The Puget Sound market entered Q1 2022 on a bull run, fueled by strong apartment rental rate growth and low interest rates punctuated by the lowest cap rates in the region’s history. But, as we all know, the good times can’t last forever. And, as the quarter ended, the good times of artificially low interest rates began to taper off — as did sales pricing.
However, before a run on the 10-year Treasury put a wet blanket on exuberance in the capital markets, the apartment market enjoyed a strong ride of high sales prices — especially in Eastside and suburban markets. Dating back to the summer of 2021, trailing sales demonstrate a returned investor appetite for apartment investment in the Puget Sound, although these are not necessarily a predictor of sales volume or pricing for the rest of 2022.
So, where do we go from here?
The Puget Sound’s economic fundamentals remain the strongest in the nation and the solid rental rate growth and stable occupancy levels demonstrated throughout the last quarter demonstrate health in the region’s rental market. As such, we expect pricing to stabilize and remain strong as investors continue to seek a seat at the table in this market. For additional insights into each of the Puget Sound’s geographic markets, please reach out to the experts on our team.
PUGET SOUND OVERVIEW
A strong end to 2021 leads to an even stronger start to 2022
The end of 2021 looked almost nothing like the start to the year: Rapidly rising rental rates, plummeting vacancy rates, and huge sales volume and pricing marked the end of 2021. Then, continuing this trend, the start of 2022 went off like a gun!
In Q1 2022, nearly every investment metric telegraphed health and vibrancy for the region’s apartment market: Rental rates rose across all markets (despite winter months that are, traditionally, a time of declining rental rates) and occupancy remained high. Investors also flocked to the Puget Sound, seeking to place bets on the future of the region and take advantage of historically low lending rates.
Meanwhile, interest rates began another historic trend — this time upward — as the quarter wound down. Accordingly, we’re all keeping a close eye on how Q2 sales pricing reflects trends seen in Q1 2022.
Urban King Market Trends
- Apartment rental rate growth continued in Seattle with 90-day growth of 1.7% (6.8% annualized). While this statistic alone is impressive, rent growth in the winter — Seattle’s slowest leasing season — is a bellwether of what’s to come.
- Although quarter-over-quarter vacancy in Seattle increased 0.2% to 6.2%, we’re not concerned; with the turbulence of who’s going back to work and when, we expect another 12 months of vacancy around 6% as the market absorbs the supply of new apartments and office alike.
- Buildings with five to 50 units continued to post much lower vacancy rates (4.6%) than 50+ unit properties (7.0%); however, they’ve also experienced much lower rent growth. In this case, the main factor is that Seattle’s smaller buildings are much older and privately owned/managed, with an emphasis on keeping units full.
Urban King Sales Trends
- In Q1 2022, sales volume dropped drastically, which is always expected after the rush of year-end closings. For comparison, we saw nearly the exact same price per foot and per unit in the same timeframe last year, but cap rates in Q1 2021 were 5.6%, whereas cap rates in Q1 2022 were 3.9%.
- In Seattle, price per unit and price per square foot were down substantially from 90 days ago. This was driven by institutional-grade properties closing out the end of year in 2021 — not by a decline in buyer demand — and is confirmed by lower cap rates in Q1 2022 (3.9%) than in Q4 2021 (4.1%).
- North Seattle looks to have been the best buy during Q1 2022 with the highest cap rates in Seattle proper (4.9%). Granted, investor demand always trails renter demand, and it’s a trend worth noting as residents position themselves to be near work as traffic continues to pick back up.
North King Market Trends
- Rents have increased by more than 10% since just over a year ago. And, although vacancy may be slightly higher, this is to be expected with this type of rent growth.
- There was a large push to close deals at the end of Q4 2021 with sales numbers high across the board. Cap rates are also continuing to rise as interest rates increase. These factors, combined with rents climbing, will maintain North King’s status as an area where investors continue to look for opportunity.
North King Market Trends
- During the middle of COVID in 2021, sales were down. But now, sales have bounced back and are trending on pace with previous years.
