EDITOR’S NOTE: Kidder Mathews is an advertiser with The Registry. The content of the following report was chosen based on its editorial value and relevance, ensuring unbiased and informative material for readers.
The apartment market in Puget Sound, which encompasses the greater Seattle area and the surrounding region, has been navigating a challenging landscape in 2023, according to a recent Q4 2023 Research Summary by Kidder Mathews’ Dylan Simon and Jerrid Anderson apartment brokerage team. Like many other markets nationwide, the Puget Sound apartment market has been marked by uncertainty and pricing volatility.
While rental rates have remained relatively steady, they are showing a moderate downward trend across all market segments. The exception is in markets that experienced sharper declines earlier in the year, which are now exhibiting signs of stabilization. However, the most crucial metric to watch in this market is vacancy rates, which are approaching a critical threshold of 7 percent, a point at which landlords may need to adjust rental rates downward to attract tenants.
Sales of apartment buildings in the Puget Sound region have been sluggish, with sustained moderation and, in some cases, a complete stall. The primary driver of this slowdown has been the significant rise in interest rates over the past 18 months. This surge in interest rates has resulted in a decline of over 50 percent in sales volume and a drop in pricing by more than 20 percent.
In Seattle, cap rates have reached the 5 percent range, and sales volume continues to lag, raising questions about the city’s apartment market’s future evolution.
Cap rates in Seattle are trending upward, possibly reaching 6 percent. While sellers and buyers are inching closer to facilitating successful transactions, sales volume remains significantly below peak pre-COVID levels. This suggests that the market’s recovery still has a way to go.
Vacancy rates in apartment complexes with more than 50 units have seen a marginal decline of 20 basis points (bps), coinciding with a one-point rent decrease. In contrast, the 5-50-unit apartment segment has remained relatively stable, with little to no fluctuation in rents and vacancies.
North King County faces similar challenges, with fluctuations in rental rates and vacancy rates. While total transactions and sales volume have decreased in North King County due to rising interest rates, there is still significant buyer demand for the limited properties available in this region. Recent sales, such as a 121-unit apartment complex in Northgate, generated considerable interest, with 45 tours and 19 offers during the marketing campaign.
Rental rates and vacancy trends remained stable in the 5-50-unit apartment segment. However, larger apartment buildings (50+ units) experienced a 20 bps increase in vacancy and a 2 percent reduction in rental rates, primarily attributed to the summer rental market’s performance.
East King County maintains a slow but steady real estate market, making it an attractive option for investors seeking stability. Sales activity in East King County has been slow, consistent with the prevailing 2023 market dynamics. However, the market’s resilience in pricing, coupled with increasing interest rates, suggests that sales volumes will likely remain sluggish as the year draws to a close.
Rental rates and vacancy trends held steady in the 5-50-unit apartment segment. In contrast, the 50+ unit properties, which constitute a substantial 92 percent of the total inventory, experienced a 20 bps surge in vacancy and a 2 percent reduction in rental rates, primarily due to the summer rental market’s challenges.
South King County continues to be a preferred location for renters, but sales volume struggles to rebound. While transaction volume picked up in Q3, 2023 sales volume is expected to be less than 50 percent of historical averages, with cap rates wider by at least 150 bps compared to pre-pandemic trends. South Sound owners appear content to weather the interest rate storm, banking on the region’s continued strong renter demand.
Rental rates and vacancy rates confirm the strength of the South Sound rental market. Smaller, non-institutionally sized buildings have seen a slight 2 percent increase in rental rates year-over-year, maintaining sub-5 percent vacancy rates. Larger buildings experienced a 1 percent slip in rental rates, with vacancy rates expanding to 6 percent, indicating a slowing demand.
Snohomish County has seen a significant slowdown in sales, with a sharp decline in total transactions and overall sales volume. The last 90 days have witnessed a dramatic drop in total transactions in Snohomish County, with only two sales totaling $30 million in volume. Comparing quarterly sales metrics to annualized metrics from previous years reveals the lowest price per unit and price per square foot averages in recent memory.
Despite the sales volume decrease, rental rates for smaller, non-institutionally owned buildings are steadily rising, possibly due to renters seeking a quieter lifestyle away from the city. However, a slight decrease in rental demand is expected in the challenging winter leasing months before the annual spring uptick.
Once a thriving investment market, Pierce County is grappling with a significant decline in transaction volume. With only 21 sales year-to-date, it’s challenging to gauge pricing in Pierce County accurately. Pricing for suburban sales is relatively close to historic averages, but an oversupply of new apartments in downtown Tacoma is softening prices, particularly for newer buildings.
Rental rates for both smaller and larger apartment buildings have remained stable, with rates increasing from 0.5 percent to 2 percent year-over-year. Smaller buildings experienced vacancy rates just above 5 percent, while larger buildings in downtown Tacoma have seen a slight moderation but remain above 7 percent for the third consecutive quarter.
Kitsap County’s real estate market is facing uncertainty, with sales volume at a decade-low performance. Kitsap County has seen minimal sales activity in 2023, with the potential for the year to record the lowest sales volume in a decade, dipping below $50 million. Price discovery may be the catalyst for the market’s resurgence.
Kitsap County experienced a significant reduction of 120 bps in vacancy rates during the third quarter. However, an oversupply of military housing continues to cast a shadow, keeping vacancies 2 percent higher than the previous year. Progress has been made, but the specter of oversupply remains a concern in Kitsap County’s real estate landscape.