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Updated Sunday, November 25, 2012 at 10:01 PM

Ballard's apartment boom comes with risks

By Eric Pryne
Seattle Times business reporter

Few neighborhoods are being transformed more than Ballard by the apartment-development boom that is exploding across Seattle.

And few neighborhoods, say industry analysts, are more likely to get overbuilt.

About 1,200 market-rate apartments are under construction in this old Scandinavian enclave, now probably better known for its nightlife than for its Norwegians.

Developers from Chicago and Virginia are building big complexes where Jacobsen's Marine, Sunset Bowl, the Jetsons-style Denny's and other longtime Ballard businesses once stood.

When all those projects are finished, sometime in mid-2014, the number of units in complexes of 20 or more apartments in Ballard will increase by 70 percent — more than any other Seattle neighborhood.

And there's still more in the pipeline. Projects with another 750 or so units that haven't broken ground yet likely will be completed before the end of 2015, according to research firm Dupre + Scott Apartment Advisors.

"They're doubling the inventory in that market," says researcher Tom Cain of Apartment Insights Washington, whose firm has developed similar projections. "That's just unbelievable."

Seattle's apartment boom extends far beyond Ballard. Nearly 8,400 units are under construction in the city now — the largest number in at least 20 years, according to Dupre + Scott.

Developers are building them because demand has risen, led by a demographic surge of young adults who prefer in-city living, at a time when there's little new supply.

Few projects were built during the recession. The last new complex in Ballard opened more than two years ago.

But analysts such as Cain and Dupre + Scott's Mike Scott forecast that, in a year or so, all the new construction will start to tip the balance between demand and supply.

Vacancies will rise, they say. Rents will stabilize, perhaps drop. Landlords will start offering tenants concessions like free rent again.

And the turnaround could be most dramatic in neighborhoods like Ballard where developers have been most active.

"That submarket is getting an awful lot of product in a very short time," says Scott. "It's bound to have an impact."

"It ... could be a disaster," Cain, whose clients are mostly landlords, wrote of Ballard nearly a year ago.

"Except, of course, for the tenants."

"It's going to get ugly"

For now, these are still the best of times for Seattle landlords.

Tenants are gobbling up new apartments almost as quickly as developers finish them. Pillar Properties, the multifamily subsidiary of Seattle's venerable R.D. Merrill Co., opened its 234-unit Lyric complex on Capitol Hill Nov. 1.

It's already 50 percent leased, says Billy Pettit, vice president of investments. And rents so far are averaging nearly $2,000 a month, more than Pillar had projected.

But Pettit says he has no illusions about the future. "The data just don't lie," he says. "Eventually, we're going to see increasing vacancies, increasing concessions, decreasing rents."

The big bump in supply isn't the only reason. Seattle land-use economist Matthew Gardner expects more renters, faced with higher rents, will decide instead to buy, lured into ownership by rising home prices and record-low interest rates.

He says he wouldn't be surprised to see some apartment projects convert to condos in 2013. The last time that happened was in 2009.

Owners of new rental projects, with loans to pay off, will do whatever it takes to fill units, Gardner says, and that will put pressure on other landlords to cut rents or offer concessions to keep up.

"By the end of 2013," he says, "it's going to get ugly."

Others are less pessimistic. Blake Carbonatto, a Wells Fargo vice president who underwrites apartment loans, told an industry gathering this fall that there's probably enough demand regionwide to fill the supply that's coming to market.

But he singled out West Seattle and Ballard as possible exceptions, neighborhoods of concern.

Putting on the brakes

Ballard is a trendy, walkable neighborhood with lots of restaurants, bars and shops. It has good transit access to downtown, including Metro's new Rapid Ride bus line.

Apartment developers Goodman Real Estate and AvalonBay Communities tout those amenities to prospective tenants on the websites of the Ballard projects they plan to open early next year.

But Ballard isn't a big employment center. Most people have to go somewhere else to work.

And that's one reason why Carbonatto, Pettit, Cain and others say it could be hit harder than other neighborhoods when and if the apartment market cools.

There are three times as many apartments under construction in downtown, Belltown and South Lake Union than in Ballard, according to Dupre + Scott.

But those are neighborhoods where people work as well as live. And they have thousands of apartments already — the market is bigger and better-established than Ballard, analysts say.

"Ballard is much smaller," Carbonatto says, and by 2015, "you're looking at a 123 percent increase in supply."

Such concerns already are influencing some developers' decisions. Pillar Properties had planned to break ground on a 124-unit complex in Ballard this fall.

A few months ago it put the project on hold.

Pettit says he looked at all the other projects under way in the neighborhood — including AMLI Residential's 304-unit complex, just across the street from Pillar's site — and decided "that's just not something I'm prepared to compete with at this time.

" At lease-up, we were all going to be cannibalizing each other," he says.

Around the same time, Pillar starting building a 258-unit project on Taylor Avenue North, near Seattle Center. It's two blocks from the Gates Foundation's headquarters, and within walking distance of Amazon.com's many office buildings.

One project made sense, Pettit says. The other didn't — at least not now.

Pillar is considering several options for the Ballard property, he says, including a retirement community: "From an investment standpoint, my long-term outlook for Ballard has not changed."

Developer Matt Griffin, whose Pine Street Group is completing a 654-unit high-rise complex in the Denny Triangle, expects the Seattle apartment market will get overbuilt over the next few years, and neighborhoods farther from downtown — like Ballard — will be harder hit.

But it won't last long, he adds: Demand will catch up.

"A good neighborhood for apartments is a neighborhood where you can walk, and where you have good transit," he says.

"Ballard has both."

Eric Pryne: 206-464-2231 or epryne@seattletimes.com


DEAN RUTZ / THE SEATTLE TIMES
Ground has been broken for about 1,200 apartments in Ballard. In this view west along Northwest Market Street, AvalonBay Communities' AVA Ballard is at lower right. Behind it, the crane is being used to construct Equity Residential's Market Street Landing.








DEAN RUTZ / THE SEATTLE TIMES
Few neighborhoods in Seattle are being transformed as much as Ballard by the boom in apartment construction. The AVA Ballard apartment building, foreground right, is nearing completion at 14th Avenue Northwest and Northwest Market Street.




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