Seattle—As Microsoft and Boeing go, so goes the Seattle apartment market. The city’s two biggest employers have been hiring at a torrid pace, keeping the area’s multifamily market booming.
“What we see is an economy that is doing well that is being supported by a couple of bellwether companies,” said Sam Chandan, chief economist of New York-based market research company Reis, Inc. “The first half of the year has already demonstrated the resilience of the market and the underlying strength of some of the drivers there.” Microsoft added about 2,400 employees in Washington over the 12 months ending in June, a 7.1 percent increase from a year earlier.
In February, Boeing said it had a $250 million backlog of orders. That pipeline is likely to keep hiring strong even after the aircraft maker added 6,000 employees in Washington last year.
“As long as Boeing and Microsoft are generating tons of jobs, you know there’s going to be some substantial growth,” said Greg Willett, vice president of research and analysis with M/PF Yieldstar, a Carrollton, Texas-based market research company.
Those high-paying jobs have helped support both an expensive housing market and steep rents. Rent increases in the Seattle metro area averaged 6.2 percent in the first quarter, up from 3.7 percent a year earlier, even as the vacancy rate fell to 5.2 percent from 5.7 percent, said a report from Hendricks & Partners, a Phoenix-based apartment sales and research firm.
That increase pushed average rents up to $913 from $859 in 2006, according to the report. The highest rents were in the downtown Seattle, Redmond, and Bellevue submarkets, which all boasted average monthly rents of more than $1,100.
Home values driving rent growth
At the same time, “the local forsale real estate market has bucked the national trend, seeing home values increase rather than stagnating,” said the report. Median home values in the Seattle area jumped 16 percent last year, and are expected to continue increasing. That will benefit the multifamily market as more residents are priced out of the home-sales market and enter the pool of potential renters.
“In a lot of places, we’re seeing rental single-family homes emerge as an option that are stealing away a lot of the demand that went to apartment communities, but you don’t really see that in Seattle,” said Willett. “The homes are just too expensive.”
The metro area’s rental market also likely will be sustained by the projected addition of more than 85,000 residents in the 20- to 34-year-old age group over the next five years, a group that is made up largely of renters, according to brokerage firm Marcus & Millichap.
Rent gains may be constrained a bit by an increase in the supply of rental units. This year alone, more than 2,600 new units are expected to be delivered, with more than 1,000 completed in the first quarter. That’s more than twice the number of units completed in 2006. And the metro’s apartment inventory is projected to expand by another 3,300 units in 2008.
Buyers don’t shy from high prices
Meanwhile, buyers are snapping up Seattle-area properties. Capitalization rates have fallen steadily for more than half a decade, from 7.5 percent in 2001 to 4.9 percent so far this year, according to Dupre + Scott, a Seattle-based apartment research firm focused on the Puget Sound region. A capitalization rate represents a property’s net operating income divided by the sales price, expressed as a percentage.
The average sales price per unit was $124,198 as of June, up 12 percent from 2006, a Dupre + Scott report said. That’s on top of price gains of 16 percent last year and 14 percent in 2005.
Transaction volume is also likely to remain close to record levels this year. Volume peaked at $3 billion in 2005 before falling to $2.8 billion last year, according to Dupre +Scott. Volume this year is projected to be about the same as it was in 2006.
One of the most active buyers this year has been Beverly Hills, Calif.-based Kennedy Wilson Multifamily, which has acquired more than 1,400 units in the Seattle area worth almost $200 million this year.
The company’s most recent purchase was the $80 million acquisition of The Mill at Mill Creek, a 516-unit complex located in Mill Creek, a community about 20 miles north of Seattle. KW Multifamily was joined in the transaction by partner RREEF Real Estate, a unit of Deutsche Bank’s asset management division. KW Multifamily plans to spend $7.2 million to renovate the property.
“Categorically, what you’re seeing throughout Seattle right now is a lot of rehab,” said Kenny Dudunakis, a broker in the Seattle office of Hendricks & Partners. “There are a lot of investors coming in and buying up mid-’80s vintage buildings and putting $5,000 to $7,000 per unit into rehab,” he said. “We’re seeing anywhere from $150 to $300 in rent growth.”
With the possibility of gains like that, buyers are likely to be chomping at the bit to purchase Seattle apartment properties for quite a while longer.