am a digital nomad, it doesn’t matter where I reside as long as I have a broadband connection.

I’ve been in Seattle since August 2007. It will be nice to explore the San Francisco area. Besides the great food, the Bay Area has one of the fastest growing specialty coffee scenes in America now. While away I will maintain a Seattle address.

After 6 months my plan is to return to Seattle in full negotiator mode to score a lease at a fair price.

Ritual Coffee

Photo by Ishwar

Getting More or Getting Nothing

Very shortly after my neighbors and I learned the new owners were going to evict all the tenants, a group was formed to fight the new developers. I wasn’t sure what the group was going to do. We were renters. The new owners wanted to make capital improvements to their property. In order for those improvements to take place, we had to leave. They owned the property. Most of the tenants were no longer on a lease and instead were on month-to-month options. And they are under no obligation to continue leasing units forever. This is a risk a renter takes.

To learn more about what this group was thinking, I went to an early meeting with a large number of my neighbors. From the start it was clear that their approach to the displacement would be conflict. They would be a thorn in the side of the new owners and maybe just maybe we could save our apartments from the developer upgrades.

I disliked the tone of what I heard. The were anti-development and pro-rent control. I see the developers that are coming to Ballard to either build new construction or upgrade existing structures as responding to market pressure. That isn’t greed. That is business. Our apartment complex is over 60 years old. At some point it will need capital improvements made. I believe in property rights. They encourage investment. I’m grateful there are developers out there building places I can rent. Rent control is an awful economic idea that discourages investment because it weakens property rights.

The problem with the high rents in Ballard isn’t caused by the developers. It is due to high demand. Developers are part of the solution. We have a rental shortage. This action will absolutely inconvenience me, but such is the risk of renting. When I was a homeowner, I had different risks.

This is Negotiating?

From afar I’ve monitored how the group “negotiated” with the developer. They using techniques such as picketing, marching, insults and personal attacks. At one point they even posted wanted signs with photos of the developers around the neighborhood.

I wonder what the leaders thought this would accomplish? Did they think the developers were going to stop the project after they were insulted?

Negotiation 101

Being hostile and emotional even when you feel you are morally right is not an effective way to negotiate. From the outstanding book Getting More: How You Can Negotiate to Succeed in Work and Life by Stuart Diamond:

Emotion is the enemy of effective negotiations and effective negotiators. People who are emotional stop listening. They often become unpredictable and rarely are able to focus on their goals. Because of that, they often hurt themselves and don’t meet their goals.

With negotiation you need to be aware of the needs of the other party. The developers had needs, but no one asked that question. More on that later.

Getting More
Getting More: How You Can Negotiate to Succeed in Work and Life by Stuart Diamond is an outstanding book. Life is a negotiation. Learn how to do it effectively.

Economics, The Law and Reality

Before I outline how I would have negotiated with the developers, I first want to empathize with those tenants that feel they were wronged. Ballard in recent years has become a very desirable neighborhood. A lot of people want to move here. Many of those people who want to move here are willing to pay more than they would have in recent years. This demand has created a shortage of rentals, which has pushed rental costs up.

New construction will almost always demand a rental premium. It is the high rents that pay for the development. An industry report that I mentioned in the post Ballard Rents – Don’t Believe the Hype! states that new construction typically gets a rent premium of 40%. The flipside to this equation is that as buildings age they lose that premium. And since buildings do not last forever, there must be a steady supply of construction to not only keep up with population demands, but the wear and tear of construction itself. Nobel prize winning economist Robert Shiller touched on this in his book Irrational Exuberance.

The timing sucks for the tenants of my apartment complex, including myself. We are being displaced at time when supply has not caught up with demand. It absolutely will cost more to stay in Ballard. The good news is I do think the builders will overshoot at some point and rents will come down, but not in time for us.

Some have stated or implied that the developers have broken the law. If that is the case, then go to court. Although legal mistakes were made early on by the developer, I don’t see evidence that their current plans are illegal. You may not like the laws, but one would assume that a successful corporation has a talented legal staff on hand to guide them through development projects. It probably isn’t too likely that a handful of tenants will know the law better.

