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Seattle Apartments Thriving in Urban Core

Performance Surpasses Market Average

By Louis Rosenthal | Thursday, May 18, 2017

 

Rents for metro Seattle apartments continue to grow at an enviable pace, contributing to — and partially driven by — a thriving urban core.

Unlike many other urban core submarkets across the country, the Seattle neighborhoods around Downtown, Capitol Hill and Queen Anne have recorded excellent effective rent growth rates, even surpassing the market average at the start of 2017, according to Axiometrics’ apartment market data.

However, market and submarket strength are governed by demand- and supply-side factors, namely job growth and new supply levels. Seattle and its urban core apartments will be tested on both fronts throughout 2017.

Effective rents in Seattle grew by an annual rate of 5.8% in April, the third strongest rent-growth figure among Axiometrics’ top 50 metros, based on number of units. In 2016, Seattle rent growth neared 7%, a remarkable achievement considering the metro area’s long-term average of 3.1% rent growth.


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Following the recession, in which Seattle’s average rent levels contracted by more than 10%, rent growth surged by 7.2% in 2011 and has remained above 5% ever since.


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For a market accustomed to delivering about 6,000 new apartment units per year, Seattle’s exceptional performance in 2016 is all the more impressive after nearly 11,000 new units were delivered to the metro last year.

Part of Seattle’s current success story is the surprising strength of the metro’s urban core, which includes Downtown as well as the Capitol Hill and Queen Anne neighborhoods.


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Effective rents for Seattle’s urban core apartments grew by 8.0% in April, while the metro area as a whole (excluding the urban core submarket) grew by 5.2%. National rent growth was 2.2%.

This is unusual among urban cores at this point in the current apartment market cycle. Several superstar cities feature urban cores experiencing negative rent growth, including Chicago, Dallas, Denver, Houston, New York and San Francisco.

Most of these struggling urban cores emerged from the Great Recession in remarkable shape: high demand for new, urban apartments combined with low new supply levels in these areas proved the right recipe for exceptional rental growth rates. But these areas began to slow around late-2013 and again in 2016. Seattle’s urban core also moderated during 2013, but rent growth never fell below 2% and certainly never went negative. What’s more, the area got stronger throughout 2016, just as other urban cores were turning negative.


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Nevertheless, the strength of Seattle apartments in the urban core will be tested throughout 2017 as the Downtown area adds the largest batch of new supply since at least 1997 – 6,049 units among 40 properties. From 1997-2015, the urban core neighborhoods added on average about 1,600 new units a year. However, in 2016 alone, the area added more than 4,000 new units. Another 6,000 new units will be delivered by the end of 2017 — an inventory growth rate of over 7%.


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Will Seattle’s urban core easily absorb the new supply levels given the extent of new supply on the way? The experience of other apartment markets is instructive. Rent growth in Denver’s downtown area peaked this cycle in 2012, when only 494 new units were delivered to the submarket. More than 2,000 new units were delivered the following year (8.9% inventory growth), and rent growth moderated to 2.5% -- a nearly 600-basis-point drop, the apartment data showed.

On the other hand, consider the case of Atlanta’s urban core, where rent growth peaked in 2014 at 6.5%, the same year that more than 5,700 new units delivered in the submarket (a 7% inventory growth rate). The following year, another 5,000 new units were added and rent growth moderated to 4.0% -- a 250-basis-point decline. In 2016, rent growth fell another 310 basis points in the midst of another 5,000 new units. Compared to Denver’s urban core, Atlanta’s urban core more easily absorbed elevated new supply levels — at least thus far.

Of course, new supply is only half of the equation. We also have to consider the role of job growth in apartment market performance. The number of new jobs added in the Seattle metro increased by 3.2% in March (compared to the year prior), continuing a 25-month streak of over 3% annual job growth.


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Yet, there are a few markets with even better job growth numbers to start 2017, including Dallas, Nashville and Austin — each of which features an urban core submarket with negative rent growth. Why, then, are effective rents in the Seattle urban core growing by 7% when Dallas is adding jobs at a higher rate but its urban core is declining by 1%?

In short, it’s the interaction between new supply levels and job growth: the Dallas metro is adding more jobs at a higher rate, but new supply levels in the urban core grew by 12% last year. Seattle, on the other hand, is witnessing strong job growth — though 85 basis points below Dallas — but only a 5.3% increase in new urban core supply in 2016.

Both sides of the supply/demand equation play a role, but given the underlying strength of Seattle’s job market, much of the current concern surrounds the new supply levels set to deliver in 2017.

 

 

 

Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on Forbes.com and Axiometrics’ blogs, among others.

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