Seattle, WA
Rain City’s Market Remains Hyper-Competitive, “Complicated”
By Carole VanSickle Ellis
When investors think of Seattle, Washington, companies like Amazon, Starbucks, Zillow, and Microsoft likely spring to mind along with sky-high property values and lots and lots of rain. These are certainly facets of life in “Rain City,” but they only touch the surface of a complicated housing market and local economy. Although inventory levels in Seattle are sporadically rising, buyers are still facing extremely high housing costs and heated competition to reach the closing table. According to information from the Northwest Multiple Listing Service (NWMLS), prices in King County, where Seattle is located, are up about 14 percent year-over-year. In neighboring Pierce County, prices are even higher. Even with more inventory, as long as prices remain high the advantages to buyers may have more to do with the ability to bring back some of the “traditional” parts of the home purchase process like home inspections and the idea of using comps to set the starting bid.
“Paying a fair price and being able to have a home inspection” could be back in the equation for Seattle-area buyers in the coming months, predicted Jon Bye, team lead at local real estate group Jon Bye & Associates. Bye told local news outlet King5 in mid-September that for the past couple of years if you wanted these things and you wanted to own a home in Seattle, “you had to roll the dice.” Now, the slight decrease in pressure on inventory might mean things that used to be “given” in the home-buying process might come back. He continued, “Before, when you had 10 offers, you would have six to eight of those be fairly normal, and then you would have two people that would really be running the price up really high. I think that is the stuff we might not see as much as what we have been used to over the next year or two.”
Marco Santarelli, founder and CEO of Norada Real Estate Investments, summarized the situation, observing, “King County and Seattle remain a seller’s real estate market with only 0.62 months of inventory – still well below what is required to meet the volume of buyers right now…. If interest rates were not so historically low, buyers would be unable to afford the escalating cost of housing.” Santarelli predicted buyers would continue to seek homes in the Seattle suburban markets since increasing listing volumes are doing little to ease inventory shortages in the city proper and emphasized the market still offered opportunities for investors. “Seattle has a track record of being one of the best long-term real estate investments in the U.S.,” he concluded, citing 140-percent appreciation since 2012 and noting Realtor.com named Seattle as the #5 housing market for “combined sales and growth for 2021.”
Thriving Local Employers Keep the Market Baseline Strong
Although Seattle has had its fair share of COVID-related challenges since the novel coronavirus seized hold of the U.S. economy and began to shake things up in early 2020, the resilience of its largest employers (think Amazon and Microsoft) has helped keep the underpinnings of the real estate market strong. “The Emerald City…seems to be more insulated than other metros of comparable size,” observed Motley Fool Millionacres contributor Tara Mastroeni. This has held true not just for owner-occupied properties, but rental occupancy as well. “Other major metropolitan areas have had people fleeing their cities in droves now that they are free to work remotely. By contrast, Seattle’s rental vacancy rate rose 0.1 percent on a year-over-year basis, which is good news for landlords,” Mastroeni said.
Of course, during the pandemic, low vacancy rates do not necessarily lead to high rates of on-time rental payments. Although Washington state estimates that statewide, between 80,000 and 150,000 renters were behind on rent payments in June of this year, The U.S. Census Bureau reported in September that “60,000 adults in the Seattle area are behind on their rent.” About half of those individuals reported being five months behind on rents but, interestingly, only about three percent said they were “very likely” to be evicted, likely because of current employment status.
Amazon, Microsoft, and Starbucks alone account for about a sixth of employment in the Seattle area, and all three companies have resisted the pandemic downturn. Amazon reported 220 percent increases in profits in May 2021, while Microsoft reported a 33 percent profit this past July. Although Starbucks, the city proper’s second-largest employer, took a hit during pandemic-related shutdowns, in April of this year it reported a “full recovery” in the United States along with profits that had nearly doubled year-over-year.