The reality is the tenants are being displaced so the developers can make capital improvements to the property. They will raise rents, not because they are evil, but because that is what the market wants at this time. You can argue with economics and the law, but the development will continue.

Negotiation Reboot

How could both parties have benefited from this situation? I have an idea. When the plans for eviction were announced in October 2013, almost all the tenants were off lease. They were paying month to month. This means they could leave with 20 days notice. Once the eviction was announced, the owners couldn’t write any new leases, because a tenant under lease can’t be evicted to make way for the new construction.

The worst financial case for the developer would have been had every tenant given 20 days notice in early October. There is lies the point of potential negotiation. We can’t stop the development, but we could have tried to collectively negotiate a lower rent to stay until the construction comes for our building. And before someone says you can’t negotiate rent, that isn’t true. I have lowered my rent and the rent of friends several times.

I heard a few months ago that half the tenants left on the news and the current vacancy rate is 57%. My rent is $875 a month and there are 138 units. Let us assume for easy math that everyone is paying the same rent. I don’t have a building schedule in front of me, so I’ll use 8 months as the average time a tenant had to leave. Some are sooner, some are longer.

  • $875 * 8 months * 138 units = $966,000 (maximum revenue to developer)
  • $875 * 0 months * 138 units = $0 (minimum revenue to developer)
  • $875 * 8 months *  69 units = $483,000 (50% vacancy revenue, which ended up happening)

For even math, I’ll use a 50% vacancy rate. This means the developers lost $483,000 in potential rent when tenants bolted. That also assumes the development has no delays. If delays happen the number will be higher.

What if collectively we would have negotiated for a $200 a month rent reduction to stay? We could run a spreadsheet on the scenarios, but the net benefit to the average renter would have been $1,600 (8 months * $200). What about to the builder? Let us say 20% of the tenants took off leaving an occupancy rate of 80%.

  • $675 * 8 months * 138 units * 80% = $596,160

In that case the builder comes out $113,160 greater assuming the project has no delays. For every month the project is delayed, they would collect $74,520 in rent. These are all back of napkin calculations. I don’t have all the data about rents, building schedules and vacancy rates.

The $200 was the first number that came to mind. It is a starting point to a conversation.

Last Words

I believe there was a path that could have benefited both parties. But it wasn’t taken. I probably should have asserted myself early on, but my pro-development, anti-rent control opinions would not have been accepted. They were angry and they wanted their voice heard. They talked negotiation, but in the end they got nothing.

Once again, I highly recommend the book Getting More. I only wish I had read it sooner in life.

My Favorite Seattle Coffee Places (2014)

This weekend Seattle is hosting the SCAA (Speciality Coffee Association of America). This is the big coffee event for the industry. People from all over the world will be visiting Seattle. In addition to the big expo, I expect our visitors will be checking out the local coffee scene.

Below is my current list of Seattle coffee shop favorites broken down by neighborhood.

Biases: I only drink espresso and I loathe dark roasts.

Disclosures: None. I’ve never worked for anyone in the coffee industry. I am the organizer of the Coffee Club of Seattle, which is a group of 700+ coffee fans that have been exploring the Seattle coffee scene since 2006. I’ve also ran the coffee hobbyist website INeedCoffee since 1999.

Downtown / Belltown / Pioneer Square

  • Seattle Coffee Works
  • Trabant Coffee
  • Street Bean Espresso (closed on Sunday)
  • Motore Coffee (closed on weekends)

Capitol Hill / Central District

  • Black Coffee Co-op
  • Broadcast Coffee
  • Tougo Coffee
  • Victrola Coffee

Fremont

  • Milstead & Co
  • Vif Wine & Coffee
  • Caffe Ladro

Ballard

  • Toast
  • Ballard Coffee Works
  • Slate Coffee Roasters

Greenwood / Phinney Ridge

  • Neptune Coffee
  • Herkimer Coffee

University

  • Trabant Coffee

Eastside (Kirkland, Bellevue, Redmond)

  • Urban Coffee Lounge
  • Zoka Coffee

On the way to the airport (South)

  • Caffe Delia (White Center)
  • Burien Press (Burien)

This list is not complete. There are many more great spots.

