Puget Sound Overview
The Pacific Northwest continues to solidify its standing as a flight-to-quality market.
Renter demand — evidenced by rising rental rates and falling vacancy — continued to surge through mid-year. However, the third quarter brought about a marked slowdown across all markets, with one exception: East King County urban markets — and their suburban counterparts — experienced slowing rental rates, rising vacancy, or both.
Notably, the inevitable slowing of apartment sales due to threats of recession and massively rising interest rates is not yet evident in the data. In fact, quarterly sales volume is nearly on pace with previous years, and cap rates have yet to reflect interest rates nearly doubling from 12 months prior. That said, expect quite a different picture once end-of-year Q4 sales are posted.
Seattle’s urban neighborhoods are regaining their footing as far as renter demand, but investors are still wary to pay a premium to reenter these markets.
Sales volume and pricing slid during the height of COVID. Then, the path to greater pricing recovery experienced briefly from mid-2021 to early 2022 was stymied due to a lack of employers requiring their staff to return to downtown offices. Of course, this was also coupled with rising borrowing costs.
Renters clearly prefer to remain in Seattle’s urban neighborhoods post-COVID, as demonstrated by rising rental rates and falling vacancy until mid-2022. Even so, third-quarter data illustrates that a limited return to work is hurting sustained rental rate growth. Similarly, continued urban development is causing some imbalances in supply and demand.
Consistency is key in North King with rents and sale cap rates staying strong.
In 2022, we’ve seen more sales of smaller properties. Specifically, North King has accumulated $39 million in total sales volume year-to-date, but it’s also recorded more sales than last year. Additionally, we’re also seeing more private groups selling their smaller properties and exiting Seattle, whereas the larger institutional companies are holding tight. Meanwhile, cap rates were at 3.7% for the quarter and, with the Fed announcing several rate increases, these are all but certain to increase as we head into 2023.
Rents for North King County have stayed consistent from last quarter with vacancy just under 5% and rents slightly higher. Compared to last year, we’ve seen an 8% increase in rental rates with a decrease in vacancy. This can be attributed to employers moving back into offices and life returning to normal post-COVID.
East King continues to set records in the entire market, outpacing itself quarter after quarter.
East King continues to lead the region at $517,000 per unit and $580 per square foot. Current sales volume is also consistent with years past ($934 million to date), with 2021 proving to be an outlier. Accordingly, investors continue to seek out opportunities as Fortune 500 companies keep increasing their footprints in Bellevue and surrounding neighborhoods. In fact, East King multifamily investments are some of the most sought-after nationwide.
East King rents continue to rise with an average growth of 6% year-over-year. Vacancy has also continued to shrink across the board. And, by consistently claiming the highest rental rates in the entire region, East King is just as attractive for investors as it is for developers. As such, we continue to see new product delivered in Bellevue, Redmond, Bothell, and Woodinville.
For investors looking for stability, look no further than South King County, which boasts the highest occupancy in the region.
Overall sales volume in South King has slowed in 2022, but total transactions will be similar to 2021. However, despite fewer institutional transactions this year, we don’t expect this trend to continue — especially as loans start to mature from the massive sales in 2015 and 2016. Rather, we believe that the negative sales metrics (cap rate, price per unit, and price per square foot) are the direct results of the decrease in overall institutional sales.
South King County continues to boast the highest occupancy across the Puget Sound. Year-over-year, we see little to no supply due to the lack of new construction and continued demand for suburban apartments directly south of Seattle and Bellevue. Therefore, investors looking for stability should look no further than South King County.
Year after year, we continue to see rent growth paired with low vacancy.
In Q3, Snohomish saw its lowest cap rate within the last 10 years at 4.3% per sale. Moreover, investors were willing to pay a premium for properties with the highest dollar per unit ($280,000). And, after a record-breaking 2021 ($1.3 billion), Snohomish is on track to approach $1 billion in sales. In particular, investors looking outside of Seattle and its jurisdiction tend to focus on expanding cities, such as Lynnwood, Monroe, Lake Stevens, and more.
Rents stayed consistent quarter-over-quarter but have risen 5% since last year. Notably, Snohomish recorded the largest rent growth (33%) in the last six years in the entire region, thereby making it one of the best regions to invest in during the last decade. And, with some of the largest units, on average, Snohomish is sought out by residents who are willing to pay a premium for more space.
Strong metrics and compressed cap rates show Pierce County continues to be attractive for investors looking south.
Overall apartment sales are down dramatically from years past: This market has averaged 103 sales per year for the last six years, but it’s looking at just 50 to 60 transactions in 2022. Even so, the county isn’t waving the white flag yet; cap rates continue to compress and sales metrics are still very strong. As pricing approached that of King County, the frenzy for Pierce lost some steam, but the county still provides some of the best returns in the Puget Sound.
Overall vacancy in Pierce County remains below 4% for the third consecutive year. Many worried that the rush to suburbia during COVID would slow once the world returned to normal. Yet, despite a mere 3% growth in rent, rents continue to tick upward. Expect newer buildings and renovated units to help rent levels in Pierce trend in the right direction.
Institutional demand in Kitsap County continues to grow, proven by average sales in the $300K per unit range.
Kitsap County had its highest sales volume in 2021, so its regression in overall sales is not a surprise. While there have been fewer sales this year, sales volume is up 33% with a total of $136 million. Notably, institutional interest has continued in Kitsap and the average price per unit consistently sits around $300,000 per unit, which is a main effect of this trend.
Overall rent trends have continued to rise since we started tracking data, most recently with a 4.6% increase last quarter. In fact, rent increases seem inevitable at this point and continue to impress. Plus, the major difference in rent prices for classic versus renovated units shows just how compelling it can be to renovate units and push for a higher-quality renter as demand in Kitsap is still strong.
Read the full study at the link below.
Simon | Anderson Multifamily Investments Team
Dylan Simon, Executive Vice President
Jerrid Anderson, Executive Vice President
Matt Laird, Vice President
Brandon Lawler, Vice President
Winslow Lee, Associate Vice President
Max Frame, Associate Vice President
Henry Ruf, Associate
Jack Counihan, Associate | Financial Analyst