Pacific Northwest: Ahead of the Curve

By Jeffrey Steele, Contributing Editor

The Seattle and Portland metros share a number of commonalities, and they’re not limited to cloudy and wet weather, nature-loving denizens or the ribbon of roadway locals disparagingly refer to as “The Slog.”

Within the multifamily sector, for instance, they are currently displaying an array of similar traits, from rebounding economies and excellent employment growth to enviable levels of housing absorption, exceedingly high rates of occupancy and very real opportunities to push rent growth rates higher.

“In general, this is the best performing region in the country in terms of recent revenue growth in multifamily,” says Greg Willett, vice president, research and analysis with Carrollton, Tex.-based MPF Research, a division of RealPage.

In metro Seattle, apartment occupancy levels are at 95.7 percent, up 50 basis points on an annual basis. Apartment buildings are full in every product niche and every neighborhood, with the exception of a couple areas in Tacoma. The result: Strong rent growth vis-à-vis other regions of the country, he says.

Rent growth in Seattle-Tacoma stands at 4.2 percent, as opposed to 2.6 percent nationwide. What’s more, rent growth in the metro hasn’t slowed much in recent months, as it has in some other areas of the country.

Portland occupancy is at 96.4 percent, and again, every product segment and enclave seems to be jam packed, Willett says. Annual rent growth pace in the Portland metro is just less than Seattle-Tacoma, and stands at 3.9 percent. These kinds of numbers place both the Seattle-Tacoma and Portland metros in the top 10 nationally in occupancy and rent growth.

The construction pipeline

Both Seattle and Portland are traditional barrier-to-entry markets, according to Willett. In both metros, new supply is typically constrained by cost factors and limited land availability, resulting in major new supply bursts being fairly rare.

However, considerable building is taking place right now in Seattle, Willett says.

While the near-term apartment inventory growth is not what it is in red hot markets like Texas, Washington, D.C., the Carolinas and Denver, the extent of new construction is significant given Seattle’s modest building history.

Ongoing construction is reported at 12,254 units, and it will yield a surge of 3.7 percent in inventory over the next 18 months, according to Willett.

“That’s almost double the average seen over the past couple of decades,” he adds. “About half the product under construction will be delivered in the urban core. While the building pace is fairly aggressive, MPF Research expects the metro to handle this burst of completions better than will most areas where lots of deliveries are unusual. While the metro’s performance premium relative to the U.S. as a whole probably won’t remain as big as it is now, we
do think the area will continue to post better-than-average occupancy and rent growth numbers.”

Alan Mark, founder and president of The Mark Company, views the Seattle market as one characterized by stark dichotomies regarding for-rent and for-sale inventory. “It’s just shocking in terms of low vacancies on the rental side, no inventory on the for-sale side, lots of apartments coming up in different markets [and] very little coming up on the condo side,” he observes.

In the meantime, the construction pipeline in Portland is at historic norms or even a bit under those norms. Ongoing construction comes in at only about 1,800 units, an inventory growth rate over the next 18 months of just one percent. “With that restrained pace of building, Portland is positioned to rank among the country’s best performers over the next couple of years,” Willett says.

“The question here will be how aggressively rents can be pushed, given housing affordability always is more of a challenge here than in most markets.”

Opportunities for investment

Significant opportunities for investment exist in the region. “Rents are still rising, and there’s great job growth,” Mark reports, citing Seattle’s current jobless rate of about four percent, as well as the heavy recruiting being undertaken by technology-focused employers like Amazon.com.

He sees opportunity in Class A, B and C assets, as well as in the construction of small condominium buildings that can be built quickly with readily obtained financing. “If it’s an apartment building, the financing’s out there,” he says. “If it’s a condo building and it’s sizeable, it’s tough to get.

“I think there’s a real opportunity … it’s like the old [saying], if you’re turning around an oil tanker you have to do it a mile ahead. [It’s] the same thing with [apartments]. One doesn’t want to wait until 2015 when the market’s hot to start building. It’s really [better to] build it now to deliver it in 2015.”

For a number of reasons, investors have liked these markets for some time, Willett adds. “You have seen considerable run-up in prices, so at this point you’re coupon clipping,” he remarks. “You know your return is not huge in these markets, because you’re paying so much.”

Regional bright spots

When it comes to positive harbingers for the future, the economy and jobs continue to loom large. Seattle is outperforming earlier projections in terms of the quickness of its job market recovery from recession.

“It kicked back into high gear very quickly,” he reports, noting annual job growth in Seattle-Tacoma stands at 2.2 percent, representing 36,700 positions, according to April figures from the U.S. Bureau of Labor Statistics (BLS).

That has translated into strong demand for apartments, with annual absorption in the Seattle-Tacoma metro coming in at 7,419 units in Q1. “When looking at individual metros across the country over the last year, the only ones that absorbed more total product were Dallas and Houston,” Willett says.

In Portland, the metro’s job growth numbers stand at 1.3 percent, or 12,900 positions, according to the BLS. The pace of expansion has eased somewhat from earlier levels. In the year-ending first quarter, a modest 2,122 units were absorbed. “Product availability has played a greater role than the state of the economy in that figure,” Willett says. “With the existing stock full, what’s been absorbed has exactly matched what’s come on line.”

The strength of the Pacific Northwest job market translates to excellent incomes as well, according to Mark. Approximately 28 percent of Seattle employees make $100,000 or more per year, he reports. Even more striking is that the largest group claiming that income level is the 24- to 34-year-old demographic.

“That’s kind of a key buying group,” Mark says. “And what we’re seeing is couples there, especially in the tech field, pulling in over $200,000 per year.”

Noteworthy projects

When it comes to eagerly anticipated developments, Willett points to the projects of Vancouver, Wash.-based Holland Partners. The developer is now at work on a much-heralded high-rise called 815 Pine Street in downtown Seattle. The 40-story tower will have 386 apartments, is anticipated to achieve LEED Silver status, and will begin welcoming first residents in late 2014, he says.

Mark gives the nod to the 41-story, two-tower development called Insignia, expected to multiply the number of condos for sale in downtown Seattle by a factor of 12. Insignia is the latest project from Burnaby, B.C.-based Bosa Development Corp. “Nat Bosa has really changed the face of Vancouver, [and] now it’s on to Seattle,” Mark says. “He always delivers beautiful product, and that’s true if you see what’s in Vancouver or San Francisco. And it’s really the only thing that will be delivered. He’s always ahead of the curve.”