- The price per unit spiked last year at $367,000 per unit; thus far, 2022 sales are more in line with historical prices at just under $270,000 per unit.
- As companies prepare to return to the office, expect vacancy to decline as employees move closer to work in surrounding Seattle neighborhoods.
East King Market Trends
- Once again, East King led all other regions in the highest average rent across all building ages at nearly $2,400 per month, which was $300 higher than Urban King. What’s more, East King also boasted the highest regional rent growth at 19% in the last year, as well as 7% in the last 90 days.
- East King did a tremendous job absorbing newly delivered units during the last 12 months, with vacancy falling 270 basis points (bps) to a healthy 5% average vacancy rate. Expect this trend to continue as 30-something renters settle down in amenity-rich, suburban/urban hubs.
- There’s still a lot of development opportunities on the Eastside outside of the main, go-to markets. Consequently, expect developers building thoughtful projects in great cities like Woodinville, Issaquah, and the Snoqualmie Valley to be rewarded handsomely.
East King Sales Trends
- Investors continue to be bullish on East King and are willing to pay top dollar to be close to burgeoning job centers and tech hubs, with two institutional deals selling for more than $600 per square foot in Bellevue and Redmond.
- Equally as impressive is the demand for value-add apartments in East King: Built in 1984, The Martine in Bellevue sold for a whopping $480,000 per unit and more than $500 per square foot.
- While it can be a challenge to collect cap rate data on every deal, it’s worth noting that Arras in Bellevue — which was built in 2019 — sold at an astounding 2.0% cap rate.
South King Market Trends
- South King County continues to boast one of the strongest overall occupancy rates in the Puget Sound due to its low development absorption: Only 326 new units were delivered in the last 12 months.
- Rent hikes in Seattle and Bellevue were strong contributors to the 13% increase in rent in the last 12 months. As workers and tenants continue to get priced out of Urban King, cities such as Renton and Burien become more affordable havens.
- South King has not had a negative average year-over-year (Y-o-Y) rent drop since the Great Recession. And, even if we’re in a “rental bubble” right now, the drivers for South King County are too strong. Along with the amount of momentum in the area, we’re confident that this trend will continue.
South King Sales Trends
- For the first time since we’ve been tracking sales data, South King County recorded an average cap rate below 4%. There are many factors at play for this all-time low, 3.9% average cap rate, including rent increases, high occupancy, and overall confidence in this market long-term.
- With only nine sales in Q1 of 2022, we’re on pace for a nearly 30% decrease in total sales. And, while a drop in sales volume is expected with the lack of inventory on the market in this region, only time will tell whether this volume picks back up. Our prediction: Overall building sales will be down in 2022, but total sales volume will pick up strongly as more institutional, post-value-add, garden-style product starts to hit the market.
- Expect the average price per unit for five- to 50-unit sales to move above $200 per unit; word from investors is that anything less than $200 per unit is going to get bought up fast.
Snohomish Market Trends
- Rents continue to increase here — up 4% in the last 90 days. Vacancy is at a healthy 4.9%, which is the result of turnover as owners raise rents to market rate.
- Cap rates have been trending downward by almost 2% in the last two years. An aggressive market has proven that investors want to be in Snohomish and are willing to pay a premium for it.
- With some of the largest units per square foot in the Puget Sound, Snohomish has made itself attractive to tenants who work from home and are yet to fully move back into the office.
Snohomish Sales Trends
- Snohomish owners have seen their properties increase substantially in value in the last several years and this is in direct relation to the where cap rates are. In 2018, cap rates were at 6.2%, whereas, today, properties are trading at 3.5%. Investors continue to invest heavily into Snohomish County as a whole.
- Coming out of COVID in 2021, sales were few and far between. Then, by the end of 2021, we saw a resurgence of deals, with transactions totaling more than $1 billion. Now, 2022 is off to a fast start and will look to rival 2021 in both sales volume and number of sales. And, as interest rates rise, it will be telling to see where cap rates finish at the end of 2022.