Caffe Delia

If you haven’t been to Seattle in a few years, the biggest changes have been:

  1. Many more coffee shops are offering more than 1 espresso option. Sometimes from multiple roasters.
  2. Caffe Ladro is much better.
  3. Caffe Vita is much worse.
  4. Espresso Vivace changed their Dolce espresso blend in 2009. They removed the premium robusta component and now it is a shadow of its former self. If you have fond memories of Vivace, stay away.
  5. When it comes to social media, Seattle coffee shops and professionals favor Twitter.

Welcome to Seattle!

Ballard Rents – Don’t Believe the Hype!

This is a follow up post to Trying to Cheer Up an Economic Idiot. In that post I outlined my opinion of what was happening in the red hot rental market of my Seattle neighborhood of Ballard. Unlike my neighbor, I don’t see the situation in Ballard as dire as he does. He believes that builders are driving up rents. I see the builders as responding to pent up demand and although new construction holds a rent premium, the increase in supply is the very thing we need to stabilize rent increases.

I want to thank Capitol Hill Seattle Blog for alerting me to the blog post If this is the calm before the storm… by apartment industry analysts Dupre + Scott. I want to highlight a few things on this report.

The report explains that new construction typically gets a rent premium of 40%. And in normal markets when building isn’t as high, this doesn’t have as much impact in the aggregate numbers. But development is high, so this makes it appear as if all rents are on a tear. They aren’t. Non-new construction rent is increasing at 5% per year. Still higher than inflation, but this is before the new supply of units hit the market.

Here is what they are saying about Ballard:

Ballard’s market vacancy is a mere 2.8%. But its gross vacancy rate is the highest in the region, at 17.3%. Now that’s downright scary, isn’t it? Yes and no. If Ballard was a city with 100,000 rental units and it had a 17% vacancy rate, then yes that would be scary. But there are fewer than 2,500 units in Ballard. That means there are 423 vacant units right now. And since developers increased the total supply of rental housing by more than 50% in Ballard over the past 18 months, it’s doing pretty well.

And they continue to build in Ballard. And they continue to build throughout Seattle. Their survey says that developers will be adding 7,000 new units in the next 6 months! Bring it on. Every tech worker with a fat paycheck signing a lease at one of these new apartment complexes is one less person bidding up existing rentals.

ballard-locks

Ballard Locks

A side note about Seattle. Tech workers tend to be young and single. They not only want to live near work, but they ideally would like to live in a fun neighborhood full of other young and single people. Capitol Hill, Belltown, Lower Queen Anne and South Lake Union all fit that bill. Ballard really doesn’t. We are a little too far from the young and hip. I love Ballard, but would I love it as much if I were 25 with a fat paycheck? Probably not.

In the post I did last week, I said this:

Supply has been lagging demand for a few years. I not only expect it to catch up, but during booms builders have this history of building too much. This is good for renters.

It appears this might be happening. Not only does the title of the report suggests the industry is concerned, but it says that although only 15% of new apartments are offering concessions, the amount is increasing. What do Dupre + Scott predict?

We expect the use and size of concessions will grow significantly over the next six to twelve months

Significantly? I like the sound of that. They also say:

It’s good to be optimistic, but investors will likely find it more challenging than normal to raise rents between April and September.

As a renter that makes me smile. I love negotiating lower rent. Finally, I want those that don’t share my optimism to look at the last chart on the report. You will see an inverse relationship between apartment vacancies and rent. When vacancies rise, rents drop.

Vacancy rates are at or near an all-time low in Seattle. Construction of new apartment units is at a 21 year high. Supply is about to meet demand head on. Grab some popcorn.