Once again, Seattle is dominating the real estate market, having been mentioned in a number of recent studies and reports as a hot market with healthy performance. Continuing its streak, the city has been named the top real estate market for single-family rentals in the United States by HomeUnion, an online real estate investment management firm. The group released a study titled 2017 National Single-Family Rental Research Report, which outlines the top markets for single-family rentals across the country.
Seattle is in a somewhat unique place, where the demand for housing is growing so fast that even with additional supply, the vacancy continues to drop. “In spite of new housing supply, vacancy is expected to drop 80 basis points in 2017 to a decade-low rate of 2.1 percent,” states the report. While vacancy rates are expected to drop, researchers found that rent growth for single family rentals is expected to slow to roughly 5.5 percent to $2,350 per month from 2016. Additionally, the report stated that prices for investment homes in Seattle at the end of the third quarter of 2016 was just under $420,000 with more than 80 percent of investors choosing to use leverage.
Part of what is contributing to the price growth is foreign investment. According to the report, “A wave of investors from China and other foreign countries pouring capital into the local market drove median prices for all types of homes to $450,000 last year after British Columbia levied a 15 percent tax on foreign buyers purchasing homes in Vancouver.”
However, the larger part of this growth comes from continued increase in employment in the region. Researchers found that Seattle, along with a number of California port cities including Oakland, Los Angeles and San Diego have the strongest job markets in the country and the highest rent growth forecasts this year. Orlando, Las Vegas, Atlanta, Boston, Austin and Raleigh filled out the top 10 markets for high rental demand.
To calculate the ranking, researchers looked at metros with the most favorable supply and demand forecasts. All the major metros that rank high in the rental demand category have strong job growth, low vacancy, high projected rent gains and limited threat from renters purchasing high-priced homes, according to the report.
The report points to the tech sector for the strong job growth and rental demand in Seattle. “The Seattle economy peaked in 2016, with employment growth of a stellar 3.9 percent – an eight-year high. A total of 63,000 positions were added to the local economy,” stated the report. While growth is expected to decline to 3.3 percent year-over-year growth, it still exceeds the national average of 1.7 percent. “Price growth for Puget Sound single family rentals (SFRs) has remained strong due to high renter demand derived from job growth,” according to the report.
“The robust tech industry presence in Seattle ensures strong renter demand and favorable market fundamentals for investors with the cash reserves to invest in this market,” said Steve Hovland, director of research at HomeUnion in a press release. “Amazon, Microsoft and other major tech companies provide a solid employment anchor for the Puget Sound. At the same time, entry prices are significantly lower than other West Coast tech hubs in Northern California, providing investors with a lower-cost alternative to a rental market with the most sought-after industry,” he added.
Mike Scott, with Dupre + Scott Apartment Market Investment Research, who spoke at a recent CCIM luncheon on March 22nd about the current state of the market and all the factors that play into its success including construction, the economy, demand and trends, confirmed as much. Scott echoed some key takeaways of the HomeUnion research report, emphasizing the importance of a strong economy and employment growth for a healthy market. “Employment is the key driver,” Scott said, adding that in order to achieve strong employment we need population increases.
“One thing we look at is migration into this region and that’s been tremendous,” Scott said. “Three or four years ago, there were about 8,000 people moving into the Puget Sound area. Now there are about 10,000 people moving in every month,” he said. While the number sounds impressive, Scott said it isn’t net migration because some people do move out of the state and we have to account for that as well. However, the number of people moving out isn’t what it used to be. The number of people leaving has fallen as a percentage of the number of people moving in, he said. “It used to be at about 50 percent, going back fifteen or twenty years, but lately, over the last few years, it’s been more like 30 or 40 percent move out compared to move in,” Scott said. He added that the reason for the migration of new residents is due to the job opportunities in the region, a key factor. “With significant amount of job growth, we’ve been adding 60,000 jobs a year for the last few years,” he said.
In another top 10 rank from HomeUnion in the same report, Seattle came in third for opportunity ranking, meaning the metro has a strong balance of supply and demand while offering favorable entry prices and limited threats. The report states that metros in this category were measured using cap rates, entry prices and projected job growth in 2017. Additionally, markets with high construction were penalized due to elevated risk of competition, which could account for why Seattle came in behind Atlanta and Orlando. Las Vegas, Chicago, San Diego, Oakland, Detroit, Dallas-Fort Worth and Memphis ranked among the top 10 for opportunity.
Nearby tech-market, San Francisco, which didn’t make any of the top 10 lists for opportunity or demand, is experiencing slowing employment growth. HomeUnion explains the slowing due to the decrease in venture capital funding. “With the tech VC funding spigot flowing slower in the Bay Area, San Francisco’s luxury housing market has started to soften, yet the market for mid- to lower-priced owner-occupied and investment homes remains solid,” according to the report.
“With double-digit investment home price growth and low cap rates, most of the region’s (San Francisco) inventory remains out-of- reach for investors,” states the report. Furthermore, as one of the highest-priced markets in the U.S., with entry prices exceeding $1 million, investors are seeking alternative markets, according to the report.
In Seattle, however, researchers said the region still has some inventory for investors, so long as they have the resources for higher entry prices. “Investors interested in stronger immediate yields will focus on the Columbia City submarket, while those seeking long- term growth from appreciation could turn their attention to West Seattle,” states the report.