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[IMGCAP(1)]SEATTLE-The Northwest apartment market is now suffering the declining occupancies and rents that have been sweeping the nation as a result of the recessionary economy. That having been said, apartment investments remain some of the best when it comes to cash-on-cash return, and it’s still better to invest in the Northwest Apartment market than almost anywhere else in the nation. That’s the bad and the good according to brokers with Marcus & Millichap, a firm with a long history in apartments, and BRE Properties, a publicly traded apartment REIT with significant holdings in the region.

[IMGCAP(2)]Constance Moore, chief executive of BRE Properties, a San Diego-based apartment that has been concentrating its portfolio in the coastal, supply-constrained markets of California and Seattle told analysts on a fourth quarter conference call earlier this month that she is expecting a negative rent curve for the next two years. BRE COO Ed Lange told analysts that effective rents in Downtown Seattle fell almost 9% in December “and are continuing to drop,” but added that Downtown was hit the hardest and its rents region wide haven’t declined nearly as much.

“All eyes are on the proposed government stimulus package; if it is successful helping to create jobs and grease the credit skids, it may soften the magnitude and duration of the pricing compression,” she said. “Regardless, we believe on a composite basis, market rents in 2009 could fall between 3% and 6% from peak levels in 2008 and the rate cuts in 2010 could be deeper depending on how this next phase of the economy plays out.”

[IMGCAP(3)]Marcus & Millichap regional manager Greg Wendelken is predicting that average vacancy in the Puget Sound tri-county apartment market (King, Pierce and Snohomish counties) will increase approximately 180 basis points to 7.7% in 2009. Average asking rents will be flat, he says, while average effective rents will decline by approximately 2.7%.

Wendelken’s forecast is much less rosy than Marcus & Millichap’s National Apartment Report, which came out prior to mass layoff announcements by Boeing and Microsoft and other major Northwest employers. Prior to the layoffs, M&M was predicting that vacancy would remain below 7% and that rents would actually rise by more than 2%.

“We’ve got a hundred condo buildings out there between zero and 50 percent sold that will probably return to the rental market,” Wendelken said. “Coupled with the job losses, sustaining NOIs will be the biggest challenge for apartment owners in the coming year.”

While Portland hasn’t experienced the same magnitude of layoffs as the Puget Sound it is nonetheless feeling the effects of the recession in general. As a result, M&M’s Portland regional manager Tony Cassie isn’t ready to predict the same level of contraction as Wendelken is for the Seattle market but he’s also not as upbeat as his company’s official forecast, which calls for average vacancy in the region to increase only 120 basis points to 6.6% and for rents to increase by 1.8%.

Cassie believes vacancy will increase along with unemployment–”There’s a pretty direct correlation between unemployment and apartment vacancy,” he says–and that rents will not post an average increase in 2009. Rents right now, by and large, are flat, and in some submarkets they are starting to go backwards, he says. As for vacancy, he says lenders have been underwriting to a 5% vacancy in the urban core and to a 7% vacancy outside the urban core.

As for the apartment investment market, Cassie is anticipating that owners’ level of distress will increase significantly as 2009 progresses. “We’re in a marketplace where property fundamentals are softening and NOIs are declining, significantly affecting owners’ cash flow,” Cassie says. “That can be devastating to owners in a high-leverage position or in a position where they have maturing debt but cannot refinance without putting up a significant amount of equity.”

There are some REO properties on the market right now, he says, but most lenders are looking to modify the loans and keep the borrower in the real estate if they feel they can work with the borrower and can turn things around. “Most banks don’t want to be in the REO position,” he says.

All that having been said, Cassie says the Northwest market is already supply constrained and with the lack of activity in the development pipeline apartments in the region are still a great investment, especially now that sellers are becoming more willing to meet the market, by choice and by force. Indeed, M&M’s National Apartment Index ranks both Seattle and Portland among the top 10 investment markets in the nation.

“You tell me where you can take a million dollars and actively manage that money for a six- to eight percent cash-on-cash leveraged rate of return anywhere else in this marketplace,” Cassie says.

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