With improving employment figures, steady rental demand, and ever-increasing investor interest, the Seattle market is percolating its way to a very strong brew.
Job growth in Washington state's Puget Sound region is perking up after several years of sluggish performance. Employers are on track to add approximately 46,000 jobs by year's end, a 2.9 percent increase, which should produce positive gains for Seattle's multifamily housing market. Analysts project strong net in-migration, and companies such as Microsoft and Amazon.com continue to invest in product development and marketing, all of which holds promise for improving fundamentals and healthier bottom lines for local apartment owners.
In addition, more limited single-family housing affordability, rising interest rates, and an influx of young professionals will expand the market-wide renter pool in the Seattle metropolitan area considerably. Investors continue to flock to the area and will find multifamily investment stability in submarkets in central Seattle, such as Ballard/Greenlake, Queen Anne/Magnolia, and Downtown/Hills, where high-quality units, urban-living amenities, and proximity to employment centers support tenant retention.
City With a Plan
With new residential space considered key to the renewal of Seattle's downtown and the surrounding neighborhoods, a number of initiatives are underway to attract developers and residents to the area. In 2004, the city introduced its Center City Seattle strategy for growth, which focuses on overhauling the downtown zoning code and improving transportation systems. These zoning changes, which are already in progress, would increase the height and square-footage allowances for residential and office projects within the city's core and provide greater subsidies for affordable housing.
Two new transportation systems, the Monorail Green Line and Sound Transit's light rail, also will soon connect Seattle's downtown with surrounding neighborhoods. Despite some delays, both systems are slated to come online in 2009. Although Seattle falls behind its West Coast counterparts in terms of urban renewal, the success seen in neighboring cities, such as Portland, Ore., bodes well for Seattle's downtown.
Apartment construction will remain modest in 2005, with just 2,000 units slated for delivery by year's end. Although this is a 25 percent increase from 2004, development activity is still well below historical highs. Completions reached 6,100 units as recently as the year 2000 and averaged nearly 4,300 units between 2000 and 2003. Investors are watching closely, however, as falling vacancy rates attract more developers and ease the restraint exercised over the past two years. In fact, multifamily permitting is on the rise, with permits for nearly 6,000 units issued in 2004–a 57 percent increase from one year earlier.
Although it remains to be seen how many of these units will actually be delivered, developers are definitely taking notice of the region's improving market fundamentals, and a significant increase in apartment construction may be forthcoming.
Seattle-based developer Harbor Properties recently announced plans to build moderately priced, mid-rise apartments near downtown Seattle, and other developers may soon follow suit. Just like in many other cities, an increasing number of workers are looking to live in an urban setting closer to their workplace, and Seattle officials are aggressively promoting more residential development in and near downtown. Recent changes in parking requirements, additional flexibility on open space requirements for multifamily projects, and a multifamily tax credit program are helping to entice developers.
Houses and Jobs
Home prices are soaring in the Puget Sound region as the buying spree, which pushed the homeownership rate to 64.1 percent in 2004, has continued into 2005. Buyers hoping to beat rising interest rates are depleting inventory faster than the market can replenish it. By the end of the first quarter, listings in King County (home to Seattle) were down 30 percent from one year earlier, while inventory in Snohomish and Pierce counties dropped 23 percent and 7 percent, respectively. Properties are receiving multiple offers, especially in hot spots such as Queen Anne, Downtown/Hills, and Bellevue. With so many hungry buyers, the median home price in King County recently reached $325,000, up 16 percent from last year.
Although Pierce County is still the most affordable area, it saw the largest jump in home prices, rising 17 percent from last year to $220,000. Although these elevated prices are bad news for would-be homebuyers, the apartment market should benefit from stable demand as many residents are forced to remain renters.
The economic recovery that began in the Puget Sound region last year continues to gain momentum. Boosted by gains in professional and business services, the employment base is forecast to expand by 2.9 percent in 2005. The manufacturing sector, which has suffered greatly in recent years, appears to have stabilized. Boeing, the region's top employer, has begun hiring again after reducing its workforce by nearly 40 percent.
In addition, the information sector is adding to the region's economic strength with a number of technology companies expanding here. For example, Microsoft announced plans to hire 3,000 local workers and increase its research and development spending by 4 percent this fiscal year, while Google recently opened a new development branch with space for at least 200 employees in Kirkland.
One area of concern, however, is the fallout from Cingular's acquisition of AT&T Wireless. The newly combined company plans to slash 10 percent of its national workforce this year, and already about 700 positions have been eliminated at AT&T's former Redmond, Wash., headquarters. Still, though the cuts are a setback for the local telecommunications industry, they are not expected to disrupt the region's overall economic recovery.
Modest Improvement
Healthy economic and population growth along with limited construction activity are helping to improve vacancy rates in the Puget Sound region. As resident demand continues to offset the delivery of new units, the overall vacancy rate is expected to fall 70 basis points to 7 percent by the end of 2005. While still higher than the market's historical average of 5.2 percent, this is the lowest vacancy rate posted since 2001.
Apartment absorption is on track to measure nearly 3,700 units this year, which is more than the last two years' totals combined. As a result, nearly every submarket is experiencing some tightening. Snohomish, the region's third-largest submarket, has seen the largest improvement thus far in 2005, with its vacancy rate falling 220 basis points from last year to 6.3 percent.
The return of job growth has come none too soon for this submarket, which was hit particularly hard by the downturn in manufacturing and saw its vacancy rate climb as high as 9 percent in 2003.
