Return to Equilibrium
The Seattle Metro apartment market (King & Snohomish Counties) bounced back from the Covid-19 disruption with a bang. The volume of units leased during 2021 shattered all records. We never thought we would see anything close to these numbers.
Pre-Covid, the Metro market had an annual demand of 9,861 units in 2019. Then Covid hits and annual demands drops to -7,133 during 2020. Then an incredible rebound occurs in 2021, when 26,452 units were leased. Who would have thought that? And of the total units leased in 2021 (26,452) 87% or 23,090 units were leased in the first six months. Did I say who would have thought that?
What is really interesting is if one averages the three years of demand, the result is 9,727 units, which has been a typical annual demand figure recently. It appears that the drop in demand during 2020 was completely offset by demand in 2021. The 2021 demand figure of 26,452 units seems to be a recapture of the 2020 demand and the new 2021 demand.
And just like that the market is back in equilibrium, and we expect it to stay in equilibrium through mid-2024 and probably beyond. As you will see, our vacancy forecasts for the Metro region as well as each of the four major submarkets are not expected to see vacancy rates climb above 4.0%. Well, Seattle may bump up to 4.3% by early 2024, but all other submarkets (Eastside, South end & Snohomish) should all be under 3.0%. Seattle’s demand could be stronger than we forecast, if office workers return to work sooner than we believe, and the city can clean up the downtown and make it safe again.
The greater Metro market has 26,000 units under construction, but only 20,660 are expected to come online and impact our vacancy forecast though mid-2024. Some large apartment towers take three years to build, and they can take two years to fully lease, so the impact of many of those high-rise units is out beyond our forecast timeline.
The total number of units that will impact the market is a combination of those units that are vacant but in lease-up, those under construction and those that are proposed but expected to come on-line towards the end of our forecast period. There are 25,630 units that are expected to impact our forecast, of which 16,242 are in Seattle, 6,795 are on the Eastside, 1,117 are in the Southend and 1,416 are in Snohomish County. Seattle has 64% of the supply. Which is about right since Seattle usually captures 60% to 65% of the total Metro demand. The Eastside captures 27% of the total Metro demand which is up significantly from just a few years ago. Since the Eastside is expected to see a tremendous growth of new jobs, it is probably appropriate that the Eastside’s total supply should be increasing.
Net apartment demand is a combination of the change in vacancy (either up or down) and the number of new units leased. Much of the incredible number of units leased was due to a substantial drop in vacancy.
The metro region had a vacancy rate at the beginning of 2021 of 6.1%, by June it was 2.5% and by year end it drifted up to 3.0%. That drop in vacancy represents an absorption of 16,123 units. Couple those numbers with the volume of new units leased at 10,329 and we end up over 26,000 units leased in 12 months. Wow.
The Seattle submarket was the market that fluctuated the most due to the rapid change in the downtown market. At the beginning of 2021 Seattle’s vacancy rate was 8.3%, by June it dropped to 3.0% and then rose slightly to 3.3% by the end of the year. This annual swing in vacancy represented 10,845 units leased. Then add the 5,566 new units leased and Seattle saw a 2021 demand figure of 16,411.
The Eastside began 2021 at 5.7% vacant and finished the year at 3.0%. This represents 2,452 units lease just due to vacancy declining. Then add the 2,471 new units leased and we see a demand in 2021 of 4,923 units.
The Southend began 2021 at 4.0% vacant and declined to 2.8% by yearend. This represents 1,240 units leased due to declining vacancy. Then add in the new units leased at 1,083 and we have a 2021 total demand figure of 2,323 units.
Snohomish County began 2021 at 4.0% and by year end was at 2.4%. This represents 1,586 units lease due to the drop in vacancy. Then add in the number of new units leased at 1,586 and we see a total demand figure for 2021 of 2,795 units.
Monthly absorption rates for new product have been mostly typical across the Metro region. However, Seattle definitely illustrates an impact that was likely caused by the Covid-19 disruption. Whereas the other submarkets experienced typical rates of absorption of say 13 to 21 units per month, Seattle experienced an overall lease-up rate of 14.9 units per month. Seattle also had more supply on top of everything else.
Our forecast incorporates an annual demand of about 5,200 units per year in Seattle, 2,600 units on the Eastside, 450 to 500 units per year in the Southend and about 500 units per year in Snohomish County. These figures equate to about 13,274 units of demand in Seattle over the 2.5-year forecast period, and about 6,725 units on the Eastside, 1,143 units in the Southend and 910 units in Snohomish County over the forecast period.
