New multifamily development in Seattle was robust through 2013. That trend is continuing into this year, as demand remains strong and interest rates stay favorable. Healthy job growth, specifically those with higher wages, has particularly benefitted the Seattle market, leading to declining vacancies and increased rental rates.
Vacancy rates continue to remain low at just 3.9 percent, compared to the five-year average of 5.2 percent, according to CoStar. Decreasing vacancy, combined with newer product, has pushed rental rates higher. The current average rent for a one-bedroom unit in the Seattle area is $1,078, up $93 compared to the five-year average. In addition to higher rents, concessions are currently at 1.5 percent, compared to the five-year average of 3.2 percent. Absorption remains strong and is keeping pace with new construction. So far, 3,300 units have been absorbed year-to-date.
New construction in 2013 and 2014 has been at one of its highest levels ever. This development is largely concentrated in the Seattle urban core. Job growth remains strong, which has kept this additional supply in check with new demand. A total of 6,171 new apartment units were added over the prior 12-month period. As further evidence of a strengthening market, even condo projects are returning, able to finally secure financing. Insignia is scheduled to open the first of two towers in Downtown Seattle next year. The total project will contain 707 units. It will be the first condo project to be completed in the past six years in Downtown Seattle.
CoStar reports that investment sales hit nearly $2.8 million in 2013, putting last year on par with 2012 and well above numbers recorded over the prior several years. Those numbers are expected to continue through 2014, with a little more than $1 million of sales already experienced through mid-May. Year-to-date, the average sales price per apartment is $146,378. This is down from $177,211 in 2013, but much closer to 2012 when the average price per unit was $154,291. The risk of increasing interest rates has put some upward pressure on cap rates, which has had some impact on pricing. Despite some concern over interest rates rising, strong investor demand is expected to keep cap rates near their current levels.
Employment growth through this year and next will be about 2.8 percent and 2.2 percent, respectively, according to Conway Pedersen. This job growth is expected to keep vacancy rates at stable levels. These rates will likely tick up slightly, however, as Conway Pedersen forecasts apartment vacancies to reach 4.6 percent in 2015.
By Pete Shelton, Executive Director, and Kim Grant, Director, Cushman & Wakefield, Commerce in Bellevue, Wash. This article originally appeared in the June 2014 issue of Western Real Estate Business magazine.