By Jack Stubbs
With a booming job market and a burgeoning tech industry that continues to wage a war on talent, Seattle is still viewed as an increasingly desirable place to locate. And the city’s multifamily market shows no signs of slowing; instead, it’s expanding geographically as rents in the downtown core continue to rise. Demographic shifts occurring throughout the city are also causing potential tenants to look further afield in the peripheral neighborhoods to find available—and affordable—inventory.
According to two reports recently released by Colliers International’s Seattle Apartment Team—a 2018 Seattle Apartment Market Knowledge Report and a fourth quarter 2017 Seattle Development Pipeline Report—Seattle’s residential market is poised for expansion in the year ahead as job creation, in-migration into the city, and median income growth all continue to accelerate and surpass the national average.
And while the year ahead looks to be characterized by expansion of the market across the board, 2017, also, was another record-breaking year for the local apartment market as investors traded over $1.4 billion worth of apartments, and developers opened 7,755 new units, according to the report. Over the last three years, 18,146 new units have been delivered to Seattle’s apartment market—and the future delivery pipeline appears robust as well, with 8,182 units set to deliver in 2018, and an additional 9,197 units expected to deliver in 2019. Further data from the fourth quarter 2017 development pipeline report reveals that this upward trajectory is set to continue in the longer-term: over the next five years, 30,276 units are expected to deliver in Seattle, with another 12,232 units under construction and nearly 25,000 planned or permitted.
Continued job growth is one of the factors that continues to contribute to the burgeoning multifamily market, according to Sam Wayne, associate vice president at Colliers’ Seattle office. “Broadly speaking, what’s driving demand in Seattle is job creation. We’ve had 3 to 4 years of really strong job growth that outpaces the national average,” he said. Roughly 23,800 jobs throughout the Puget Sound region were added since January 2017, and the current unemployment rate for King County stands at 3.8 percent, down from the 4.3 percent figure posted in in June 2016, according to the Bureau of Labor Statistics. Employment growth in the Puget Sound region rose 2.6 percent in 2017, while income growth for the region rose 5 percent.
Over the last few years, the growth of the tech sector in particular has dominated the headlines around influential tenants in the market fueling job growth. There are currently 2,694,000 active tenants in the market, according to the report, with technology accounting for 72 percent of this figure, professional services accounting for 20 percent with the architecture, engineering and healthcare sectors accounting for the rest of the tenants in the market.
Companies like Amazon, Microsoft and Facebook have in recent times stolen the headlines—but other tech companies, too, are fueling the tech sector and subsequently driving demand for more inventory in the multifamily market, according to Wayne. “It’s not just home-grown Microsoft and Amazon, but also other tech companies coming up here [to Seattle] and opening satellite offices that turn into major outposts for engineering work for Google’s Facebook’s and Tableau’s campuses,” he said. “And all these other tech companies that are creating all these jobs and paying pretty high wages. They support a new demographic that can really afford all these new apartments.”
And while demand in the multifamily market has historically been centered predominantly around the urban core—namely in South Lake Union and Downtown—the multifamily market is booming more geographically stratified and diversified in terms of where the available inventory is, according to Wayne. “We’re definitely seeing demand in the urban core in Capitol Hill and the SLU areas, but we’re also seeing it more broadly in Beacon Hill and down towards Columbia City and into the Rainier Valley around Othello station,” he said. “We’re also starting to see growth north into the U-District and towards Roosevelt,” he added.
Another one of the trends characterizing this shift further afield—further away from the neighborhoods in the urban core and closer to neighborhoods further south, such as Beacon Hill—is demographic evolutions occurring throughout the city, according to Dan Chhan, senior vice president at Colliers. “We continue to see younger people coming into the city. We see a lot of young families moving into Beacon Hill… demographic changes mean that these families want better schools, daycare, community spaces for their children…they’re starting young families and still want to be close to the core, so they buy a house in Beacon and remodel it,” he said.
Although there is a lack of construction occurring in the submarket, new projects have seen quick absorption and strong rents. With more construction and sales anticipated over the next few years, the neighborhood remains one of the most attractive submarkets for opportunistic buyers, according to Colliers’ 2017 Knowledge Report. Currently, there are 7,112 units in Beacon Hill/Columbia City/Hillman City, with 949 units expected to deliver over the next 5 years and 151 expected over the next 12 months, with another 850 units under construction, according to the fourth quarter 2017 Development Pipeline Report.
