Fueled by substantial population growth and solid employment, Seattle has been one of the strongest multifamily markets in the U.S. over the past few years. According to a recent Yardi Matrix report, downtown Seattle’s construction boom has served as a magnet for white-collar workers, boosting the need for residential properties.
As a multifamily and senior housing developer in the Puget Sound area, Pillar Properties owns more than 1,600 units in the region. President Billy Pettit has been with the company—formerly R.D. Merrill Co.—for 12 years and now oversees the development pipelines and asset management. In an interview with Multi-Housing News, Pettit reveals the surprising challenges generated by growing supply in a hot market like Seattle.
What can you tell us about the evolution of the Seattle multifamily market?
Pettit: There is no doubt that the Seattle market has been on an unprecedented run over the last few years and all the underlying fundamentals have been working in our favor, leading to record rent growth, low vacancies and demand far outpacing the substantial amount of new supply entering the market. All that said, the new supply has absolutely introduced new challenges to the market here. We have seen downward pressure on rent growth and, for the first time in a while, we have seen the use of concessions appearing more and more in the market.
Is there any more room for multifamily expansion downtown?
Pettit: The short answer is yes, there is definitely more room for multifamily expansion in the downtown core. It really comes down to timing for us. Do I want to deliver another 2,000 units in the next two years? No. Do I want to deliver another 2,000 units over the next five years? More likely. Do I want to deliver another 2,000 units over the next 10 years? Absolutely.
Rents in Seattle have been above the national average for the past five years. What sustains this growth?
Pettit: What sustains the growth is that Seattle is a very attractive place, and it’s a hot city right now. People want to live here, and unlike in the past, more people are driven towards living in the downtown core. We are also lucky to be bolstered by strong job growth with higher than average wages which drives the demand.
Most of the units under construction are high end. How do you expect this to influence Seattle’s rental market?
Pettit: It’s not about targeting high-income residents, it’s about supply matching up with demand. Market fundamentals are market fundamentals and we have the luxury of extremely strong fundamentals that are driving rents. Demand has largely outpaced supply over the last three to five years. Going forward, I do expect to see some softening in the market as more supply will be delivered this year and the next one.
What are the main differences between Seattle’s most coveted submarkets when it comes to financial performance?
Pettit: Our submarkets are performing better than most and actually we are starting to see some of the most coveted submarkets perform really well as the more centralized locations become more expensive.
How will recent changes, such as the tax reform, affect the multifamily sector in Seattle?
Pettit: I don’t know if anyone is sure how tax reform will impact the multifamily sector because we are still trying to digest what it really means. Recent legislation passed by the city council here and their position on the affordability problem is a primary concern for us. We are encouraging the city to find a way to work with developers and landlords rather than against them.
Pettit: Beyond the new supply entering the market and the challenges that come with that, the number one challenge we are facing is attracting and retaining quality team members. This is particularly true on the maintenance side where we are seeing serious pressure due to the boom in the construction industry in the Puget Sound area. We are also seeing competition for talent arising from all the new supply entering the market.
Tell us more about your plans at Pillar Properties going forward. Is the company considering entering other markets, outside the Puget Sound area?
Pettit: Our core strategy remains the same as we continue to look for attractive opportunities throughout the Puget Sound region. Over time we may consider exploring new markets in other areas, but at this point we remain committed to our strategy.