Investors interested in rental properties in the area can rely on solid employment opportunities for tenants but should bear in mind Seattle’s local government as well as Washington state’s government have a history of extending eviction moratoriums and stonewalling frantic landlords’ attempts to remove tenants who are deliberately damaging their properties. “The challenge is during this COVID moratorium, the city has passed new legislation which makes it more onerous…for us to successfully evict the tenants, and it has made it extremely expensive,” one local landlord complained. He cited as an example a tenant who has allegedly failed to clean up after his pets “in months,” owes $25,000 in back rent, and, at time of publication, could not be proven to a local court’s satisfaction to be “a threat to health and safety,” which would enable the landlord to remove the tenant in spite of the moratorium.
Short-term rental investors should also be aware of Seattle limits on Airbnb properties imposed in 2017, which required all short-term rental operators to be licensed and limit new operators to listing only their primary residences and one other unit. The restrictions were intended to address a then-burgeoning (now full-blown) housing inventory shortage in the area. At the time, critics of the rules argued that most of the properties currently in use as short-term rentals were “unlikely to become affordable options for locals” anyway. That trend has certainly held true during the pandemic.
It appears likely that Seattle’s underlying employer strength could support much more of Washington state’s market than just the extended metro area if remote work continues to be an option. It is likely to remain so for tech employers like Amazon and Microsoft even if other companies like Boeing and Starbucks ultimately require most employees to return to on-site locations. According to Seattle Times business reporter Heidi Groover, “White-collar workers, untethered from their desks after companies flipped to remove work because of the pandemic, are taking their housing searches – and their cash – farther from Seattle.” In October, Groover reported “outlying areas have boomed, from Spanaway to Poulsbo to Orcas Island.” Although some buyers have said they plan to wait and see how the fall, which tends to be a strong buying season in the northwest, plays out, local inventories are still strained.
Access to outdoor recreational activities like mountain biking and hiking just adds to many Seattle-area markets’ appeal, and investors should be aware that some of these “extension” markets are taking steps to preserve affordability. For example, in Bellingham, Washington, which is just over an hour from Seattle, a local land trust has been established that requires new homeowners buying properties from the community trust to agree to receive limited equity in order to preserve home affordability into the future. The trust is currently building more than 20 homes in the Bellingham area, has 45 more planned, and hosts a waiting list of about 70 homebuyers.
Multifamily, New Construction, Luxury Represent Potential Opportunities in 2022
Demand for housing units of any type still pervades Seattle, but condominium inventory is slightly more accessible for buyers with a median price just under $500,000. Investors will have to move quickly, however, as priced-out single-family residential buyers appear to be reconsidering the condo option.
“Not only is there pent-up demand as some choose to move back to the city center a year after civil unrest and a pandemic, but residential buyers are finding themselves priced out of the market and are moving toward condo ownership,” said Coldwell Banker Bain executive vice president of operations John Deely. He added, “People are buying the maximum house they can and factoring in the variable cost of a commute,” speculating that the condo market might not spike as quickly or as high as the SFR market simply because many buyers are still willing to buy in the suburbs because they are either “accustomed to long commutes” or are banking on not making them very often.
Unlike many other metro markets where the luxury market is softening, the Seattle upper-end residential market shows no signs of slowing. This could represent opportunity for investors able to tap into off-market listings or force dramatic appreciation in this housing tier. According to the NWMLS, about 15 percent of home sales through August in Seattle were for $1 million or more. The volume of homes meeting these criteria continues to grow; in 2021 (to date) there have been more than 10,200 $1-million-plus sales compared to just over 6,700 in 2019.
Yardi Matrix analyst Evelyn Jozsa added new construction in the Seattle area to the list of potential investment opportunities for investors, placing the city 10th on the Multi-Housing News list of “Top Markets for Construction Activity” in Summer 2021. “Seattle’s robust economic expansion and tech presence have contributed to creating demand for consistent, multifamily deliveries,” she wrote. “Major tech employers include Facebook, Amazon, Microsoft, and Google, which continue to attract well-educated Millennials and Gen Zers to the metro. Despite embracing the remote-work model, Microsoft, Amazon, and Facebook all expanded their local footprints [in 2020 and 2021].”
Investors who are able to create affordable housing units may also find specialized financing for their projects. The mayor of Seattle, Jenny Durkan, announced in late September that $50 million would be available for public-private joint projects that would “rapidly create new income- and rent-restricted housing in Seattle.” Durkan projected that “more than 1,300 homes will come online” in the next year. The city is also engaged in identifying existing multifamily buildings that are eligible for conversion to affordable housing. This, says one city councilmember, is the only solution to Seattle’s ongoing challenges with homelessness and affordable housing.
