The Seattle MD Apartment Market Report Volume 14 Issue 2, May 2015 Was 2014 the Peak? In 2014 the Seattle Metropolitan District saw record figures in regards to employment and apartment demand. An astounding 11,010 total units were absorbed by the market, more than doubling the 2013 demand (5,350 units), and beating our original 2014 demand predictions of 9,500 units handily. Combined with a reduction in the vacancy rate, down to 2.9% in 2014, from 2013 s 3.7% vacancy rate, the market is in a very strong position entering 2015. Of the 11,010 units of demand in 2014, 8,839 of them were new units. Demand in the region remains high, and will be needed, as over 20,000 new units are expected to enter the market in 2015 and 2016. Part of the massive demand in 2014 can be explained by the large job growth seen during the year, when the Seattle MD gained 46,200 jobs, beating predications and continuing a trend of consecutive job growth of over 40,000 jobs per year from 2012-2014. While local economists have predicted job growth not to be quite as strong as that seen in 2014, there is still predicted to be a growth of over 71,000 new jobs between 2015 and 2016. Despite being slightly less than 2014, 40,987 new jobs in 2015 and 30,680 in 2016, job growth during that time will by no means be weak. Job growth is predicted to remain strong through 2015 and 2016, however, there is still a slight decline from 2014, which was a record year. This will effect vacancy rates, as there will be slightly less demand in 2015 and 2016, resulting in a level vacancy rate in 2015 of 2.9% and then a slight increase to 3.3% vacancy rate in 2016, as more units enter the market and we begin to trend more towards market equilibrium (a 5% vacancy rate). The Seattle MD market is a complex region, with many factors driving job growth, migration, and demand. The area has emerged as a tech sector giant, a great place to do business, and as an area appealing to companies as a location to make a start, or to expand. Numerous companies have opened tech and engineering satellite locations in the Seattle MD, primarily in the city of Seattle. This growth comes, in part, from an exodus occurring in Silicon Valley, where housing and office prices have become so extreme that the comparatively inexpensive cost of operating in Seattle (along with a few other select Seattle-Bellevue-Everett MD Vacancy History Year-End Mid-Year Year-End 2013 2014 2014 Seattle 3.3% 2.4% 2.7% Eastside 4.5% 3.0% 3.4% Southend 3.6% 2.6% 2.3% Snohomish 4.0% 4.2% 3.5% Metro Total* 3.7% 2.6% 2.9% Seattle-Bellevue-Everett Vacancy Forecast Mid-Year Year-End Mid-Year 2015 2015 2016 Seattle 2.9% 3.0% 3.5% Eastside 2.9% 3.3% 4.0% Southend 2.3% 2.1% 2.2% Snohomish 3.4% 3.3% 3.5% Metro Total 2.8% 2.9% 3.3% cities) is bringing a mass of new businesses, and their employees, into the region. Adding to the Silicon Valley migration, and driving up demand in the Seattle MD, is a decreased average house hold size. Seattle is rapidly becoming a city of single occupants, where much of the new apartment construction, some 80% of new units, are built for a single occupant (i.e. Micro-units, studios, and small one bedrooms). Construction focused on smaller units alters the demand as more units are being occupied by less people, leading to the record demand. Lastly, there continues to be a battle for renters between the City of Seattle versus the Eastside, where Seattle remains dominant and captures the majority of new renters, and the new supply, as people are favoring the lifestyle available in Seattle, even though the Eastside may be closer to their workplace. When considering 2015 and 2016, we must ask, has the peak of the Seattle MD s apartment demand been reached? While we are not expected to see the record growth in 2015 that we experienced in 2014, we do expect strong but moderating growth. ~Brian O Connor, MAI, CRE SeattleMetro Two-Year Apartment Market Summary Year-End 2014 % 2 Year 2 Year S/D 2 Yr. Vac. Vacant Demand Supply Net Rate** Seattle 2.7% 11,644 13,168 1,524 3.4% Eastside 3.4% 3,993 4,738 744 4.3% Southend 2.3% 1,150 1,145-4 2.2% Snohomish 3.5% 1,464 1,529 65 3.5% MD* 2.9% 18,251 20,580 2,329 3.3% **Two-Year Vacancy rate is 1st Quarter 2017
