In 2018, Seattle Will Prove Its Mettle

A Closer Look at Data from 2017, Key Factors Impacting the Apartment Market and What We Can Expect for the Year to Come

Dylan Simon | Colliers International | Seattle Multifamily Team

Welcome to 2018 — time to buckle up for a fast-paced year! Opportunities in this market — whether you plan to buy, sell or hold — are nuanced, and require a critical eye to identify and a deft team to execute.

We’ve analyzed key indicators, from rental rate growth to the health of complementary markets, to help you maximize your investments.

Rental Rate Growth Positive Despite Seasonal Impacts

The start of the Fall rental season in Seattle marks the beginning of tough months for leasing. However, despite the doldrums of “seasonality” each year, Spring has carried the Seattle apartment rental market through for the last six years.

Looking back 20 years, there are marked periods of flattening rent — only to rise again. The Dot-Com / Dot-Bomb period of the early 2000s, then the Great Recession in the start of the 2010s, proved market vulnerability at the change of a decade.

Urbanization, demographic trends and preferential shifts all support the outsized growth in rental rates in Seattle’s urban markets, and continued growth is on the horizon.

Abundant Development Pipeline Leading to Balance of Supply & Demand

Where apartment investors see rental-rate growth, they see fertile ground for development. In the last six years, the Puget Sound region added 52,000 new apartment units, with an additional 50,300 units slated for delivery by 2020.

Expectations for rental rate growth must be tempered against a delicate supply-demand balance. For locations and building types where there is not demonstrable new supply, the future is remarkably bright. For all others, competition will remain fierce for the time being.

Seattle’s apartment market relies on the entire ecosystem of employment — whether blue collar, grey collar or white collar. The health of other commercial real estate sectors offers solace that new jobs in our region will maintain demand for future apartment supply.

New Office Space & Reasonable Leasing Rates Attracting Employers

A healthy and growing office market is the best predictor of a healthy and growing apartment market.

The Puget Sound office market demonstrates some of the healthiest fundamentals in the nation, with vacancy rates falling from a Great Recession peak vacancy of +16% to 8% currently, and positive net absorption of new office space.

Along with falling vacancy rates are rapidly rising office rental rates. Although Seattle’s rates are now cresting $38 LSF, compared to San Francisco’s $70 LSF, this pricing remains very reasonable.

It’s no wonder any exodus of San Francisco and Silicon Valley is landing in Seattle!

Growing Industrial Market Supporting North & South End Apartments

In a region so focused on ecommerce, industrial use is infinitely important to our region. Vibrancy in the industrial sector supports apartment markets in the North End (Lynnwood to Everett), as well as the South End (Renton to Tacoma).

Developers rushed to the market in 2014 to add space as vacancy dipped below 5%, and users met delivery with strong absorption throughout the past three years. Vacancy rates fell to 2.8% in Q3 2107, with capitalization rates not far behind, setting the stage for continued growth in 2018.

2017 Apartment Sales as a Benchmark for 2018

Many owners and investors are measuring 2017 apartment sales against previous years as a benchmark for the market. A quick look at the numbers may raise questions, as tri-county sales volume was down 25% year over year. However, much is lost in simply measuring transaction volume, so we’ve analyzed multiple investment metrics across distilled market segments.

Core-Located, Vintage Apartment Sales: Given that these buildings have a much lower cost basis than brand-new buildings, price appreciation in this asset segment is the greatest across the market. Average pricing in the year 2000 was $129 NRSF, which grew to $376 NRSF by 2017. Over the last 17 years, the peak sales volume was achieved in 2016, yet that volume is only off by 1.4% from a peak in 2005 — proving that certain investors have understood the value of core-located vintage apartment buildings for some time!

Suburban, Value-Add Apartment Sales: While investors and renters alike flee the urban core of Seattle in search of better pricing, they find themselves competing in the suburbs. Pricing has surged to $200 PPSF from $120 PPSF in 2008 — and given that average rental rates were $1,514 / month in 2017, it’s no surprise that investors are willing to buy into these assets at a much higher basis.

Core-Located, Class-A Apartment Sales: There is no question that 2015 marked the peak in sales volume of these buildings; however, when it comes to value-based sales metrics, the market hasn’t slowed! Price per square foot (PPSF) continues to escalate, with capitalization rates settling around 4.3% to 4.4%. Although average price per unit (PPU) and average rental rates are down from a peak in 2015, this is simply the phenomenon of ever-decreasing average unit sizes.

Have more questions about what to expect for 2018?

A quick look at the data will only provide marginal insight, but our continuous research and deep understanding of the apartment market shows a bright future in 2018! If you have additional questions, give us a call to discuss your plans and goals. Whether you are considering selling your apartment building, buying more apartment buildings, or simply trying to optimize the portfolio of apartments you currently own, we can help.

Dylan Simon is a co-founder of the Seattle Multifamily Team, which represents apartment investors and developers in the purchase and sale of apartment buildings and development land ranging from $1M to more than $100M in the Puget Sound. The Seattle Multifamily Team closed 2017 with 25 deals and $269M under escrow and sold. These deals set records in the market, and included buildings from 4 to 132 units. Contact Dylan at (206) 414–8575 or dylan.simon@colliers.com. Visit their website at SeattleMultifamilyTeam.com.