Raymond Allen, Marcus & Millichap
The underlying forces bolstering the strength of the Seattle metro multifamily marketplace are robust job growth, new development projects and the short supply of single-family houses. While these factors also slightly impact vacancy levels, property prices and sales activity are expected to continue to rise.
New and expanding companies, particularly in the tech sector, have sustained job growth in the Seattle-Tacoma region over the past five years. They have put more than 115,000 people to work since the pre-recession peak. This influx of workers, strong housing demand and a number of new development projects contributed to the construction sector posting the region’s strongest 12-month job gain of 14,600 new jobs. Company expansions are anticipated to generate an additional 65,000 jobs this year alone.
Construction of both single-family and multifamily housing projects is expected to continue at an accelerated pace over the next several years. Limited inventory and affordability issues associated with single-family houses are preventing many people from transitioning to homeownership, thus fostering intense demand for apartment rentals. Roughly 12,000 rentals are expected to come online this year – with about 2,600 apartments delivered in the second quarter of 2015 alone. This represents the second-largest quarterly gain in more than 15 years. The bulk of new completions will be focused in the in-city Seattle market. Development activity is expected to remain elevated, as nearly 20,000 units are under construction with completions scheduled into 2017.
Vacancy has dropped to its lowest level in 15 years, despite the more than 25,000 apartment deliveries in the past three years. Apartment demand will not be able to keep pace with the wave of new deliveries, however, in the second half of the year. This will likely cause the metro’s vacancy rate to increase 30 basis points to 4.2 percent by end of year.
Even with this slight uptick in vacancy levels, significant tenant demand and a wealth of new luxury apartment deliveries are expected to increase effective rents by 8.4 percent in 2015 to an average of $1,348 per month.
The Seattle-Tacoma metro’s strong economy and attractive housing market are causing investors to flock to the metro, as evidenced by the 17 percent surge in transaction velocity year-over-year as of June 2015. While local buyers have accounted for the majority of sales activity, foreign and institutional investors, and out-of-state investors—primarily from California—have also escalated purchasing this year.
Capitalization rates near the Seattle core are in the 5 percent area, while properties in cities like Tacoma and Everett are trading hands with capitalization rates in the low- to mid-6 percent range. Even with many new completions this year, competition remains intense for available assets. Net operating income has increased – as a result of solid rent growth –incentivizing owners to hold onto their properties. With this in mind, investors may want to consider non-luxury assets or assets farther from the metro core. Yield-driven investors searching for repositioning options might also consider assets in South Seattle, Pierce or Snohomish counties.
By Raymond Allen, Associate Director, Marcus & Millichap. This article originally appeared in the November 2015 edition of Western Real Estate Business magazine.