The Seattle multifamily market has reclaimed its position as one of the nation’s hottest, with a flurry of investment and development activity now targeting the Emerald City.

The metro’s apartment market saw about $396 million in transactions in the second quarter, more than double the first quarter’s $172.4 million, according to New York–based market research firm Real Capital Analytics. And a bevy of developers is increasingly breaking ground, with nearly 4,000 units expected to be completed in the city and its suburbs by the end of 2012, according to New York–based market research firm Reis.

“Seattle is one of those markets where you’re seeing an economic recovery, some job growth, and some really positive absorption trends,” says Dan Fasulo, managing director of Real Capital Analytics. “Now that everyone is convinced the worst is over, investors this time are being much more selective in which markets they’re picking.”

The fundamentals certainly prove it out. The Seattle apartment market hit the skids in 2009, with rents falling more than 6 percent and vacancies hitting 7.3 percent. But the pace of absorption has kicked into gear since then, with vacancies currently around 5 percent, and rent growth forecasted at 5 percent for this year and next, according to Reis.

Cap Rates Descend
As acquisition activity heats up in Seattle, yields continue to drop. In the second quarter, the average price per unit jumped to more than $143,000, up from $89,000 per unit in the previous quarter. And average cap rates fell precipitously, down to 5.1 percent, from 6.8 percent in the first quarter, according to Real Capital Analytics.

Institutional investor interest has picked up in a big way. Last year, only 8 percent of all multifamily transactions were bought by such large investors. But so far this year, 35 percent of the $568.4 million in transactions has been gobbled up by firms like JP Morgan, Deutsche Bank, and UBS. And foreign investment interest in Seattle is accelerating—12 percent of this year’s transactions are coming from cross-border investors, compared with about 3 percent last year, according to Real Capital Analytics.

Not surprisingly, there have been some pretty aggressive cap rates lately. Of the 13 trades closed in Seattle since the beginning of June, at least five featured cap rates of less than 5 percent. Some of these deals include Cornerstone’s $55.9 million buy of the 248-unit Pratt Park (4.3 percent cap rate); Equity Residential’s $49.4 million acquisition of the 251-unit Moda (4.5 percent); and Deutsche Bank’s $44.1 million purchase of two complexes called Eden Hill and Sweetbrier (4.8 percent).

Cranes in the Skyline
As yields drop in the acquisition space, more developers are crafting growth initiatives in Seattle.

Take Charleston, S.C.–based Greystar. In the past, the firm’s development footprint only extended as far west as Denver. But last November, the company acquired Seattle-based property manager Glacier Real Estate Services, with a portfolio of 640 units. The acquisition gave Greystar a foothold in the local market, and soon after, Greystar hired two managing directors on the West Coast, Jerry Brand and Ali Warner, to direct development efforts from Seattle down to Southern California.

The company is enamored with the city’s younger demographics and robust job growth and industry diversification. And of course, it’s a very high-barrier market, which should keep supply and demand in check.

“It’s a difficult market to establish scale in. The sites we’ve found that are developable and entitled tend to be fairly small, so you get into some denser construction, which makes it more complicated,” says Derek Ramsey, Greystar’s CFO. “But that’s why it’s interesting, because it’s difficult to add new supply. When the market starts running, it tends to run longer and harder than markets that have fewer barriers to entry.”

Phoenix-based Alliance Residential is also intent on growing its presence in Seattle and will soon start work on Broadstone Koi, a 166-unit mixed-use project in the Ballard submarket.

“And we’ve got another couple sites that we’re working on in Seattle,” says Jay Hiemenz, CFO of Alliance Residential. “And we’d like to do more.”

Alliance and Greystar certainly aren’t alone. Vancouver-based Holland Residential Partners broke ground in mid-July on a 284-unit mid-rise in Seattle’s South Lake Union neighborhood, just two months after breaking ground on another Seattle project, a 237-unit high-rise called 1200 Madison. And Arlington, Va.–based AvalonBay is building a 204-unit project in the Lower Queen Anne area and is looking to break ground on a 272-unit project in Ballard in the fall.