Further bolstered by limited supply growth, significant barriers to entry, and continued positive in-migration, rents in Puget Sound are forecast to increase by nearly 25 percent over the next five years, according to Dupre + Scott Apartment Advisors. Meanwhile, NOI is predicted to increase by 35 percent during the same time frame. Those numbers speak well for hungry apartment investors.
A Look Back
Understanding the current situation requires a little reflection on the past 12 months. In 2010, the Puget Sound multifamily market experienced a dramatic turnaround. Sales volume in 2009 hit a 30-year low, and expectations for 2010 were not much better. Headlines forecast further declines, with the only regularly occurring sales coming via foreclosures.
Rental rates subsequently fell from their peak two years ago, declining 10 percent (inclusive of concessions) by the first quarter of 2010. Simultaneously, vacancy rates rose to above 8 percent.
As 2010 progressed, predictions of future rental increases began to take hold. Vacancy levels began to drop, as apartments filled with former homeowners and “would-be” homeowners who had decided to forgo buying in favor of renting. Much of this shift in attitudes can be attributed to stricter single-family lending standards, the decoupling of roommates, and a philosophical sea change of people living within their means.
With increased optimism and declining vacancy rates, buyer interest strengthened. By the end of the third quarter of 2010, the number of transactions in the Puget Sound market had nearly equaled the number of transactions in all of 2009, and sales dollar volume was up 61 percent. Cap rates, which had hovered in the mid–5 percent to 6 percent range, dropped to the high–4 percent to mid–5 percent range.