After declining every year since 2001, the average asking rent region-wide is expected to climb 1.6 percent to $818 per month by year-end. As vacancies decline, concessions are becoming less prevalent as well, decreasing from 7.1 percent of asking rents in 2004 to 6.5 percent.
Though most submarkets are still seeing modest rent increases of less than 2 percent, a few areas around the market's core have posted significant increases over the past 12 months. In South Seattle, asking rents jumped 10.2 percent to $787 per month, while rents in the desirable Downtown Hills submarket rose 6.4 percent to $1,000 per month. In the central submarket, rents have risen 2.6 percent to $1,013 per month, making it the region's smallest yet most expensive market. Despite a 1.6 percent increase in asking rents from this time last year, the predominantly working-class Pierce County remains the most affordable submarket at $685 per month.
Although there have been widespread improvements in occupancies, a handful of submarkets continue to struggle. The University submarket, where many properties are dependent on students with typically lower incomes, has seen rents fall 6.6 percent in the past 12 months. Apartment owners in the affluent Eastside and Queen Anne submarkets continue to lower rents as well, looking to replace tenants who were likely lost to homeownership or payroll cuts. Serious Investment
Investor interest in the Puget Sound region is expected to remain strong in 2005 due to the market's growing economic strength and improving market conditions. The region posted record apartment sales activity in 2004 as the total transaction dollar volume rose 65 percent from one year earlier to $1.4 billion. Highly interested buyers, including a growing number of investors from less affordable West Coast markets, are flocking to the area and bidding up prices. In fact, the median price per unit jumped 20.3 percent to $87,400 in 2004.
Institutional investors also are attracted to the region, as is evidenced by the recent increase in the number of sales valued at $5 million or more. There were 50 transactions in this dollar range in 2004, compared to just 32 one year earlier. Equity Residential, the nation's largest publicly traded apartment owner/operator in the United States, recently acquired the Harbor Steps mixed-use property in Seattle. Constructed in the 1990s, the four-tower high-rise property contains 785 apartment units, 51,600 square feet of retail space, and 31,000 square feet of office space, as well as 413 underground parking spaces.
All of this demand is putting downward pressure on cap rates. The average cap rate has fallen steadily over the past few years, declining 90 basis points to 6.3 percent in 2004. Investors looking for higher returns, however, can still find assets with cap rates in the 7 percent range in areas outside of central and northern Seattle.
The bottom line is that the recovery in the Seattle apartment market is gaining momentum, with nearly every submarket seeing improvements in occupancy. As the local economy posts solid gains in employment, tenant demand will continue to strengthen, allowing property owners to raise rents and limit concessions. Although developers are beginning to increase activity, completions remain moderate and overbuilding is still a relatively distant concern. Investor sentiment is strong, supported by the region's positive long-term outlook. Institutional, out-of-state, and local investors are all active in the market, which continues to put upward pressure on values.
Big Divide
A new housing report highlights the widening housing gap.
Reading the Harvard University's Joint Center for Housing Studies newest report–The State of the Nation's Housing 2005–you could get very depressed or very excited. It all depends on your perspective.
On one hand, low interest rates have brought a flurry of people into the housing market, as the homeownership rate reached 69 percent. But this flood of people has pushed prices to unaffordable levels for a growing number of Americans and also stimulated talk of a bubble.
"The overall tone of the report is wow to the housing sector at large," says Nicolas P. Retsinas, the center's director. "But that obscures some different issues within the housing sector and masks some very serious affordability problems. There has not been a return to widespread affordability. The new units come on-line at prices that exceed what people working in low-wage jobs can afford."
The worst part: The affordability problem could grow worse in coming years. "If there were to be a slowdown in homeownership because of rising interest rates, you could see a substantial run up in rents," Retsinas says. "And, in many cities, we're seeing widespread conversions to condos, which takes rental stock off the market."
Immigrants will offer even more opportunities for apartment owners. The report says that the number of new arrivals this decade could top the 1900s record of 10 million.
"Newly arriving immigrants are far more likely to rent than to own their housing," says Mark Obrinsky, chief economist and vice president of research for the National Multi Housing Council. "The continued influx of immigrants to the U.S. will add considerably to the overall demand for apartment residences. This should result in both additional apartment construction plus a moderate rise in rents."
–Les Shaver
STAT TO WATCH
Up, Up, And Away
Multifamily investor activity picks up speed. For the fourth quarter in a row, senior apartment executives report improvements in key market indicators, including sales of multifamily buildings.
According to Mark Obrinsky, chief economist at the National Multi Housing Council in Washington, D.C., which produces a quarterly sales volume index, 41 percent of respondents observed higher sales volume in their markets in the period between April and July 2005 than they had in the previous quarter.
"We have seen record buying," Obrinsky said. "We have the condo converters" on a roll in many markets around the country, and "we also have people buying apartments because they think down the road, [certain markets] will be the place to be."
"We have been actively but cautiously buying apartment communities," noted Lili Dunn, AvalonBay's senior vice president and managing director for investments. Since the Alexandria, Va.-based company in March closed a value-added apartment acquisition fund with a total investment capacity of $940 million, Dunn said, AvalonBay has purchased five multifamily communities in four cities: Redmond, Wash.; Columbia, Md.; Los Angeles; and Chicago. The total value of these communities is approximately $150 million, she added.
AvalonBay's buying spree may not yet be over. "We're looking [for desirable properties] in all of our markets, but the timing depends on the fundamentals of those markets," Dunn said.
Obrinsky added that this is only the fifth time in the six years that NMHC has conducted the quarterly survey that all four indexes–occupancy rates, debt, and equity availability, as well as sales volume–have exhibited improving conditions.
–Amy Rogers Nazarov