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.