We could easily see demand being stronger than we forecasted. Apartment demand is highly dependent upon in-migration into the Metro region. In-migration is clearly picking up, mostly from California, so if there happens to be more people moving in than expected, demand will be stronger than we forecasted. Due to the Covid-19 rebound it is a more difficult time to estimate in-migration and thus demand.
Rents are increasing and we expect that to continue. The issue now is how much of the rent increases are due to the Covid catch up versus a true market increase? When we hear about 18% rent increases, we know some portion of that increase is simply rents starting to catch up from being held in check for almost two years.
The best way for us to determine rent increases is to evaluate the relationship between vacancy rates and increases. As vacancy rates increase rent increases moderate, as vacancy rates decline rents grow. Our rent growth estimates are relative to current market rents. So, if a building has rents that are 15% below market due to Covid restrictions, then we do not count that 15% as a market growth rate. That type of rent growth is specific to individual buildings not the market.
The pattern we expect to see is that annual rents in the Seattle submarket will increase at rates of between 4% and 5% in 2022 and in 2023, which is strong but not reflective of an ultra-tight market.
The Eastside will likely see slightly stronger rent growth since vacancies are expected to dip to as low as 2.0% and stay around 2.5% for most of the next two years. This tells us that rent growth will be above 5.0% and will likely be closer to 7.0%.
The Southend is expected to be extremely stable at around 2.8% to 2.9% for the entire forecast period. This implies that rent growth will be stronger than 5.0% and will likely be at 6.0% to perhaps 7.0% per year throughout the forecast period.
Snohomish County is similar to the Southend, vacancies are expected to remain below 3.0% for the entire forecast period. Throughout all of 2022 and most of 2023 vacancies are anticipated to be in the 2.5% range. This means the market is tight enough for stronger rent growth, of say 6.0% to 7.0% relative to market rents.
The rent growth expectations also consider inflation as well as market conditions. The work from home trend is likely to continue and may contribute to rent increases in larger units in the suburbs. Much has been written concerning the popularity of larger suburban units for the work from home folks. We agree, but the lifestyle choices of younger tenants will likely off set some of that trend.
We expect to see a robust economy adding a significant level of new jobs in 2022, which in turn drives in-migration, household formations and ultimately apartment demand. We need to watch the pattern of job growth on the Eastside given the Amazon hiring forecast. But that hiring takes time and will likely be seen in 2023 and 2024.
We do not see anything that seems to be an impediment to new employment and apartment demand. The question (like always) is dependent upon the magnitude and timing of those new jobs.
Pre-Covid, the Metro market had an annual demand of 9,861 units in 2019. Then Covid hits and annual demands drops to -7,133 during 2020. Then an incredible rebound occurs in 2021, when 26,452 units were leased. Who would have thought that? And of the total units leased in 2021 (26,452) 87% or 23,090 units were leased in the first six months. Did I say who would have thought that?
What is really interesting is if one averages the three years of demand, the result is 9,727 units, which has been a typical annual demand figure recently. It appears that the drop in demand during 2020 was completely offset by demand in 2021. The 2021 demand figure of 26,452 units seems to be a recapture of the 2020 demand and the new 2021 demand.
And just like that the market is back in equilibrium, and we expect it to stay in equilibrium through mid-2024 and probably beyond. As you will see, our vacancy forecasts for the Metro region as well as each of the four major submarkets are not expected to see vacancy rates climb above 4.0%. Well, Seattle may bump up to 4.3% by early 2024, but all other submarkets (Eastside, South end & Snohomish) should all be under 3.0%. Seattle’s demand could be stronger than we forecast, if office workers return to work sooner than we believe, and the city can clean up the downtown and make it safe again.
The greater Metro market has 26,000 units under construction, but only 20,660 are expected to come online and impact our vacancy forecast though mid-2024. Some large apartment towers take three years to build, and they can take two years to fully lease, so the impact of many of those high-rise units is out beyond our forecast timeline.
The total number of units that will impact the market is a combination of those units that are vacant but in lease-up, those under construction and those that are proposed but expected to come on-line towards the end of our forecast period. There are 25,630 units that are expected to impact our forecast, of which 16,242 are in Seattle, 6,795 are on the Eastside, 1,117 are in the Southend and 1,416 are in Snohomish County. Seattle has 64% of the supply. Which is about right since Seattle usually captures 60% to 65% of the total Metro demand. The Eastside captures 27% of the total Metro demand which is up significantly from just a few years ago. Since the Eastside is expected to see a tremendous growth of new jobs, it is probably appropriate that the Eastside’s total supply should be increasing.
Net apartment demand is a combination of the change in vacancy (either up or down) and the number of new units leased. Much of the incredible number of units leased was due to a substantial drop in vacancy.
