By Meghan Hall
After several years at a full sprint, the Puget Sound multifamily market has paused to catch its breath. While nearly every aspect of the residential industry has stopped as commercial real estate players evaluate their options, local experts believe that the strong fundamentals that led to the market’s explosive growth over the last few years will help buoy the region as recovery takes place. However, before recovery can occur, the industry faces one large hurdle: new apartment product, lessened tenant demand and cautious investors skewing the balance.
“The big overlying trend is this imbalance in supply and demand,” explained Kidder Mathews’ Executive Vice President Dylan Simon. “…But what we’re experiencing is just a moment in time.”
The impacts of COVID-19 have been felt unevenly across the region. Suburban markets are now outperforming core markets as the region’s “rush to urbanism” has been put on hold. With renters now living, working and playing at home, not only are fewer potential tenants seeking out centrally-located apartments, but suburban areas are becoming of increasing interest due to their affordability and proximity to open space.
“In urban markets, there is a larger amount of supply, which is shifting more towards a renter’s market, and as the market is continuing to deliver new supply, it is trying to find that equilibrium,” said Simon. “Contrarily, in more suburban markets, we have less added supply and also demand is shifting towards more space, bigger units, etc. Those markets are not completely in the clear so to speak, but they are facing far fewer headwinds.”
Since March, markets such as Lake Union and Downtown Seattle have seen their rents decrease by 12.9 percent and 11 percent, respectively. Both Bellevue and Redmond saw their rents decline by 7.10 percent, while Renton and Central Seattle saw decreases of 5.2 percent. Kent saw a more modest decline of 1.5 percent. On the flip side, the SeaTac submarket saw a modest gain of 0.40 percent. Puyallup and Tacoma saw the biggest increases in rents so far this year. Puyallup’s rents increased by 2.10 percent, while Tacoma’s went up by 1.30 percent.
How long imbalances remain in the market will likely be a function of density of construction. Since 2010, developers have delivered 85,00 new apartments—an average of between 9,000 to 11,000 units each year. There are 100,000 units in the overall development pipeline. Over the next three years, between 8,000 and 10,000 units will be delivered throughout the region—indicating that the development pipeline is slowing while developers wait for rent growth to resume and for construction costs to lower. For many, added Simon, it has also become more difficult to get construction debt.
The markets that are seeing the largest number of deliveries will also likely face more difficulties in recovering rent growth over the next year and a half to two years, as supply continued to outweigh demand. Additionally, income collection and collection issues will likely remain a reality for many landlords over the course of the next 12 to 24 months until markets regain stability.
“Really the arbiter between what’s given is how much competition is there in the marketplace,” noted Simon. “
In response, more and more landlords are beginning to offer concessions in a bid to keep rental prices—and therefore their property valuations—higher. Concessions were originally offered by the developers of brand-new buildings as an incentive to tenants and to quickly execute lease-up. Now, as demand has lessened and supply has increased, almost all building types are offering concessions in some form. Kidder Mathews now estimates that between 65 to 70 percent of landlords are offering concessions, including buildings constructed four to five years ago competing with new supply. Assets that are surrounded by less construction, and where landlords have not pushed rental rates are faring the best, offering fewer to no concessions.
“Those rentals are attractive where they are, and they’re not at top of market,” said Simon.
And as rental rates and absorption dipped, sales and investment have also slowed. While 2020 was ultimately expected to be calmer than 2019—which was considered a huge year with 353 transactions totaling $7.3 billion in volume—the pandemic slowed things further as companies refrained from making major investments.
“There’s definitely been a pause in the market as both would-be sellers and buyers regroup to understand the market,” said Simon. “It’s really kind of a tale of two operations with what I’m seeing when it comes to sales.”
On one side of the coin are investors and owners still very bullish on the Seattle market, those who believe in the region’s longevity and feel investing is still a safe bet. On the other side are those who have been more reserved in their investing. Properties that have maintained high occupancy and collection rates are also faring well, while assets that have struggled with collections have not sold as quickly. Between both buyers and sellers ask-bid spreads have been growing, as buyers want discounts for any future headwinds that may arise, while sellers are still looking to get top dollar.
Simon added, “…But there’s a lot of capital on the sidelines that wants to be deployed, and I think investors will get more comfortable with the market and make some bets here knowing some of the challenges are going to go away soon.”
On a brighter note, deals are still closing many of the companies driving the region’s growth—from tech firms to life sciences and health—are expected to lead recovery moving ahead. If employment holds, the region’s recovery will follow suit, and Kidder Mathews believes the Pacific Northwest will bounce back.
“[Those companies] really haven’t slowed down; they’re continuing to hire,” said Simon. “I think 2021 will be a transitional year and by 2022 we’re going to see the great majority of the workforce is back, and the economy will start growing again.”