After a turbulent pandemic and post-pandemic environment, the market is showing signs of stabilization. Rents across Puget Sound are up slightly year-over-year, vacancy rates are holding around 7%, and cap rates in most submarkets appear to be settling in the low-to-mid 5% range.
While still somewhat cautious, investors continued their slow return to the market in the third quarter with sales reaching $983 million with a total of 60 transactions (up 83% and 46% year-over-year, respectively). At the same time, the average cap rate in the quarter across Puget Sound was 5.1%, which was flat year-over-year and down 30 basis points (bps) from last quarter.
Vacancy has also held relatively steady, coming in at 7% in Q3 2024. And now that higher interest rates and construction costs have led to a slowdown in new construction, we expect limited new supply in the coming quarters. As a result, vacancy should continue to decline slightly throughout the year as the recent wave of new supply is absorbed.
Most Puget Sound submarkets saw only modest year-over-year growth in rental rates this quarter with the majority hovering around 1%. Notably, the post-pandemic era has brought a relative softening in fundamentals, as well as a more muted outlook for growth in rental rates. As such, the coming quarters should see similar modest, but positive rental rate growth.
Now with the benefit of hindsight, it looks as though the majority of the post-pandemic cap rate expansion was already realized in the latter part of 2022 and 2023. Additionally, now that the Fed is forecast to cut rates, we may see some cap rate compression (if anything) in the coming quarters.
Seattle
As market-watchers and investors eye multifamily sales looking for a return of confidence and resulting transaction activity, Seattle stands out among the Puget Sound submarkets as sales volume bounces back well in excess of 2023 figures.
- Sales Insight
Sales volumes are returning strongly in Seattle – much more so than in other Puget Sound submarkets. Specifically, $1 billion in transactions took place year-to-date with $414 million in Q3 2024. Similar to the end of Q3 2023, we’ve already seen more than 40% volume than in the full year of 2023. As for cap rates, we’re seeing stabilization around the 5% mark. In fact, the average cap rate on transactions in Q3 2023 fell 45 bps quarter-over-quarter to hit 4.9%. - Rent/Vacancy Insight
Rents are holding fairly steady year-over-year in Seattle, up 1% from Q2 2023. As for vacancy, the market began to tighten last quarter as the newly delivered product continues to be absorbed. More precisely, vacancy rates among larger buildings (50 units or more) are still elevated relative to smaller buildings (8.6% versus 5.5% vacancy, respectively), largely due to the recent delivery of primarily larger product. Thus, as the construction pipeline continues to shrink due to higher financing and construction costs, we expect to see that vacancy delta narrow in the coming quarters.
North King
While sales volume in Q2 was strong, investor activity cooled off again this quarter. That said, progress is rarely linear, and we expect investment volumes to continue to rise as the market stabilizes and interest rates normalize.
- Sales Insight
Sales activity is still sluggish in North King with year-to-date sales volume totaling $50 million, down from $60 million (for the full year) in 2023. Granted, we still have another quarter to go before the end of the year, it remains to be seen whether 2024 volumes will surpass those of 2023. - Rent/Vacancy Insight
Rental rate growth is behaving similar to that of Seattle with average rents up about 1% year-over-year and down slightly quarter-over-quarter. Overall, rents have moved little throughout the last year and should continue slowly increasing in the coming quarters. Meanwhile, vacancy rates are still somewhat elevated in North King but should come down as recent developments lease up and stabilize.
East King
A slightly more volatile market in terms of rent growth and vacancy, East King is among the markets that have been exhibiting a slower return in sales activity. Therefore, pricing metrics – like cap rates and prices per square foot – should still be taken lightly.
- Sales Insight
East King is seeing investors return to the table at a slower rate with just three transactions recorded during the quarter for a total value of $174 million. As such, the approximately 80-bps drop in average cap rates (both year-over-year and quarter-over-quarter), should be taken with caution, yet it remains clear that capitalization rates in East King are the lowest in the region. - Rent/Vacancy Insight
We’re seeing rental rates show a bit more volatility in East King relative to other counties with rents up 4% to 5% year-over-year, but down 3% to 4% from last quarter. It’s worth noting here that vacancies are also up from both Q2 2024 and Q3 2023, hovering in the mid-6% range (still a reasonable level in a healthy market).
