By Meghan Hall
2020 saw Seattle investors and commercial real estate experts put the brakes on activity, as predicting how the market would evolve seemed like an insurmountable task. Movement in the market remained limited while speculation around emerging trends such as the impact of work from home and the popularity of suburban assets continued to swirl. However, a recent report released by local firm Lee & Associates predicts that multifamily fundamentals in particularly have remained relatively stable. Looking ahead, Lee & Associates believes that the impacts of 2020 are unlikely to morph into the long-term trends that many thought would flip the commercial real estate industry on its head.
Sales volume for multifamily properties in 2020 came in at just 31 percent of the volume of 2019. Just about $2.6 billion in deals closed last year, while $8.4 billion in multifamily transactions were solidified in 2019.
“I think that buyers waited all year for there to be this big price reduction and blood in the streets, and that was not what we saw,” explained Lee & Associates Principal Candice Chevaillier. “What we saw was a big pause and a bid-ask gap…So from that standpoint, I think that the seller community kind of froze and really focused on their operations…And on the buyers’ side, there was an expectation that prices would immediately come down because the sky was falling.”
However, fundamentals held largely steady. Market vacancy ticked up slightly from four percent to 4.4 percent across the Tri County area, while rates dipped 4.8 percent. In Snohomish and Pierce Counties, rents even increased, rising by one percent and 2.4 percent, respectively. As 2020 and the pandemic wore on, the hope for a vaccine and a return to normalcy expectations about what would happen within the market moderated.
“I think especially with the advent of the vaccine and news of the vaccine, the perception of values coming down in any kind of significant manner really evaporated,” added Chevaillier.
There will still be a few factors that at least short-term, will have the ability to impact the multifamily market. As the previous market cycle ends, resulting in the softening of fundamentals, delivery of apartment supply is peaking. 13,466 units are expected to deliver in 2021, and another 6,682 units will deliver in 2022. The vast majority of these units will be delivered in downtown Seattle.
By comparison, 2,777 units came online across Pierce, Snohomish and King counties in 2019, and just 431 units delivered across the same region in 2018.
“That is what is kind of unfortunate, the timing of our big development cycle really coincided with COVID-19,” said Chevaillier. “Not only are there more than 10,000 units coming on line in 2021…but demand is down…Downtown Seattle is pretty much closed.”
Chevaillier added, “I am not going to kid around, I think 2021 is going to be a long year for leasing agents…The fundamental operations of these properties are just not as strong right now in 2021.”
Lee & Associates maintains that while it may take longer for units to absorb, there will still be an overall housing shortage across the Puget Sound. Long-term affordability will still see upward pressure as the economy recovers.
A potential longer-term trend, however, is employees’ ability to work from home. Looking ahead, the incorporation of work from home policies could become a longer-term shift for many companies, impacting multifamily fundamentals. Technology, financial and management advisory workers are the most likely to want to continue working from home full time, while consumer goods, life sciences and government employees are more likely to return to the office. According to its data, Lee & Associates also states that the majority of employees would prefer a mix of in-office and work from home in the future.
Even on days when employees may want to work from home, Chevaillier emphasized that a lively neighborhood to provide activity—nearby retail, coffee shops, eateries—will become even more important.
“There’s got to be something to do while you’re working from home,” said Chevaillier.
Moving deeper into 2021, Lee & Associates predicts that more affluent areas that have only suffered minimal job losses will recover first. For investors and property owners, the firm emphasized that while 2020 was filled with a spectrum of change, commercial real estate decisions are based on long-term outcomes. The Puget Sound’s history of stable fundamentals should help to bolster confidence in the coming months to years.
“There has been a really incredible amount of change in a very short amount of time,” said Chevaillier. “It’s important to recognize that real estate investment is about making your decisions based on years not months.”
When a return to normal will take place is unclear, but Lee & Associates is relatively confident that the new “normal” will not be entirely different than what was experienced pre-pandemic.
“I would wager that a lot of what we have seen over the past year has been a temporary shift but not a fundamental shift,” said Chevaillier. “…I don’t know if just a year is going to create a completely new paradigm [in the market].”