T a b l e o f C o n t e n t s Vacancy Forecast..1 Vacancy Forecast Charts.2 V a c a n c y.. 3 Employ ment Fo reca st 4 Population Forecast..4 Apartment Demand..5 A b s o r p t i o n. 5 Supply Forecast.5 Supply and Demand.6 Rental Rate Forecast 7 Condo minium Talk.7 Under Construction Map...8 Jobs & Absorption by 9 Vacancy Forecast The graphs below illustrate our vacancy forecast for each of the four primary Puget Sound markets. Please note that these graphs reflect physical vacancy, not economic vacancy. Economic vacancies are typically one or two points above physical vacancies. We expect the vacancy rate of all the submarkets to increase slightly throughout our forecast period, except the Southend submarket which has a lack of new construction or proposed apartment projects. The Seattle Apartment Market Report is a publication of the O Connor Consulting Group, a Seattle-based real estate appraisal and consulting firm specializing in mixed-use multifamily and commercial property valuation and consultation. For more information regarding these services please contact Brian O Connor, MAI at 206-622-5100 The Seattle Apartment Market Report is edited by: Casey O Connor, Associate.
Vacancy Our Year-End 2014 vacancy survey covered approximately 140,000 units. Overall, physical vacancy was estimated at 2.9% for the Seattle MD and is allocated among the primary markets and submarkets as shown below. The Seattle MD vacancy rate decreased in 2014 from 3.7% in 2013 to 2.9% by year end 2014. The decline in the vacancy rate was a result of a historic amount of demand. This decline was also in the face of a historic amount of supply considering that the Seattle MD added over 4,000 new units in six months. We believe we have reached the peak of the apartment boom in the Seattle MD. As additional new supply enters the market over the next few years, we expect the vacancy rate to gradually increase throughout our forecast period. PUGET SOUND APARTMENT MARKET December 2014 Vacancy Survey SEATTLE SNOHOMISH COUNTY Units Vacancy Percent Units Vacancy Percent Ballard 720 28 3.9% Edmonds 1,346 45 3.3% Beacon Hill 715 0 0.0% Everett 10,752 484 4.5% Belltown 3,814 141 3.7% Lynnwood 5,620 178 3.2% Capitol Hill 1,186 31 2.6% Marysville 447 13 2.9% Central 995 28 2.8% Bothell/ Mill Creek/ Canyon Park 8,149 230 2.8% Delridge 2,618 53 2.0% Monroe 222 2 0.9% Downtown 1,436 30 2.1% Mukilteo 1,550 67 4.3% First Hill 1,691 57 3.4% Snohomish 152 6 3.9% Fremont, Wallingford, Greenlake 617 25 4.1% Arlington 267 6 2.2% Greenwood 707 6 0.8% Lake Sevens 99 1 1.0% Industrial District 0 0 0.0% Mountlake Terrace 1,691 55 3.3% Interbay 0 0 0.0% Subtotal 30,295 1,087 3.6% Lake City 939 15 1.6% Lake Forest Park 297 3 1.0% SOUTHEND Lake Union 2,151 93 4.3% Magnolia 336 22 6.5% Units Vacancy Percent Northgate 1,945 35 1.8% Burien 1,831 29 1.6% Pioneer Square & Intrl District 450 7 1.6% Des Moines 1,407 29 2.1% Queen Anne 1,008 32 3.2% Tukwila 1,294 12 0.9% Rainier Valley 539 31 5.8% Seatac 2,244 18 0.8% Ravenna/Sand Point 456 7 1.5% Federal Way 8,909 313 3.5% Seward Park 0 0 0.0% Kent 9,704 229 2.4% Shoreline 1,615 44 2.7% Auburn 2,787 32 1.1% University District 1,221 5 0.4% Algona/Pacific 349 7 2.0% West Seattle 1,145 31 2.7% Renton 9,626 259 2.7% Subtotal 26,601 724 2.7% Enumclaw 219 6 2.7% Subtotal 38,370 934 2.4% EASTSIDE Units Vacancy Percent Units Vacancy Percent Fife/Milton 1,356 10 0.7% Downtown Bellevue 2,238 61 2.7% Fircrest/University/Dupont/Steilacoom 1,371 32 2.3% Suburban Bellevue 5,912 131 2.2% Gig Harbor 551 19 3.4% Kirkland 3,698 168 4.5% Lakewood 1,807 74 4.1% Redmond 4,866 138 2.8% Puyallup/Sumner 2,649 68 2.6% Issaquah 1,580 80 5.1% Tacoma 12,589 397 3.2% Sammamish 1,224 51 4.2% Downtown Tacoma 1,292 23 1.8% Newcastle 401 2 0.5% Subtotal 21,615 623 2.9% Snoqualmie 120 3 2.5% North Bend 281 5 1.8% Mercer Island 1,226 65 5.3% County Kenmore, Bothell, Woodinville 2,427 98 4.0% Subtotal 23,973 802 3.3% Seattle Source: O'Connor Consulting Group, LLC Eastside Southend Snohomish Seattle-Bellevue-Everett MD Weighted average by submarket size PIERCE COUNTY Summary by County/MD (Weighted) Vacancy 2.7% 3.4% 2.3% 3.5% 2.9%
