By Jacob Bourne
The Seattle & Puget Sound Q1 2017 Multifamily Report from Colliers International suggests a healthy outlook for the region’s multifamily market as it rests on a firm foundation of booming job growth. Although the year was off to a relatively slow start, possibly influenced by uncertainty in national politics, Seattle experienced an increase of 7,800 jobs in March compared to 3,100 that month last year. Across the region about 15,000 jobs were added in Q1. The city’s unemployment rate of 3.3 percent is well below the nation’s 4.5 percent, indicating a market strength that is driving immigration to the Puget Sound region overall. The tech sector is being progressively revved by increased hiring on the part of industry giants like Amazon and Google, which has attracted talent from San Francisco, New York City, Chicago, Los Angeles, Boston, Washington, DC and Bangalore, India.
“Multifamily demand is being driven by job creation,” said Jerrid Anderson, senior associate, Colliers. “If we continue at that clip there will be plenty to absorb the new supply. We seem to just keep producing jobs. The dynamics are so strong on the demand side. We’re one of the only cities that’s seen unemployment tick down with income levels on the rise. All the numbers are going in the right direction.”
The report examined multifamily buildings between 5 and 50 units as well as those over 50 units in urban King County and suburban areas in Snohomish and King Counties. Year-over-year rental rates for 5 to 50-unit buildings climbed by 8 percent and also saw an increase in vacancy by 60 basis points. For buildings 50 units and over, the rate increase was a more modest 5.1 percent with vacancy dropping by 60 basis points. Cap rates were between 4 and 5 percent, well below the national average. In terms of apartment type, 2017 sales in Seattle were $3.4 billion for garden court apartments and $1.8 billion for mid/high-rise apartments.
“We’ve definitely seen investor appetite stay strong for garden court apartment buildings,” offered Dylan Simon, senior vice president, Colliers. “Since 2016, there’s been a surge in demand for garden court buildings. Sales volume has been strong in all categories but transaction volume has slowed down. However, with job growth picked back up, it will increase throughout the year.”
The report stated, “Overall year-over-year sales volume is steadily increasing toward the previous peak in 2016. The fact that Q1 2017 had half the number of sales of Q1 2016 yet will equal the volume of dollars is a testament to the increased pricing in the core.”
Seattle’s typically more sluggish rental activity during the winter months was likely another contributing factor to the lower number of Q1 sales transactions that are expected to tick up for the rest of the year. Despite the spike in interest rates during the months after the November election, researchers have witnessed a resurgence in confidence in commercial real estate as rates have since dropped. More and more investors are considering commercial real estate opportunities as a healthy option.
Anderson explained that the increase in rental rates for smaller buildings was due to that product type having older inventory and more affordable pricing, while new buildings tend to be larger and carry premium pricing that can only be pushed up so far given the fierce competition, especially in Downtown Seattle.
“The differences in vacancy rates are a result of more sophisticated operations to push the limits,” Anderson explained. “They’re trying to achieve a mix of high rental rates while maintaining low vacancy.”