The metro region had a vacancy rate at the beginning of 2021 of 6.1%, by June it was 2.5% and by year end it drifted up to 3.0%. That drop in vacancy represents an absorption of 16,123 units. Couple those numbers with the volume of new units leased at 10,329 and we end up over 26,000 units leased in 12 months. Wow.
The Seattle submarket was the market that fluctuated the most due to the rapid change in the downtown market. At the beginning of 2021 Seattle’s vacancy rate was 8.3%, by June it dropped to 3.0% and then rose slightly to 3.3% by the end of the year. This annual swing in vacancy represented 10,845 units leased. Then add the 5,566 new units leased and Seattle saw a 2021 demand figure of 16,411.
The Eastside began 2021 at 5.7% vacant and finished the year at 3.0%. This represents 2,452 units lease just due to vacancy declining. Then add the 2,471 new units leased and we see a demand in 2021 of 4,923 units.
The Southend began 2021 at 4.0% vacant and declined to 2.8% by yearend. This represents 1,240 units leased due to declining vacancy. Then add in the new units leased at 1,083 and we have a 2021 total demand figure of 2,323 units.
Snohomish County began 2021 at 4.0% and by year end was at 2.4%. This represents 1,586 units lease due to the drop in vacancy. Then add in the number of new units leased at 1,586 and we see a total demand figure for 2021 of 2,795 units.
Monthly absorption rates for new product have been mostly typical across the Metro region. However, Seattle definitely illustrates an impact that was likely caused by the Covid-19 disruption. Whereas the other submarkets experienced typical rates of absorption of say 13 to 21 units per month, Seattle experienced an overall lease-up rate of 14.9 units per month. Seattle also had more supply on top of everything else.
Our forecast incorporates an annual demand of about 5,200 units per year in Seattle, 2,600 units on the Eastside, 450 to 500 units per year in the Southend and about 500 units per year in Snohomish County. These figures equate to about 13,274 units of demand in Seattle over the 2.5-year forecast period, and about 6,725 units on the Eastside, 1,143 units in the Southend and 910 units in Snohomish County over the forecast period.
We could easily see demand being stronger than we forecasted. Apartment demand is highly dependent upon in-migration into the Metro region. In-migration is clearly picking up, mostly from California, so if there happens to be more people moving in than expected, demand will be stronger than we forecasted. Due to the Covid-19 rebound it is a more difficult time to estimate in-migration and thus demand.
Rents are increasing and we expect that to continue. The issue now is how much of the rent increases are due to the Covid catch up versus a true market increase? When we hear about 18% rent increases, we know some portion of that increase is simply rents starting to catch up from being held in check for almost two years.
The best way for us to determine rent increases is to evaluate the relationship between vacancy rates and increases. As vacancy rates increase rent increases moderate, as vacancy rates decline rents grow. Our rent growth estimates are relative to current market rents. So, if a building has rents that are 15% below market due to Covid restrictions, then we do not count that 15% as a market growth rate. That type of rent growth is specific to individual buildings not the market.
The pattern we expect to see is that annual rents in the Seattle submarket will increase at rates of between 4% and 5% in 2022 and in 2023, which is strong but not reflective of an ultra-tight market.
The Eastside will likely see slightly stronger rent growth since vacancies are expected to dip to as low as 2.0% and stay around 2.5% for most of the next two years. This tells us that rent growth will be above 5.0% and will likely be closer to 7.0%.
The Southend is expected to be extremely stable at around 2.8% to 2.9% for the entire forecast period. This implies that rent growth will be stronger than 5.0% and will likely be at 6.0% to perhaps 7.0% per year throughout the forecast period.
Snohomish County is similar to the Southend, vacancies are expected to remain below 3.0% for the entire forecast period. Throughout all of 2022 and most of 2023 vacancies are anticipated to be in the 2.5% range. This means the market is tight enough for stronger rent growth, of say 6.0% to 7.0% relative to market rents.
The rent growth expectations also consider inflation as well as market conditions. The work from home trend is likely to continue and may contribute to rent increases in larger units in the suburbs. Much has been written concerning the popularity of larger suburban units for the work from home folks. We agree, but the lifestyle choices of younger tenants will likely off set some of that trend.
We expect to see a robust economy adding a significant level of new jobs in 2022, which in turn drives in-migration, household formations and ultimately apartment demand. We need to watch the pattern of job growth on the Eastside given the Amazon hiring forecast. But that hiring takes time and will likely be seen in 2023 and 2024.
We do not see anything that seems to be an impediment to new employment and apartment demand. The question (like always) is dependent upon the magnitude and timing of those new jobs.
Brian O’Connor, MAI, CRE
Partner, Co-Founder & Data Junkie
Commercial Analytics
Partner, Co-Founder & Data Junkie
Commercial Analytics
