Cooling of the Seattle apartment market

Written by Edward Krigsman

A decade of limited supply of rental units and heightened demand due to strong local employment caused a dramatic increase in Seattle’s rent rates. They surged nearly 70% over the past decade, nearly 8 times the national average. During this period, apartment developers responded by constructing new apartment units. The past decade saw the construction of 20,000 new rental units, and there are about 30,000 in the construction pipeline.

As a result of these factors, Seattle’s rental market has finally cooled off, providing some relief to renters and a shift in profitability for investors. Rising vacancies combined with renter-incentives (at least in the newer, more expensive buildings) diminished investor returns. Combine these factors with slightly increasing interest rates and you have a receipt for slightly higher cap rates when properties are traded. Not surprisingly, development of new units is slowing. New apartment construction is down 22% over last year, the first such drop in a decade.

What does this shift mean for you?

If you are a renter

Now is a good time to renegotiate your lease. Landlords will likely be putting forth effort to retain your business, and perhaps without the rental increases you may have experienced before. They may even be willing to sign a lease longer than the standard 12-months. Take advantage of this blip in the market.

If you are considering buying investment property

If you want to get a foothold in Seattle’ market and are willing to deal with some short-term softness, now is an excellent time to explore your options.Our investor-buyers are encountering a surprising range of choices, often at cap rates that are a bit higher than they would have been in 2016-17. Flattening rents and increasing vacancy loss combined with rising interest rates have made some investors skittish at a time when apartment values seem to have peaked. Investors without a long-term time holding horizon are choosing to cash out now, rather than risk future market softness.

If you own investment property

If your time horizon is short, you might considering cashing out now. But if your investment horizon is five years or longer, it may be wise to hold onto your property. Seattle’s business environment remains favorable, and our city will likely continue to attract highly-compensated workers, especially from areas that are less affordable. I believe that Amazon and other newer tech firms are poised to produce the region’s next generation of entrepreneurs and start ups. If this happens, it will create another boom of new jobs and heightened demand for workers. So if you share my favorable long-view, then consider weathering the softening market because Seattle is likely to remain a strong place to live, work, and own property. To address the current cooling market however, increase rents only after carefully assessing today’s rent rates at nearby buildings. Work carefully to retain your most desirable tenants.

To discuss the opportunities and threats posed by the cooling rental market, please contact us at 206.387.6789 or edwardk@ekreg.com