Employment Forecast The Seattle MD continues to out perform the rest of Washington State and the nation with respect to employment, adding 46,200 jobs during 2014. That is a growth rate of 3.1%, the highest since 2006, and a record for total number of jobs gained. The Seattle MD remains a s t an dou t market n at io nwid e. Unemployment continues its downward trend and healthy job growth in forwardlooking industries helps position the Seattle MD as one of the top regions for job creation. Population Forecast Our forecast of vacancy and rental changes are driven primarily by anticipated population growth in the region. The chart below displays the historical relationship between net migration and net employment growth in the Seattle metropolitan area. As is evident in the chart below, net migration is heavily dependent upon net employment growth.. Migration rates are sensitive to both local economic conditions as well as economic conditions elsewhere. The pattern of future job growth will determine the pattern of net migration and thus population growth and household growth. Based on the April 1, 2014, As of December 2014 national unemployment was at 5.6%, Washington state was at 6.3%, and the Seattle MD was at 4.6%. Looking forward, local economists Dick Conway and Doug Pederson predict employment growth to slow over the next few years. They estimate Seattle MD employment growth at 2.64% in 2015, and 1.93% in 2016. These increases in job growth would represent approximately 71,500 new jobs over the next two years. We cannot talk about employment in the Seattle MD without population increase of 45,850 people, we have an estimated net migration figure of 28,400 people for 2014, and 14,500 for 2015. The 2014 estimate would be the largest net-migration for the Seattle MD since 2006. It is fascinating that despite historically lower net migration figures, the Seattle MD continues to absorb a healthy amount of apartment units. We believe that this is due in large part to a shift in household tenureship and a smaller household size. We are currently experiencing a significant shift away from ownership and toward the rental market. Despite historically low interest rates, there are a multitude of factors that are currently acting upon potential mentioning the rapid expansion of the internet based retail giant, Amazon.com. Amazon currently employs approximately 30,000 people in the South Lake Union neighborhood in Seattle. This estimate is based upon current occupied office space, and previous statements made by Amazon. Considering what is currently leased, under construction, and proposed, Amazon will reach somewhere between 40,000 and 50,000 employees in SLU in 10 years. buyers that make renting a more attractive option. We believe that this trend may be one of the most significant factors acting upon the Seattle MD apartment market today and strongly encourage the reader to download our PDF on Housing Tenure, which can be found on the same web page as this newsletter. Despite the hiccup in net migration experienced in 2010/2011, Seattle remains one of the healthier regional economies in the nation. Due to this factor, we believe net migration will be positive moving forward (averaging over 14,500 per annum through 2017) despite the notably slow national recovery. 80,000 Net Migration vs. Net Employment Growth 60,000 40,000 20,000 0-20,000-40,000-60,000-80,000-100,000 Net-Migration
