A year into the Seattle area's biggest apartment-construction boom in decades, some analysts say it's in danger of getting too big.

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A year into the Seattle area’s biggest apartment-construction boom in decades, some analysts say it’s in danger of getting too big.

They’re starting to use the “O” word — overbuilt.

The surge of young renters expected to fill all the new projects may not be as strong as was anticipated a few months ago, analysts say.

One reason: rock-bottom interest rates and falling home prices that could turn many of those prospective renters into buyers.

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The apartment market may be softening already, says Tom Cain, president of research firm Apartment Insights Washington.

After trending mostly down for two years, vacancies at larger complexes in King and Snohomish counties jumped significantly this fall, from 4.74 to 5.25 percent, according to his company’s analysis.

Average rents fell a hair after six consecutive quarterly increases.

Those numbers surprised him, Cain says, and tempered his expectations for future demand. If new construction continues apace, he says, some neighborhoods — including Ballard, the West Seattle Junction area, Queen Anne and the University District — could find themselves seriously overbuilt.

What’s behind the apparent turnaround? “There are signs that renters’ aversion to homeownership is beginning to subside,” Cain wrote.

Pause button

He isn’t alone. “It’s time to push the pause button” before committing to more projects not yet in the development pipeline, Mike Scott of research firm Dupre + Scott Apartment Advisors told developers in the fall.

He, too, cited the increasingly favorable economics of buying versus renting.

His firm still projects regional vacancies will fall to 4 percent in about a year. A few months ago, however, it was predicting 3.5.

Seattle land-use economist Matthew Gardner, while still bullish, also warns that the apartment boom may not last as long as some developers believe, in part because of stronger competition from homeownership.

Gardner has one word for 2013: Beware. Belltown and West Seattle top his list of neighborhoods that could be overbuilt.

Still, several of the most active developers remain unshaken in their conviction that demand for apartments — especially in close-in neighborhoods — will remain strong.

Tom Parsons, who runs Holland Residential’s Northwest development arm, has a bet with Gardner that the city of Seattle will hit “negative vacancy” — more would-be renters than available apartments — by 2013.

“We’ve still got five to 10 years of growth in the rental market,” he said.

Construction boom

More than 6,000 apartments are under construction in King and Snohomish counties, according to researchers, and an additional 16,000-plus are in the pipeline. The region hasn’t seen this much multifamily development in more than 20 years.

This construction boom began to take shape about two years ago, when the apartment market rebounded unexpectedly.

Rents started rising, despite anemic job growth. Vacancies declined. New buildings leased up quickly.

Observers attributed much of the shift to “echo boomers” — the fast-growing number of young adults entering the housing market.

They wanted to be in Seattle because it’s cool. They wanted to rent because it fit their lifestyles, and because homeownership in the postbubble era held little appeal.

Because of the recession, however, relatively few new apartments were coming online to serve this demographic bulge.

Little new supply. Rising demand.

Developers smelled opportunity.

Seattle-based R.D. Merrill Properties is building or planning to start about 1,000 apartments in Capitol Hill, Pioneer Square, Wallingford and Lower Queen Anne. CEO Bill Pettit says reports of rising vacancies don’t concern him much.

That hasn’t happened in Merrill’s buildings, he says, and recent job growth “is making us even more confident about our portfolio.”

Holland Residential also has more than 1,000 units under construction or in the pipeline, mostly in South Lake Union. Parsons, too, says the uptick in employment, and forecasts for more job gains, make prospects for rent growth and apartment development even rosier than a year ago.

But Cain says rising vacancies, in the face of job growth and little increase in apartment supply, should give developers pause.

The vacancy rate ticked up slightly this summer, he says, but he didn’t think much of it.

“I thought it was a pause rather than a reversal in the trend,” he said. The big fourth-quarter jump changed his mind. “I definitely think it’s a reversal now.”

Home prices and interest rates have dropped so much, Cain says, that with even a modest down payment, a first-time buyer can purchase a bank-owned home or short sale for “dramatically less” than the average rent for an apartment in a larger complex.

He suspects that’s what more erstwhile renters are doing.

Others discount that. The neighborhoods with affordable homes aren’t the neighborhoods where young adults want to live, Parsons says:

“They say, ‘I know I could buy a house in Bothell — but I work in South Lake Union.’ “

Renting also offers greater flexibility in this era of more-frequent job changes, Pettit says.

Say you live in Seattle and leave a job with Amazon.com in South Lake Union for a job with Google in Kirkland, he says. “You’re not too excited about commuting over [Highway] 520.” Renters usually can move more easily.

Gardner, the economist, predicts 2012 will be a great year for apartment developers and owners. Beyond that, he’s less certain.

The higher rents developers are banking on may not materialize if wages remain stagnant, he says. Owning a home also is becoming increasingly affordable.

Despite that, apartment projects already under construction should do just fine, Gardner says.

“But if you’re not yet in the ground,” he said, “I have a little bit of uncertainty about that. … At some point, those people [renters] are going to start buying.”

Eric Pryne: 206-464-2231

or epryne@seattletimes.com