Tri-County Multifamily Real Estate Investment Trends
After an uncertain 18 months, it seems as if the Puget Sound Market is starting to turn for the better. With the problems created by a worldwide pandemic, in Covid-19, the country seemed on the brink of political and economic turmoil. Recently however, with the economy starting to bounce back and people being able to go to work again, we are starting to make great strides on a road to recovery. As businesses have started to reopen their doors, indoor dining has started to make its return and people that were forced to leave their busy city lives due to economic stress have started coming back to the city of Seattle. It was because of the economic hardship and the stay at home order put in place, that we observed demand for city living decrease and demand for outlying markets bolster. People spread out all over the Puget Sound area, radiating north, south and east from the Seattle hub. From mid-2020 through early 2021, the rental “Flight to the Suburbs” was largely driven by two factors: unprecedented job loss in low- and lower-wage jobs which affected tenants’ ability to pay; employed workers who could work from home did, and began seeking apartments that provided more space at home for working, family, and social distancing.
In 2020, sales volume in the Tri-County area was nearly $2.8 billion slightly more than one third compared to 2019 sales at $7.3 billion. Snohomish County represented the lion’s share of the year-over-year decrease, falling from $990.4 million in 2019 to under $128 million in 2020, demonstrating that market participants were reluctant to change holdings during this time.
Since 2020 came to a close, the sales volume in Snohomish County has been significantly lower than in years past. To date, Snohomish County has seen under 5 million is sales which is a significant downturn even when compared to 2019 when COVID was at its peak.
King and Pierce counties also demonstrated a decline in both sales volume and the number of transactions, albeit not as extreme when compared to Snohomish.
Sales volume for King County dropped 60% year-over-year with just a little over 2 billion in sales in 2020 compared to around 5 billion in sales for 2019. Similarly, the number of transactions fell by 53%; from 2019 to 2020, with 313 and 147 transactions, respectively. Pierce County was less affected than the previous two counties, showing a 41.1% decrease in sales volume with 430 million in 2020 compared to an excess of 730 million in 2019. The total number of sales in Pierce County fell only 14.1% in 2020 with a total number of 67 sales compared to 78 in 2019.
Overall, the Tri-County was down more than 60% with 2.7 billion in sales in 2020 as well as 47% in total number of sales with the amount being 243. The two largest sales of the year coming December 14th with a sale price of 191 million dollars and December 22nd with a sale price of 175 million.
This drop in sales volume and total number of sales was to be expected however when the new graduated real estate excise tax (REET) took effect in January 2020. The market took another blow and continued to suffer as the COVID-19 pandemic closed businesses and shuttered the region at the beginning of Q2-2020. We can see the market begin to strengthen with the opening of business and economy now in 2021 with nearly 1.3 billion of sales volume in the months of January through July compared to that of around 968 million in 2020, an increase of 34% through the first seven months of the year.
Capitalization (cap) rates are best described as an assessment of risk with a higher cap rate equaling more income compared to price paid with a higher amount of risk and a lower cap rate being the opposite with a lower amount of risk. It was not a surprise to see cap rates move up in 2020, driven largely to the uncertainty around the coronavirus pandemic.
When analyzing King, Snohomish and Pierce Counties, we witnessed an increase in the average cap rate for each individual county. Together, these three counties saw an increase of 8.5% year-over-year with the average combined cap rate of 4.7% in 2019 increasing to 5.1% in 2020.
In 2021, we have since seen the cap rate decrease back from 5.1% at the end of 2020 to the current average of 4.76%. The way a cap rate is derived is by dividing the annual NOI (net operating income) by the sales price.
A caveat about cap rates: because so much interpretation is necessary to derive a cap rate it is the most elusive of all of the value metrics. It is well known in commercial real estate that there are seller cap rates and buyer cap rates. Seller cap rates are often lower, and considered the actual cap rate because seller cap rates are calculated using actual rental data from the time of sale.
Buyer cap rates are also known as market or pro forma cap rates. These are typically optimistic and based on buyer assumptions of stabilized expenses and increasing actual rents at the property to market rents.
There are also post-rehab cap rates, which reflect expected returns after a property is renovated. Unless invested capital is underwritten into the expenses, the post-rehab cap rates are expected to show strong returns. These assumptions hold true in an environment when rents are going up.
From 2019 to 2020, the market shifted and rents dropped. Before, buyers were buying off on lower cap rates with the expectation of rent growth. Now buyers can no longer make such assumptions.
In 2020, buyers asserted that in-place cap rates needed to meet their investment parameters upon purchase. As rental market fundamentals deteriorated, buyers showed higher vacancy rates in their analyses; actuals included bad debt, more expenses for property management, marketing, and turnover.
Buildings that were presenting an acceptable current cap rate on current rents and updated underwriting standards sold. Those which were not priced with their current cap rate at the time of listing in mind, simply did not sell. As we moved into 2021 investors saw rents start to moving up, bolstering their confidence in higher pro forma cap rates once again.
Price Per Unit
In the Tri-County, price per unit has varied a great deal between 2019 and 2021 year-to-date. The average price per unit decreased by 12.1% from 2019 to 2020; from $268,688 to $236,284, respectively.
We can, for the most part, see similar shifts occurring in each individual county during the same period.
King County demonstrated a 10% decrease, with the average price per unit falling from $306,957 to $276,260 between 2019 and 2020, respectively.
In Snohomish County we observed just a 0.9% price per unit decrease, with an average price per unit going from $192,494 to $190,760.
Lastly, Pierce County went against the norm from 2019 to 2020, actually increasing 12.9% with an average price per unit of $149,078 rising to $168,278. We believe the cause of this overall decrease, and specifically the decrease in King County, is due to people moving away from the city to the surrounding suburbs during the pandemic in order to access housing with more space at a lower cost, in part due to the ability of most being able to work remote.
Through the first half of 2021 we have since seen numbers return to and even grow above pre COVID levels. The average price per unit for all three counties has risen to a staggering $289,780 between January to July. King county has risen to $328,220, Snohomish County to $227,080, and Pierce County to $177,440. We believe this overall increase is because of the expanding Tri-County market, combined with the resurgence of the economy after the difficulties of COVID-19.
Price Per Square Foot
The Tri-County price per square foot decreased 8.8% in 2020 when compared with 2019, respectively. The average of the price per unit decreased from $352 in 2019 to $321 in 2020. The largest decrease in price per unit year-to-year occurred in King County, where the price per unit fell from $413 to $374, a decrease of 9.4%.
Even with the overall price per unit decreasing in the Tri-County, both Snohomish and Pierce counties had an increase in price per square foot. Snohomish County increased from $237 in 2019 to $374 in 2020, an increase of 57.8%.
Pierce County didn’t see as big of an increase when compared to Snohomish County, but still went up significantly, with a 12% increase from $183 in 2019 to $205 in 2020. We believe, as stated earlier, the cause of this was Seattle residents wanting more living space at a lower cost while the restrictions experienced during Covid-19 were in effect.
Currently, through the first half of 2021 we have seen the price per square foot make a significant increase. The current price per square foot averaged across all three counties is $415.32. This a large increase even when compared to that of the pre-pandemic numbers of 2019. King County has seen an increase from $374 to the current $476.
Snohomish, experienced a decrease in price per square foot compared to that of 2020 with the average of $374 decreasing to $261. Although Snohomish saw great demand with people moving away from cities during the pandemic the average has since fallen back down, the current price per square foot is an increase when compared to 2019.
Lastly, Pierce County has also seen an increase in price per square foot when compared to 2020. The current number of $237 is a significant increase to the previous year’s average of $205, further showing the benefits of market fundamentals beginning to return.