Apartment Demand Despite the economic turmoil of years past, the Seattle MD is one of the most economically attractive regions in the nation, regularly receiving attention in nation-wide publications due to the area s strong base with forwardlooking industries such as aerospace, biotechnology, and software design. Given the area s strong fundamentals, expected net positive migration, and the recent employment forecast by Dick Conway and Doug Pederson, we believe that positive growth will continue. In the first half of 2014, the Seattle MD experienced over 9,000 units of demand (4,414 new units and 4,891 existing units). By the end of 2014 we saw the demand jump up to over 11,000 Absorption The Seattle MD absorbed a staggering 8,839 new units but only 2,171 existing units by the end of the year in 2014. Important to note is that out of the 8,839 new units absorbed, the Seattle submarket captured 72% or 6,364 new demand. For reference, the Seattle submarket historical captures approximately 50% of the demand. The Snohomish submarket captured the second highest amount of new units during the first half of the year (15.6% or 1,377 new units). Supply Forecast total units absorbed. Looking forward, we forecast demand in the Seattle MD to near 9,500 in 2015 and remain over 8,500 units in 2016. The Seattle MD has not seen consistent levels of demand over 5,000 units on an annual basis since the apartment boom in the late 1980 s. The current boom is smaller than the boom in the 1980 s but the demand numbers we are experiencing have not been seen in approximately 25 years. The year 2014 may have been the peak year with respect to the gap between supply and demand, where the vacancy rate was as low as 2.6% at mid year, and only a slight increase to 2.9% by year end. We expect demand to remain strong in our forecast period. Metro Area Market Demand Summary 2013 Mid-214 Year End 2014 Vacancy Rate 3.7% 2.6% 2.9% Market Size 448,195 452,609 457,174 Occupied Units 431,554 440,859 443,966 New Units Absorbed 6,213 4,414 8,839 Existing Units Absorbed -863 4,891 2,171 Total Demand 5,350 9,305 11,010 Multifamily Demand Forecast by (in Units) 2015 2016 Seattle 6,168 5,476 Eastside 1,803 2,190 Southend 712 438 Snohomish 807 657 Metro Total 9,489 8,762 Year End 2014 Absorption Summary New Units New Units Abs. Average 2013 2014 Absorption/Mo. Seattle 1,918 6,364 15.8 Eastside 112 980 15.1 Southend 0 118 17.3 Snohomish 103 1,377 15.7 Metro Total 2,133 8,839 15.7 Our estimate of new multifamily supply is derived from a survey of all units currently in lease-up, projects under construction, and known projects in their pre-development stage. To gauge the number of units in the pipeline, we track all multifamily building permits, physically inspect the permitted sites, and reconfirm the number of units and the property type (apartment or condominium). This information was calculated for each of the four major markets within the Seattle metropolitan area. As of our year end 2014 survey, the Seattle MD has a approximately 20,000 apartment units under construction. The majority of those units under construction will be impacting the Seattle MD during our two year forecast. The Seattle submarket deserves special mention as approximately 60% of all region wide construction is centered in Seattle. More specifically, approximately 13,168 of those units, or 64% of all units under construction throughout the Seattle MD, are located within the city of Seattle. Seattle-Bellevue-Everett MD Two-Year Apartment Market Summary December-14 Market % No. 2 Year 2 Year S/D 2 Yr. Mkt. 2 Yr. Vac. Total Size Vacant Vacant Demand Supply Net Size Rate** Vacant Seattle 184,004 2.7% 5,013 11,644 13,168 1,524 197,172 3.4% 6,703 Eastside 74,859 3.4% 2,526 3,993 4,738 744 79,597 4.3% 3,383 Southend 101,621 2.3% 2,301 1,150 1,145-4 102,766 2.2% 2,306 Snohomish 96,690 3.5% 3,368 1,464 1,529 65 98,219 3.5% 3,470 MD* 457,174 2.9% 13,208 18,251 20,580 2,329 477,754 3.3% 15,848 **Two-Year Vacancy rate is 1st Quarter 2017
