The continual influx of new tech jobs coming to Seattle has simultaneously put stress on the housing market over the past decade and led to a development boom. But judging by rebounding rental rates and apartment vacancies in 2019, the market appears to be properly meeting the demand. And according to real estate firm Kidder Mathews’ new 2019 Apartment Rent and Vacancy Analysis for the Puget Sound region, these trends shouldn’t slow down anytime soon.
“We’ve been pleasantly surprised by the growth in rental rates in 2019, compared to a slowdown that we had seen in the market in 2017 and 2018,” says Kidder Mathews executive vice president Dylan Simon.
The Kidder Mathews report examines apartments with 5 or more units specific neighborhood regions, and then further distills the granular analysis into three cycles: building built pre-1995, those built 1995-2010, and then units built post-2010. Breaking down the data into three generational cycles of buildings offers insight into what market rents might be out of logistical line.
“What we’re watching for is on the submarket level – the interplay between older buildings and newer buildings,” says Simon. “And I think the question with older buildings is how quickly do you raise rent to get near rental rates of new buildings. So the markets we’re watching for, where we see the most potential upside, is where there’s a huge difference between rental rates in old buildings and new buildings, meaning there’s a strong delta where we expect older buildings to still perform well because they’re closing a gap that’s pretty wide. The markets we’re more watchful of are where all of the buildings are at similar price points and they’re adding a huge amount of new development. Those are the markets we’re looking out for.”
For example, in North King County the gap in average rent between pre-1995 buildings and new buildings is under $300 ($1,417 to $1,684) while new building vacancy is high at 9.5 percent, and there are 7,156 units in the development pipeline. If rents aren’t adjusted, there’s very little keeping renters in old buildings from moving to new ones at relatively little increased cost. For comparison, Urban King County boasts an average rent gap of between pre-1995 and new buildings of $778 ($1,589 to $2,367).
According to the data, while rental prices in Urban King County continue to rise, vacancy this year has dropped to 4.9 percent, down from a three-year average of 6.5 percent. Of the 13 King County regions Kidder Mathews studied, vacancy fell compared to its five-year average in all but one sub-market (South Seattle). South Lake Union showcased the most drastic decrease, dropping to 6.9 percent in 2019 compared to a three-year average of 11.2 percent. This is notable because despite adding over 1,000 units each of the past three years – making it hard for the market to stabilize – the continued rent growth indicates demand remains high.
However, Simon noted: “I caution readers when they see very high vacancy in new products. As soon as you deliver a new building it’s 100 percent vacant, so it takes a while [for those numbers to come in]. The data we have does not sort out buildings that are stabilized versus building that are lease-up. So, I’d take the new supply vacancy with a grain of salt when there’s a lot of new deliveries.”
According to Simon, there are two headline causes for the growth in rental rates. First is the office market delivering a significant number of new office building space that was rapidly absorbed. In 2017 and 2018, growth waned in Seattle’s urban core neighborhoods, but the completion of office construction projects like Expedia’s new campus led to a predictable upturn.
“I was very pleasantly surprised to see the absorption in markets that had a significant amount of new development,” says Simon. “You can measure absorption by just looking at vacancy rates. You may deliver a lot of new units and rental rates may not fall, but vacancy may increase – it’s just supply and demand. And in years past, when we’ve had a spike in new deliveries, we’ve also had a spike in vacancies. And I’ve been very surprised when I looked at the data that vacancy has remained low even though there’s been a huge quantum of new deliveries this past year.”
The second primary reason for this year’s rental rate upturn is what Simon calls the “multiplier effect:” “For everyone one Class A job in a tech company, there’s what I call the ‘support staff’ – people that walk dogs, wash cars, cut hair, pour coffee. And that multiplier effect is usually four -to-one, and it takes a while to take effect. So all the office leasing that’s been going on the last three or four years has had this cumulative effect of increasing demand across the market just based on employment growth.”
Essentially, according to Kidder Mathews’ model (found on page 12 of its 2019 Employment and Apartment Development Pipeline Analysis, every new high end tech job eventually leads the creation of four new renters via service jobs. A new tech job is essentially the earthquake and it takes a while for the support staff aftershocks to be felt.
“It just takes a while for that demand to pick up enough,” says Simon. “It’s just not as immediate as someone who moves from New York to Seattle to take a job at Amazon, [because] that person rents an apartment Day 1. And as they’re going about their life – needing financial services, needing an accountant, needing a dog walker, or a barista – it takes a while for those jobs to take effect.”
The report notes each neighborhood’s development pipeline in order to gauge what might be coming for each sub-market.
“Most of the development has been concentrated in the core of Seattle,” says Simon, “and what’s happened is demand has increased beyond the core. Generally, people are moving outside of Seattle for two reasons. One is affordability. Brand new high-rise apartments are expensive, and when you can build outside of Seattle, the cost to rent is not quite as high. And [the second reason] is livability. Seattle is becoming a dense urban center – there is more traffic, more congestion, more homelessness -and people are moving outside of the core for more livability. So we’re starting to see developers moving to areas like Northgate, Renton, and Kent, and building new properties that are very attractive for renters.”
Looking at these development pipelines offers insight into what areas may be experiencing housing booms in the near future. Within the King County core, South Seattle is notable as there are more than three times as many units in the pipeline (5,504) as have been built in the neighborhood since 2004 (1,748). For similar jumps in potential units verses ones recently built, one must look outside Seattle to places like Kitsap County (with 2,921 units in the pipeline compared to 867 built since 2004).
Digging into the data further shows growths in certain markets due to what Simon calls the “spillover effect.” When a neighborhood like Capitol Hill is running low on housing supply, that can be a boon for other nearby neighborhood, as growth in the Central District shows.
Overall, the Kidder Mathews report’s 2019 paints a pretty optimistic view of a Seattle apartment market where the spate of new buildings is being met by housing demand. And with all the housing projects currently in the pipeline, there shouldn’t be a shortage in the market anytime soon.
