Seattle Apartment Market continues to Boil

The apartment market in Puget Sound is boiling thanks in part to the expansion of tech-firms, aerospace and more importantly the changing demographic of our areas workforce. Millennials, or the generation born between the early 1980s and early 2000s, are flocking to Seattle from more expensive metro areas to fill the 45,000 new area jobs added.   

According to America in 2013: A ULI Survey of Views on Housing, Transportation, and Community 54 percent of gen Y’ers rented their primary residence in 2013, compared with 32 percent of all adults in the United States. Of those gen Y’ers who are very likely to move within five years, 69 percent expect to rent, compared with 25 percent of all adults. At the same time, baby boomers are selling their houses to rent apartments within walking distance of downtown areas or moving into centers for active seniors. “There is a growing demand for projects that target residents who are 55 and older. They want high ‘walk scores’ and access to entertainment, amenities, and quality health care,

In New York, gen Y renters spend roughly 70 percent of their income on housing, reports JLL, which compared millennial income data from to its own data on rents. In San Francisco, it’s about half their income. In Seattle, rent consumes about 30 percent of millennials’ income. “Everyone’s building here because of that,” said David Young, a Seattle-based managing director overseeing apartment investment sales for commercial brokerage Jones Lang LaSalle. Those transplants could eventually push rents in Seattle to San Francisco levels, he said.

Developers are set to open more units this year than our market King Snohomish and pierce has seen in more than 20 years. And they plan to do it again next year. Over the next five years, more than 70% of the new units will be in the Seattle market. The hottest local submarket is Capitol Hill, where rents rose 6.9 percent from mid-May to mid-August and 13 percent over the past year, said Tom Cain, owner of Apartment Insights Washington, another research firm. “It’s astonishing to me,” he said. These completed and new projects in the Seattle core are renting from $1700 to $2200 for a one bedroom, older properties from the last rental boom in nearby neighborhoods such as Queen Anne, Ballard, Capital Hill and West Seattle offer rents for two bedroom units at lower prices with more space, but those rents are also rising quickly.

These older in city apartments have been attracting a lot of attention by private investors and small syndication’s for investment and renovation projects were they see potential rent bumps to increase value and cash flow.  Competition is keen for the few opportunities which do come on market with more than 70% of sales closing at list price or better.  Those which do not come on market are being renovated by their owners to compete with the higher rents generated by the newer buildings.   

The hottest of these local submarkets is Capitol Hill, where rents rose 6.9 percent from mid-May to mid-August and 13 percent over the past year, as quoted by Tom Cain, owner of Apartment Insights Washington, another research firm.

All of these factors are causing a rent squeeze and many renters are finding that they can no longer afford their neighborhoods and are facing “economic eviction” as rental prices escalate.  Service industry workers in restaurants, retailers, and blue collars are being forced to move to secondary markets and it’s not just Seattle where this is happening    

With an overall median income of less than $35,000, not only does the Bronx contain some of the nation’s poorest communities, but average rent is high at nearly $1,800 a month. Similar trends are occurring in other cities that are home to large pockets of low-income residents. Renters in Philadelphia, Brooklyn, Baltimore, and Miami are paying nearly 50% of their income toward rent, RealtyTrac reported.

The foreclosure crisis turned millions of former homeowners into renters, while years of economic uncertainty has kept many would-be buyers from leaving their rentals and making the leap into home ownership, according to Harvard’s Joint Center for Housing Studies. That has created big demand for rental housing and has helped push rents more than 21% higher since the housing market peaked in 2006.

Meanwhile, renters have been getting squeezed on another front: Real income Income after inflation is taken into account — has fallen some 14% over the past six years, according to Chris Herbert, the research director at Harvard’s housing studies center. This year, next year and 2015 each will see more apartments built in the region than in any of the previous 20 years. By 2017, developers could add as many as 42,000 units to the region’s supply.  About half those new units will be in Seattle, much of it concentrated in or near downtown, where and Apple’s newly announced engineering center and others are hiring thousands of new employees. Hard as it might be to imagine, some might view the rents here as cheap.

Since more than half of the population of Seattle rents their home (which is a high percentage for an American city) Apartment investors have been historically been bullish and therefore willing to accept higher prices and more modest cash flows as they look to hold their building for long term gain. While this holds true for the Puget Sound area and particularly so in the in-city markets, one must now ask: does this “new market place” make sense to the non institutional investor seeking to build a portfolio or achieve higher yields?

The more affordable areas in King County are in southern parts like SeaTac and Des Moines, and Kent where monthly one bedroom rents average $873 and $883, respectively. Contrasting the Seattle Core these areas also offer investors higher returns and an opportunity to benefit from what we believe will be the best multifamily investment opportunities in our region. Existing apartments in the secondary submarkets around Puget Sound are currently affordable. Apartment development and investment will flow into these markets and opportunities will be found in properties that can be repositioned or developed, are close to transit, or clustered around local retail centers. An example of this coming trend is the recently completed project by John Goodman “The Platform” in downtown Kent, and the current Tarragon construction of the 154 unit Kent Station Apartments which are located adjacent to the retail and transit hub of Kent station.

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