By Jack Stubbs
With a booming tech industry, an emerging life sciences sector, a growing talent pool and an active commercial real estate industry, the Puget Sound region is an increasingly desirable place to settle down. And in the longer-term, while demand for multifamily inventory has largely been concentrated in King County, investors and tenants alike are starting to look further afield.
According to a 2018 Multifamily North American Investment Forecast Report recently released by California-based Marcus & Millichap—in which the company analyzed the current state of 46 multifamily markets across the U.S.—the upward trajectory of the multifamily market in the Seattle-Tacoma metropolitan area is set to continue. The housing shortage, coupled with decreasing vacancy rates and rising rents, signals an active market across the region in the year ahead.
One key statistic in particular from the report reveals that the multifamily market in the Seattle-Tacoma metro area, which encompasses King, Snohomish and Pierce Counties, is as active as ever. The Seattle-Tacoma market leads this year’s National Multifamily Index, which ranks 46 major markets on a collection of 12-month, forward-looking economic indicators and supply-and-demand-variables including projected job growth, vacancy rates, construction, housing affordability and rents.
The Seattle-Tacoma multifamily market is characterized by robust employment in the tech sector and escalating rental prices, which sustain demand. Additionally, increased demand for housing inventory—and the subsequent rise of housing prices—will contribute to the development boom in downtown Seattle.
The median home price in the Seattle-Tacoma metro is more than five times greater than the median income, according to the report. In several of Seattle’s submarkets, the median home price sits above $700,000, a figure that highlights the need for more rental units across the metro. The report predicts that the largest concentration of multifamily inventory will once again be in the bustling South Lake Union/Queen Anne submarkets, which will receive roughly one-fifth of the expected completions this year.
Even in light of the current dearth of available inventory, the pace of construction is not expected to keep up with demand in the market in 2018: following the largest level of completions in more than a decade in 2017 at 15,100 units, deliveries will slow to 11,100 units anticipated to open this year. This slowdown in construction means that demand will outpace supply growth, dropping the vacancy rate to 3.5 percent at the end of 2018, according to the report. And, along with decreased vacancy rates, rental rates are up 5.4 percent from last year as well, climbing in 2018 to an average of $1,643 per month in the Seattle-Tacoma metro area.
The strong state of the multifamily market in 2018—characterized by lower vacancy rates and higher rental rates—means investor confidence in the Seattle-Tacoma region is high, with rising household growth, and steady asset appreciation drawing investors to the wider region in the year ahead.
Due to increased activity—and constrained inventory—in the multifamily market, investors are broadening their search and geographical scope to find investment opportunities further afield. Investors have expanded their criteria and are considering a variety of Class B and C assets, outer-ring suburban locations, and properties in secondary or tertiary markets throughout the region, according to the report.
Indeed, geographical considerations are playing an increasingly prominent role in the Seattle-Tacoma multifamily market from an investor’s standpoint, according to Joel Deis, regional manager at Marcus & Millichap’s Seattle office. “You can’t be myopic to just Seattle or King County…if you can’t get the return needed for the risk profile that you want to accept in Seattle, you need to go to Tacoma or Spokane or Bellingham,” he said.
Investor confidence continues to increase in areas other than Seattle, and investors are now considering other locations throughout the region, according to Deis. “Present day, there’s a lot of confidence from investors in Pierce County and South King County and Central Washington, specifically the Tri-Cities [Richland, Kennewick and Pasco],” he said.
Data from the report reinforces the idea that investors are looking outside of the active King County region: buyers will be active in the outlying cities of Everett, Lynnwood and Tacoma as assets often trade with cap rates that are at least 100 basis points above similar properties in Seattle’s urban core.
Ultimately, this trajectory is reaffirmed by where the equity in the market is ending up, according to Deis. “Over the last twelve months; we’ve see an [increase] in investors willing to go to markets outside of King County, while still remaining bullish on King County. That’s not a prediction, but I’m looking at where the equity is going,” he said.
And while demand in the market across the board will remain robust in the year ahead—as a shift in perspective occurs towards the more peripheral submarkets and counties—assessing the evolving multifamily market ultimately requires a long-term perspective, according to Deis. “Investor confidence is so subjective…if there are more transactions in submarket X or Western or Eastern Washington, then that [indicates] investors are confident there…it all goes back to what the investor is trying to achieve in the long run.”