Urban Tacoma Market Trends
- Urban Tacoma has continued to see a rise in vacancy as tenants and workers search for more affordable housing options in suburban Pierce County.
- This vacancy trend could continue; we’re going to see an influx of new-construction units that are being delivered to the market around the downtown light rail station and waterfront.
- That said, as more tech startups enter “(tech)oma” and the whispers of Amazon coming to the city get louder, the demographics and quality of apartments will continue to be extremely attractive to buyers and tenants alike who are looking for the highest quality product south of Seattle.
Urban Tacoma Sales Trends
- With less than 8,000 units in the entire region, it comes as no surprise that there were only three sales in Q1 of 2022.
- We don’t expect this sales volume to trend dramatically upward, but the price that investors are paying to be in urban Tacoma shows a lot of promise for the area: The 90-day change in price per unit and price per square foot were both up more than 100%.
- Certain development sites on the market right now will prove how the current market views urban Tacoma as the debt market really shifts. Specifically, keep an eye out for the Foss Harbor development site; the Tacoma “super-block” 12th & A Street Lofts site; and the Ship Lofts site for examples of how investors are viewing the future of Tacoma.
Suburban Pierce Market Trends
- The name of the game for suburban Pierce County in the last two years has been low vacancy and high delinquency. Fortunately, the county has been more helpful in covering delinquency than any other county we cover (by a longshot), which is helping to flatten the delinquency curve.
- Rents in Pierce County peaked at $1,500 for the first time at the end of last year and continue to trend in the right direction; tenants are still getting up to a 30% discount compared to urban King County and more than a 35% discount compared to East King County.
- We’re starting to see nicer renovations and finishes in certain markets — such as Lakewood and Parkland — that never had enough demand for those units. Consequently, this new demand is providing more upside for deals, as well as making the South Tacoma market more attractive for investors chasing yield outside of King County.
Suburban Pierce Sales Trends
- The moral of the story with the numbers below: Don’t buy into them. Only two sales in Pierce County is not the new normal; it’s a fluke. For a county that has averaged 79 sales per year in the last five years, we expect many listings and sales to be coming through the pipeline — and we already see it in the start of Q2.
- The overall confidence in suburban Pierce County continues to remain extremely strong. From a 4.4% cap rate in Q4 2021 to a 3.4% cap rate on the small sample size we have for Q1 2022, we’re seeing buyers take riskier bets for South Tacoma.
- Expect to start seeing more post-rehab sales cycle through the market again this year, which will confirm the price per unit and price per square foot of suburban Pierce County.
Kitsap Market Trends
- Kitsap County continues to be highly desirable to renters, apartment investors, and developers alike. This demand is spurred by the appeal of “island life,” coupled with steady job and demand drivers — such as a new Amazon fulfilment center, Microsoft’s Silverdale AI-focused campus, and a new $500 million medical center.
- Surprisingly, Kitsap County boasts the second-highest patents held per capita in the nation, trailing only Silicon Valley’s San Jose County.
- With a renter pool largely comprised of members of the military, apartment owners stand to benefit from the increase in military rental allowance, which ranges from $1,500 to $2,700 per month. As such, expect new and renovated units to continue to command strong rent increases on renewals and recently signed leases.
Kitsap Sales Trends
- Sales volume has been slow to awaken from hibernation this year, with only two small apartment sales thus far in Kitsap County. Even so, we anticipate sales to pick up drastically throughout the county soon; our team is already working on a handful of exciting deals.
- Expect to see an uptick in post-value-add sales throughout the course of the year as apartment investors capitalize on strong cash-flowing properties with future upside from bourgeoning rental rate growth in renovated units.
- We predict that 2022 will be the year that we see the first efficiency-unit apartment building completed; if sold, it would surely be a record-setting price per square foot sale for the county, by a long shot.
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, Senior Associate
Brandon Lawler, Associate Vice President
Winslow Lee, Associate
Max Frame, Associate
Jack Counihan, Associate | Financial Analyst