Supply and Demand Summary The table below illustrates our forecast for both apartment supply and demand within each major submarket in the Metropolitan area. Vacancies are expected to start trending upward toward 5% over the next two years as supply steadily catches up with demand. However, we expect the vacancy rate to remain below 5.0% during our forecast period. Not all submarkets are created equal, as the reader can see in the table below. The Seattle submarket will receive the vast majority of both the new supply and demand over the next two years. It is because of the events of the previous years, such as the recession, lack of available financing, and pent up demand that has lead to this supply boom that the Seattle MD is now in the midst of. The Seattle submarket can expect 13,168 new units over the next two years. The next closest submarket is the Eastside with 3,993 new units over the next two years. In the Southend, we expect 1,145 new units to enter the market. The Snohomish submarket will see 1,529 new units over our forecast period. Equally noteworthy as the oncoming supply is the demand expected to impact the Seattle MD apartment market over the next several years. Annual demand for 2014 was just over 11,000 units. We expect the annual 2015 demand to be approximately 9,500 units and the 2016 annual total to exceed 8,500. In the table below, we can see that our in-house supply/demand models predict vacancies will reach 3.3% in the Seattle MD by the 1st quarter of 2017. This is the result of supply slowly catching up with demand over the forecast period. Seattle-Bellevue-Everett MD Two-Year Apartment Market Summary December-14 Market % No. 2 Year 2 Year S/D 2 Yr. Mkt. 2 Yr. Vac. Total Size Vacant Vacant Demand Supply Net Size Rate** Vacant Seattle 184,004 2.7% 5,013 11,644 13,168 1,524 197,172 3.4% 6,703 Eastside 74,859 3.4% 2,526 3,993 4,738 744 79,597 4.3% 3,383 Southend 101,621 2.3% 2,301 1,150 1,145-4 102,766 2.2% 2,306 Snohomish 96,690 3.5% 3,368 1,464 1,529 65 98,219 3.5% 3,470 MD* 457,174 2.9% 13,208 18,251 20,580 2,329 477,754 3.3% 15,848 **Two-Year Vacancy rate is 1st Quarter 2017 Rental Rate Forecast The two tables to the right illustrate the recent history and our forecast of changes in rental rates for each submarket of the Seattle MD. Responding to a rapid drop in vacancies, Seattle MD rents grew by 5.4% 2012, as some supply entered the market and rents stabilized somewhat yet we still saw an increase. In 2013 we saw a rent increase of 4.4%. 2014, despite high amounts of new supply and absorption, rents increased by 8.3%. Based upon our estimates of new apartment supply and demand, we estimate rent growth in 2015 to be sizable, but less so then 2014, and a more modest rent growth going forward. As new supply enters the market, we expect rent growth to stabilize. However, there will be s u b s t a n t i a l v a r i a t i o n a m o n g neighborhoods and submarkets, all will have some reduction in rental rate. Seattle and the Eastside will have the greatest reduction as these will be the areas with the most new supply entering the market Seattle-Bellevue-Everett MD Rental Rate History 2012 2013 2014 Seattle 6.0% 6.2% 8.0% Eastside 8.0% 3.8% 9.0% Southend 3.9% 3.6% 9.0% Snohomish 3.3% 2.3% 7.5% Seattle MD Total* 5.4% 4.4% 8.3% Seattle-Bellevue-Everett MD Rental Rate Forecast 2015 2016 2017 Seattle 7.0% 6.0% 5.0% Eastside 8.0% 5.0% 4.0% Southend 10.0% 8.0% 8.0% Snohomish 7.0% 7.0% 6.0% Seattle MD Total* 7.8% 6.5% 5.7%
