With employment growth projected to rise in the Puget Sound region over the next few years—mixed with a 3.4 percent apartment vacancy rate—developers and investors are unveiling ambitious plans to fill the gap in the area’s multifamily housing sector.
The Puget Sound region, including the King, Pierce, Snohomish, Kitsap and Thurston county markets, is expecting a 3.2 percent annual employment growth (64,600 new jobs) this year, followed by 1.9 percent in 2016 (39,500 new jobs), 1.5 percent in 2017 (32,500 new jobs) and 1.3 percent in 2018 (27,700 new jobs), according to reports by commercial real estate brokerage Kidder Mathews and market research firm Dupre + Scott Apartment Advisors.
Meanwhile, the unemployment rate in the Seattle-Bellevue-Everett region is currently 3.7 percent.
Kidder Mathews’ second quarter 2015 apartment market report said that job growth along with most planned new apartment construction has been focused toward the core urban metropolitan locations in the region, where new houses and condominiums are scarce and existing infrastructure is present. Of the more than 49,000 units planned through 2018, 43,500 units (88.6 percent) are located in King County. Of these, 27,000 units are in the Seattle sub-region, Kidder Matthews reported.
Among the larger apartment complexes that opened so far this year are the Cielo, a 335-unit building in the First Hill neighborhood, developed by Walnut Creek-based Laconia Development; and Premiere on Pine, a 386-unit building located downtown and developed by pension fund TIAA-CREF.
Currently under construction is 2nd and Pine, a 398-unit downtown complex developed by Chicago-based Equity Residential and scheduled for a February 2017 completion. Also, a 40-story, 461-unit South Lake Union tower developed by Holland Partner Group of Vancouver is scheduled to start construction early next year with completion set for 2018.
Kidder Mathews said that several demand factors are driving this marketplace, including household creation peaking in the 25- to 34-year-old age bracket that is traditionally mostly renters with transitory lifestyles. Also impacting the market are a return toward traditional lending regulations with large down payment requirements that has postponed many home purchases and will likely keep a portion of the population as renter households for the foreseeable future, and a lack of affordable condominium inventory in the neighborhoods most desirable to many potential entry-level buyers.
Another issue driving the Puget Sound apartment market is the tight inventory of single-family homes available for sale, which is pushing home prices higher and preventing many tenants from transitioning to homeownership, according to a new Seattle apartment research report by commercial real estate brokerage Marcus & Millichap.
The firm also said the energetic economy and strong housing market are drawing buyers to apartment assets in the metropolitan area. “Foreign as well as institutional capital continues to flow and much of it is focused on stabilized properties close to the Seattle core that trade at cap rates in the 5 percent range,” the firm said. “Mounting prices are limiting the number of value-add opportunities that will provide sufficient returns, making them harder to find. This is sending many investors into cities such as Tacoma or Everett where properties will trade in the low- to mid-6 percent range.”
Marcus & Millichap added that developers will finalize roughly 12,000 new apartment units this year, a 3.5 percent increase in the metro’s apartment stock. Rents will adjust to demand and inventory, and this year will average $1,348 per month, an 8.4 percent jump over last year, the firm reported.
Despite the clamoring for more apartments, condominiums, either newly built or apartment conversions, are not at the top of the to-do list. Kidder Mathews attributes the region’s strong apartment market performance to a change in the “rent vs. own” psychology with more transitory lifestyles and residual lack of confidence in the housing market, along with the current low inventory of affordable condominiums in the most desirable neighborhoods. “These factors likely will contribute to continued demand for apartment units over the next few years,” the Kidder Mathews report said, “especially better quality apartments as a significant number of the new jobs being created are transient but also high wage.”
Even though little financing is available for new condominium projects in Seattle, Kidder Mathews’ Vice President Dan Swanson said a self-financed twin-tower condominium complex is opening across from the Amazon campus—the city’s first new condominium units in six years. Burnaby, B.C.-based Bosa Development’s Insignia in the South Lake Union neighborhood features twin towers, each with 350 units in the one-, two- and three-bedroom range. Swanson said that nearly 50 percent of the units have closed in the south tower; the north tower is scheduled to open next summer.