Finding the “Best Life” for Your Real Estate Investments
Seattle’s nickname, the “Emerald City,” is a tribute to the year-round, lush greenery that characterizes the region. Also, most likely, it has something to do with wanting nomenclature a little less directly focused on roughly half a year of rain. For thousands of locals, however, the rain is just part of the city’s charm and makes the mountain biking, hiking, whale-watching, and fine dining even more fun. The appeal reaches far beyond the city proper, with areas as far away as Bellingham (two hours), Skagit Bay, and, of course, cities and towns proximal to Puget Sound.
The current homebuyers in the extended Seattle area have “cash to spend and mountain bikes in tow,” said Bellingham agent Damian Pro in an interview with the Seattle Times. “They have this mentality of ‘we want to live our best life,’” he added, noting that smaller markets are changing to accommodate new demand. Investors may well find the “best life” for their Seattle-area real estate investments by looking not just in the metro area but also farther afield.
SIDEBAR
Port of Seattle: Leading the Pacific Northwest Economy
In 1911, King County voters approved the Port District Act and created the Port of Seattle, one of the largest airports and container terminals on the West Coast. Although construction on the port began in 1913, it took more than two decades to get the port running. When construction was finally completed, the port grew rapidly, adding piers, receiving a foreign-trade zone designation in the wake of World War II, and eventually expanding to include a cruise terminal. Just over a century after the Port District Act was approved, the Ports of Seattle and Tacoma merged to form the Northwest Seaport Alliance, creating the third-largest cargo gateway in the United States.
Today, the Port of Seattle’s mission statement includes a goal to “add 100,000 jobs through economic growth led by the Port for a total of 300,000 Port-related jobs in the region.” The Port of Seattle also conducts an annual “diversity in contracting” report and holds itself “responsible for catalyzing growth in our regional economy while intentionally pursuing policies that foster and sustain family-wage jobs at small businesses, promote equitable career opportunities, promote tourism in the state, and leverage its real estate holdings for job creation.”
Investors should take note of port operations when considering Seattle-area investments. Port-related jobs tend to be relatively recession-proof and even pandemic-resistant because of the importance of maintaining the supply chains both locally and nationally. According to the Port’s own economic impact analysis published in 2013, that year the Port generated more direct jobs in the Seattle area than Microsoft, Boeing, and the University of Washington as well as bringing nearly $20 billion in business revenue into the local economy.
SIDEBAR
Top 5 Employers in the Seattle Metro Area
1. Amazon // 80,000 employees in Washington State
2. Microsoft // 57,666
3. The Boeing Co. // 56.908
4. Joint Base Lewis McChord // 54,000
5. University of Washington Seattle // 49,526
* Data provided by Paxtyn Merten, Puget Sound Business Journal
SIDEBAR
Seattle’s Thriving Startup Community
Seattle was crowned #9 on CrowdSpring’s list of “15 best U.S. Cities (outside of Silicon Valley and the East Coast) to Build Your Startup in 2021.” It comes as little surprise that the home of Microsoft, Amazon, and Starbucks would make the cut. According to CrowdSpring analysts, Seattle will likely add another 200,000 residents by 2041. They credited “a young, vibrant population, a booming tech industry, and a run of interesting restaurants, unique shops, and coffeehouses as among the reasons for the increase in start-up traffic in Seattle.” CEO of the Seattle Metro Chamber of Commerce Maud Daudon credited Seattle residents’ “eclectic, entrepreneurial spirit” for the burgeoning startup community. Interestingly, the city does not offer substantial tax incentives to small businesses or startups, so the main attraction lies in the many small-business incubators and programs and venture capital firms located in the area. The “first neighborhood” of Seattle, Pioneer Square, is currently considered a hot area for startups and their owners and employees, but there is relatively little available housing in the area. In fact, the neighborhood contains about 2,500 households and fewer than 4,500 residents, so investors able to create more housing opportunities in the area or near the area without violating development restrictions could find themselves in the enviable position of having attractive inventory and very little competition.