And the demographic changes occurring throughout the city mean that looking further north or south for available inventory is more of a preference rather than a necessity for potential tenants, according to Tim McKay, senior vice president at Colliers. “One of the really interesting trends that we’ve been following is that…25 to 30 years ago, you didn’t generally see families going further south in Seattle unless they were financially constrained. They were more likely to go out to the suburbs to the east and Northeast,” he said. “Now, you’re seeing them choosing denser, closer-in neighborhoods, which is opening the retail opportunities and creating new commercial spaces closer to culture,” he added.
One of the metrics by which demand and strength of the multifamily market is gauged is the vacancy rates for different product types. Across all of the submarkets in Seattle, vacancy rates are higher on new construction (built within the last seven years) than on older inventory (built before 2010), according to the report. For example, in Belltown/Downtown/SLU, vacancy rates stand at 4 percent for older construction and 5.7 percent for new construction; in Capitol Hill/Eastlake, vacancy rates stand at 3.2 percent for older construction and 5.2 percent for new construction.
And some of this discrepancy is due to the differing demands for product types in the market, according to Wayne. “Part of that is supply driven, part is competition and the higher price point…if you’re delivering all these units with high-end finishes, the tenants that are price-motivated are looking more closely at the older inventory,” he said. And even though vacancy rates are higher for newer inventory, rents for new inventory in all of the submarkets are higher than rents for older inventory.
“We haven’t seen rental rates start to decline yet. There’s obviously a seasonality to all this in Seattle,” Wayne said, also emphasizing that although rental rates for multifamily inventory will remain the same, landlords might begin offering tenants greater concessions.
In the current market, much of the inventory coming online is furnished—and tenants are willing to pay higher rents for high-end amenities. “A lot of the units being delivered and in the pipeline now are full of the cutting-edge technology and finishes that demand high rental rates,” Wayne said. “So technology is really one element that developers are attempting to utilize as a different factor between product offerings. And we’ve seen demand from tenants for these offerings so far.”
While the extensive activity occurring throughout Seattle reflects continued demand in the multifamily market, the rising tide means that market-rate apartments are harder to come by, according to McKay. “Because construction costs and land costs have gone up so much in the last 3-5 years, the only projects that are pencilling out now are very high-end, and we’re seeing less demand for the typical market-rate apartment.”
However, worryingly for the trajectory of the multifamily market moving forward, developers’ emphasis on creating high-end product is creating a gap in the market, where the construction of studio and one-bedroom apartments is much more common than the construction of 2-3 bedroom apartments. “We’re not seeing a lot of development of inventory geared towards the middle market. From a civic standpoint, if you’re not building for the middle, and you’re not building for families, that’s going to leave a deficit for the two categories in the urban cores and around transit,” Wayne said. “We have to find a way to incorporate all those demographic segments and populations into the market. This is a challenge that Seattle faces as we continue to grow.”
Rising rents for newer inventory across the board mean that the issue of housing affordability will continue to pressurize and constrain the market. “Any time there’s less supply and continued demand, prices are likely to go up,” Wayne said, also emphasizing that rising property taxes and utility costs are also a concern moving forward. Another challenge that remains on the table is the implementation of HALA (Housing Affordability and Livability Act) a city-wide neighborhood-by-neighborhood initiative that incentivizes developers to build up and include more affordable housing in their projects.
In the longer-term, greater leadership is needed at the local level to ensure that housing supply keeps up with demand. “[The question is] whether City Council will have enough influence to guide the policy that creates a positive impact for generations to come,” Wayne said. Hopefully, politicians are taking the outlook of what Seattle will look like 50 years down the road.”
Ultimately, the issue of affordable housing boils down to communication at the city level between all involved, according to Wayne. “The average Joe in Seattle might not want to listen to apartment developers, but every time one of these apartment properties opens, it’s in high demand,” he said. “Creating more affordable housing through HALA will ease some of the cost constraints for low-income families…if not, you’ll chase everyone away, and cost will continue to increase.”
And in the longer term, continually escalating rents—coupled with the lack of available inventory—might cause tenants and developers alike to look elsewhere, according to Wayne. “Seattle has often been viewed as the affordable option in relation to San Francisco or the Silicon Valley…but at some point, companies aren’t going to look to open their offices in Seattle, because it will no longer be the affordable option,” he said. “Seattle remains desirable, there’s just not as much room for growth.”