With its picturesque views, moderate climate, and proximity to both water and mountains, it’s no wonder Seattle is such a popular destination for businesses, investors, and renters alike. Situated at the heart of the greater Puget Sound region, Seattle’s strategic location and thriving economy have made the metro a commercial force in the Pacific Northwest for decades and one of the strongest multifamily markets in the nation.
Many historians claim that the city (in particular, its core) was built on and around “Seven Hills” when it was founded in the late 1860s—First Hill, Crown Hill, Denny Hill, Capitol Hill, Beacon Hill, West Seattle Hill, and Queen Anne Hill. Over the years, each has evolved into a bustling residential district and community of its own. The apartment sector is not exempt. Across all seven hill areas, rents have rebounded and, at $1,245, now exceed pre-recession levels. Occupancy, too, has increased, to 96.7 percent, just below 2007’s pre-recession level of 97.1 percent.
Seattle’s multifamily strength has been tried and true through the dot-com bust and the Great Recession. The city’s resiliency in weathering both downturns is a testament to its powerful economic engines, strong demographics, and desirable location.
Seattle’s economy has come a long way from its dominance by the logging industry in the mid-1800s, having become a flourishing, multifaceted economy driven by information and communications technology (ICT), aerospace, biotechnology, and clean technology, to name a few. Aerospace and ICT have long been key industries in the area, thanks to The Boeing Co., Amazon.com, and Microsoft, all of which hold headquarters or major corporate divisions in the Puget Sound region. Recently, however, the biotechnology industry has had a significant impact on the area’s economy and overall employment.
With an endowment of more than $36 billion, the Bill and Melinda Gates Foundation is a major supporter of Seattle’s global health and biotechnology industries, which account for more than 22,000 direct jobs in the metro. The foundation recently completed its home offices in South Lake Union, an up-and-coming area within Denny Hill. South Lake Union is home to several biotechnology firms, including the Fred Hutchinson Cancer Research Center, the Pacific Northwest National Laboratory, and the Seattle Biomedical Research Institute.
Seattle’s diverse economic engines played a key role in enabling the city to overcome the Great Recession. The U.S. national unemployment rate spiked to 10.1 percent in October 2009 and stood at 8.6 percent in November 2011; comparatively, Seattle’s unemployment rate reached only 9.1 percent during the downturn and currently stands at 8.1 percent.
Overall, the Seattle metro accounts for 1.93 million jobs and has an estimated gross metropolitan product of $218.8 billion. Besides Amazon, Boeing, and Microsoft, Seattle is considered the base for many other established Fortune 500 companies, including Starbucks, Nordstrom, and Costco.
It’s easy to see why Seattle’s economy has evolved over the years, as its dwellers are ingrained with the entrepreneurial spirit: In 2011, the metro had 13 firms on Inc. magazine’s list of the 500 fastest-growing companies. This counterbalance between established Fortune 500 companies and rising businesses creates the perfect atmosphere for members of the coveted Gen Y target market to gain employment and residency in Seattle.
Aside from having the largest concentration of population north of San Francisco and west of Chicago, Seattle enjoys a robust apartment market because of the age demographic of its 612,000 core population. Almost 19 percent of the population falls within the prime renter age range of 24 to 35, nearly 600 basis points higher than the national average. This trend is primed to continue as a bulge of approximately 80,000 20- to 34-year-olds is expected to hit the Seattle market in the next five years.
Another emerging trend within the Seattle area is the dramatic increase in the number of Baby Boomers reaching retirement age. Historically, over the past 20 years, an average of 18,000 people per year working in the Puget Sound region turned 65, and over the next 10 years, that number is projected to nearly double, to 34,000 a year. In addition, Conway Pedersen Economics estimates that the net migration to the Puget Sound region will total 60,000 people over the next five years, or an average of 12,000 annually. Taken together, all three demographic factors mean that over the next 10 years, Seattle’s population and age profiles will continue to favor multifamily investors and push demand for apartment units.
Indeed, even during the Great Recession, rental demand remained relatively healthy as the downturn’s impact on the Seattle multifamily market was minimized. The metro was both one of the last markets to fall within the recession’s grasp and one of the quickest to recover. During the slowdown, market rents went relatively unscathed, with a modest decline of only $14 from their pre-recession peak of $1,175 in 2007 to $1,161 in 2009. Investors did feel the recession’s impact on their net operating income, however, with increased economic losses primarily driven by concessions. Concessions spiked in 2009, with more than half (51.5 percent) of Seattle-area properties offering incentives to lure residents, effectively lowering rents by 10 percent.
One factor to consider when looking at the effects of the Great Recession on Seattle’s multifamily market is the condo-conversion craze. From 2005 to 2007, condo developers stripped 1,994 apartments from the city’s multifamily supply and converted them into condos. During this period, Seattle’s multifamily market experienced negative growth in overall units, resulting in an astounding 18.7 percent increase in rents. The pent-up demand for apartment units didn’t last long, however, as developers of proposed condo projects quickly adjusted course in response to the bursting of the housing bubble and the subsequent credit freeze. In 2009 and 2010, 2,843 units were added to the multifamily market and apartment vacancy rose modestly by 120 basis points from its peak of 2.9 percent in 2007 to 4.1 percent in 2010.
Seattle has long had a high barrier of entry for developers because its geographic characteristics and eco-friendly political atmosphere place significant hurdles before new development. Seattle encompasses 84 square miles bordered by Puget Sound to the west and Lake Washington to the east, with the 580-acre Lake Union intersecting the middle of the city. Indeed, water plays a major role in Seattle, which comprises approximately 41 percent water within the city limits and, as a result, is one of the most restrictive development regions in the country. The abundance of water and mountain ranges curtails growth to the east and west, leaving limited land for development. In addition, the Growth Management Act (GMA) requires state and local governments to manage Washington state’s growth by identifying and protecting critical areas and natural resources, and designating urban growth areas. Furthermore, in 2006, an environmentally critical area ordinance was implemented and essentially reduced the amount of developable land in Seattle by an estimated 35 percent.
Investors’ appetite for the Seattle multifamily market continued to improve in 2011. Through September, investors had purchased more than $1.22 billion in multifamily assets, a 40 percent increase in transaction volume over that for all of 2010 and 171 percent above 2009’s $450 million. Multifamily trades have primarily occurred in core Seattle locations. Take, for example, three recent transactions in prime Seattle locations trading between $325,000 per unit (the Marlborough House on Capitol Hill) and $350,000 per unit (Eden Hill and Sweetbrier on Queen Anne Hill) at a low 4 percent capitalization rate.
Developers, too, have exhibited renewed confidence in the Seattle multifamily market. Earlier last year, the Seattle Department of Planning and Development saw a jump in permit applications for new apartment projects as well as the restarting of old ones. Several projects are already under construction by prominent developers, including Holland Partners, Bentall Kennedy, Goodman Real Estate, AvalonBay Communities, and Vulcan.
Seattle’s distinct blend of geographic, economic, and demographic attributes will continue to bode well for multifamily investors and rank the Emerald City among the nation’s leaders in multifamily investor desirability. Having minimized the effects of the Great Recession, Seattle is poised to shine on in the future.