Condo Talk In this section we will take a brief moment to cover the condominium market in the Seattle MD. Condos throughout the region continue to be out performed in almost all regards by apartments, so much so that one condo development, the Salt Condos in Ballard, have changed course midconstruction to become apartments. Condominium developments remain expensive and risky for developers to build. In similar feasibility comparisons between apartment and condo developments, we found that apartments were more feasible and profitable then condo developments in every reasonable situation, under current and near-future market conditions. Additionally, from the buyers perspective, due to the extra costs associated with condos they remain unaffordable to most new buyers. When we look at the sales data for condominiums, between year-end 2013 and year end 2014, we see a drop in sales volume (for all condos, new and resale) of 2%. If we look only at new condos, we see a decrease in the number of condos sold by a staggering 53%. The only increase condos saw was in sales price, which rose 9% by the end of 2014 over 2013. The bottom line is, at the moment, apartments are more feasible, profitable, and there is less liability and risk. Until those factors change, developers will continue to build apartments. Change will only occur when market demand decides it is better to own than rent. That will only occur if we have true appreciation that buyers believe in.
Map of Apartment Projects That Entered Lease-Up in 2014 The following map is of the Seattle-Bellevue-Everett MD that consists of every apartment project that completed and began leasing by the end of 2014. By mapping the locations of each project it clearly illustrates the geographic distribution of supply. When looking at the map of the entire Seattle MD, the reader can see that the vast majority of projects currently under construction are in the Seattle submarket. Within the Seattle submarket, the projects are focused in the Seattle Core and the surrounding neighborhoods. The map as a whole represents 106 different apartment projects that were completed in 2014 in the Seattle Metro Area. The Seattle submarket has approximately 73% of those developments. This map illustrates, apartment construction is almost entirely focused in centrally located Seattle neighborhoods. The centrally located distribution is not a coincidence. As the economy was coming out of the recession, developers were able to finance their projects in the areas with the least amount of risk. Many of those projects happened to be in the Seattle Core, where many of the jobs are located. This trend that we have seen for the last few years, will likely transition to more projects developed outside of the Seattle Core. On the next page we have mapped projects under construction.
Map of Apartment Projects Under Construction The following map is of the Seattle-Bellevue- Everett MD that consists of every apartment project currently under construction (as of December 2014). By mapping the locations of each project it clearly illustrates the geographic distribution of supply. When looking at the map of the entire Seattle MD, the reader can see that the vast majority of projects currently under construction are in the Seattle submarket. Within the Seattle submarket, the projects are focused in the Seattle Core and the surrounding neighborhoods. The map as a whole represents an astounding 20,580 units currently under construction. The Seattle submarket has approximately 60% or 12,348 of those units. The Seattle core has approximately 35% or 7,203 of all the units under construction. Important to note, of the 20,580 units currently under construction. Approximately 65% of all units under construction will be impacting the market in 2015. As we move into the future, development continues to be focused on Seattle, as we have shown that a good majority of new renters are interested in living in the city of Seattle. What we must look for as developments progress, is the pull that the Eastside will exhibit on new renters, and if the supply-demand struggle will shift as more renters seek less expensive, or larger, or simply more convenient living options outside of Seattle on the Eastside.
For more information on services offered by the O Connor Consulting Group, LLC please contact Brian O Connor, MAI at (206) 622-5100 or visit our website at: www.ocgp.com