This regional apartment overview is based on survey results produced by Dupre+Scott Apartment Advisors Inc, who publish the most comprehensive apartment survey in the Puget Sound region. Although this data excludes projects smaller than 20 units, it provides a good proxy of the overall apartment market.
The regional apartment market is composed of five counties including King, Snohomish, Pierce, Kitsap, and Thurston Counties.
Apartment rental demand is a function of many factors including demographics (i.e. population size & growth); employment, consumer/investor preference and price all play a role.
As of April 2011, the five-county Puget Sound region had a population of 3,969,750. This is a 14% increase over 2000. The Puget Sound Region contains 59% of the state population. King County grew at a slower relative pace than the other four counties. This outward growth is a function of the area’s maturation as new development moves toward areas of greater land availability. The area’s quality of life has always been an attraction and net in-migration has played a major part in the population growth.
In general, when the economy and employment are growing, the greater the demand for housing. The region lost some 121,200 jobs during the previous recession. Predictions are that it will take until early 2015 to recover the jobs lost since the region’s employment peaked in mid-2008.
The regional vacancy rate last peaked at a rate of 7.2% in Fall 2009 then fell substantially through 2013. Rental rates have now recovered to pre-recession levels and both use and quantity of concessions have decreased resulting in increasing overall effective rents. Current Seattle vacancy rate is below 4.5%.
The improvement over the past years is mostly attributed to a release of pent up demand as households that doubled up to cope with the recession disjoined along with a decrease in home-ownership rates, which increased the number of renter households.
Also benefitting the market was a record low number of new units added to the overall inventory. Looking forward however, employment growth is predicted to be the primary driver of demand.
Apartment rents in the Seattle area rose faster in the past year than in any of the 81 other major U.S. metros tracked by a leading property-research firm.
New York-based Reis, which sells data to the commercial real-estate industry, reports the average asking rent in the Seattle area climbed 6 percent in the past 12 months, outpacing increases in other bustling tech centers such as San Francisco, San Jose, Calif., or Boston.
Another firm’s data put Seattle’s rent increases at fourth-highest in the nation, up from sixth just three months earlier, but concurs with the 6 percent growth rate.
According to Reis, rents here grew more than twice as fast as the national average of 2.6 percent.
Across all apartment sizes, the Seattle area’s average asking rent in the second quarter was $1,150. (The area included in Reis’ surveys extends from King County up to North Marysville in Snohomish County.)
Currently there are an estimated 237,500 market rate units in complexes with 20 or more units in the five county region. King County has the largest proportion with 60.5% of all existing units.
Since 1990, new construction has averaged 4,294 units per year. From 2003 to 2008, this rate decreased to an average of 2,600 units per year before significantly increasing in 2009 and 2010 to 6,549 and 4,148 new units delivered respectively. While new construction is increasing, the past years saw new building estimated to be the lowest level in more than 30 years.
Offsetting new construction is the loss of apartment units that have been demolished or converted to another use. This loss of units was mostly driven by condominium conversions, which grew from about 30% of removals to more than 80% during the economic downturn.
With new apartment construction currently feasible, developers have been scrambling to find sites that are entitled or with plans that can be quickly finalized because being first to market is important in this phase of the real estate cycle. Looking forward, new construction potential is anticipated to grow to the highest level the market has seen since 1991.
While not all of these projects will be completed, we do expect upward pressure on vacancy rates as construction begins to ramp up.
Most planned new construction has been focused toward core metropolitan locations where jobs and existing infrastructure are present. Nearly 85% of the planned development projects are located in King County. Of these, about 75% are in or near the Seattle sub-region.
With future apartment demand mostly a function of employment and population growth, if the economy were to improve (even modestly) this would positively impact future demand projections.
The other item impacting future demand is the amount of inventory delivered. At this time, we can reasonably assume that most projects already under construction will be completed. The market continues to look favorable for new construction in the coming years.
Over the past years, the apartment market has benefited from a changing "rent" vs. "own" psychology. Following the bursting of the housing bubble and resulting recession, home ownership is now seen as a less secure financial investment as home values have decreased due to excess inventory brought on by the foreclosure crisis. Although home values have compressed and appear to have stabilized, the Puget Sound region still has a high cost of home ownership compared to other markets in the county. This results in a large price gap between owning and renting. This price gap, along with a return toward traditional lending practices with large down payment requirements has pushed and will likely keep a portion of the population as renter households.
Further, those households age 25 to 34 are expected to dominate growth over the next five years and this group is traditionally mostly renters. These factors point toward increased demand for apartment units over the next few years.
The regional apartment market is in the ascendant phase of the real estate cycle. Apartments are showing financial feasibility for new construction with most attention focused on the best, close in locations.
My next blog will focus on opportunities that exist in the South Seattle rental market.
Happy investing!
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