South King
Vacancy rates in South King continued to subside in the third quarter as the wave of new, pandemic-era development sees its units lease-up. Plus, along with improving fundamentals, investors are returning to the table – they’ve transacted $405 million in volume year-to-date, which is on par with the full year 2023.
- Sales Insight
With $405 million in sales volume year-to-date (roughly the same figure as the full year last year), any further sales in Q4 will mark a year-over-year improvement from 2023. On the valuation front, cap rates in South King appear to be stabilizing at a similar level to those of most Puget Sound markets (in the low- to mid-5% range). - Rent/Vacancy Insight
Rental rates are largely flat in South King with no significant moves either year-over-year or quarter-over-quarter. However, vacancy continues its trend downward, returning to the historical average as new supply is absorbed.
Snohomish
Both rent and vacancy rates in Snohomish have been remarkably stable throughout the last year, which may help encourage investors to continue to return to the table. On that note, sales have been showing signs of life lately, although we may not start seeing more normal transaction levels until 2025.
- Sales Insight
Sales were strong in Snohomish this quarter volume-wise with total volume hitting $81 million – up 295% and 174% from Q2 2024 and Q3 2023, respectively. However, volumes are still well below the 2023 total of $325 million, which indicates that investors may still be exhibiting caution. Even so, with seven transactions recorded, cap rate visibility is returning and indicating an average cap rate in the mid- to high-5% range. - Rent/Vacancy Insight
Vacancy rates didn’t change much from last quarter, ticking up 10 bps among both larger and smaller multifamily assets. Much like the majority of Puget Sound submarkets, rental rates are up modestly from the same period last year, showing only a small degree of volatility from quarter to quarter.
Pierce
In 2023, Q3 saw such little activity that no cap rates were reported. Conversely, this year’s Q3, the market is experiencing greater clarity regarding multifamily valuation in Pierce County.
- Sales Insight
Multifamily investors in Pierce are slowly wading back into the water with a total of 11 transactions in the quarter valued at $53 million in aggregate. Here, the average cap rate recorded this quarter was 6.1%. That brings the year-to-date average to 5.9%, which is roughly in line with the other, less-urban Puget Sound markets. - Rent/Vacancy Insight
After a year of little movement in rental rates or vacancy, stabilization is returning. This should come as welcome news to investors, many of whom still sit on the sidelines waiting for the right time to redeploy capital.
Kitsap
Kitsap is still experiencing a notably soft sales market (despite the healthy, 5% annual growth in rental rates) with only one transaction recorded in Q3 and no reported cap rate.
- Sales Insight
Investment activity continues to return to Kitsap, even though it remains well below pre-pandemic levels. Thus, with only one transaction this quarter and no cap rate recorded, there remains little readthrough to valuations in Q3. However, transactions year-to-date indicate cap rates in the mid-5% range. - Rent/Vacancy Insight
Larger multifamily assets (more than 50 units) recorded significant positive net absorption during the quarter as newly constructed buildings continue to lease up. At the same time, the vacancy rate among these assets fell 210 bps sequentially to 10.7%. Finally, rent growth for this segment has also stood out within Puget Sound after climbing 5% year-over-year and 2% from last quarter.
About the Dylan Simon and Jerrid Anderson apartment brokerage team
The apartment brokerage team led by Dylan Simon and Jerrid Anderson of Kidder Mathews represents apartment investors, developers, and landowners in the sale and purchase of apartment buildings and development land across the entire State of Washington. The team of 10 brokerage professionals specializes in the sale and purchasing of apartment buildings and development land from $1 million to more than $100 million. For more information, visit simonandersonteam.com.
About Kidder Mathews
Kidder Mathews is the largest fully independent commercial real estate firm in the Western U.S., with over 900 professionals in 19 offices across Washington, Oregon, California, Idaho, Nevada, and Arizona. We offer a complete range of brokerage, appraisal, asset services, consulting, and debt & equity finance services for all property types. Kidder Mathews averages over $10 billion in transaction volume, manages more than 57 million square feet of space, and conducts 2,600 appraisal, consulting, and cost segregation assignments annually. For more information, visit kidder.com.
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Contact
Simon | Anderson Multifamily Investments Team
Dylan Simon, Executive Vice President
Jerrid Anderson, Executive Vice President
Matt Laird, First Vice President
Max Frame, Vice President
JD Fuller, Associate
Jack Shephard, Associate
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