Multifamily housing sales performance in the Puget Sound region was a welcome highlight in local real estate last year, and this year the segment promises equally compelling momentum.
Our friends at Collier’s reported the Seattle/Puget Sound saw big multifamily gains in 2021, accounting for $8.2 billion in regional transactions, well above (more than 40%) the historical five-year average of $5.4 billion. Things picked up in Seattle’s rent submarkets most notably after mid-2021, up an average 13%. Looking at the apartments that sold in 2021, 9 out of 10 were either high-rise or midrise. These investments were predominately bought by institutions and family offices that took advantage of low rates. In any case, multifamily has been and continues to be an opportunity worth a second look.
Forging into 2022, inflation will have the biggest impact on private real estate. It affects ground-up construction, capital expenditures, and cap rates. Consider that year-over-year inflation increased 6.8% for the 12 months ending in November 2021 at a rate not seen since 1982. Supply chain costs and higher wages follow. We’ve been anticipating the Fed raising interest rates by 2023, but after November’s spike, indications point to the interest hike coming closer to mid-2022.
Cross-industry labor shortages are also inflationary, and COVID continues to affect how and where we choose to work. Imagine, 4.2 million workers left their jobs in September. As in-demand candidates are looking for the best offer, a hybrid environment (part in-office/part remote) will continue to have appeal. Employers still need office space, but also need to remain flexible to remote work styles if they plan to retain talent. We say this because remote and hybrid work will only continue to fuel the migration to warmer states with lower housing costs and lower taxes.
That brings us back to multifamily. Multifamily will see modest valuation appreciation and strong rent growth, especially in suburban areas. Whether city or suburban, rent growth should continue to hold strong for 2022 and properties should see modest appreciation, but less than we saw in 2021. Where interest rates can put upward pressure on borrowing rates and more, there are still plenty of investors (and private lenders!) looking to put equity in multifamily housing. Impending inflation suggests rents will continue to rise as workers making those higher wages have a little more money to spend. And, because those remote workplaces demand more elbow room and delineation from the common living spaces at home, suburban multifamily growth potential looks favorable.
New construction always fetches premium rents. That, combined with more modest price appreciation expected this year, tips the risk-reward balance in favor of new construction. Value-add renovations, on the other hand, must have real competitive advantages to pencil out and attract investment/lending.
Another multifamily development-boosting initiative specific to Washington State could be coming straight out of Olympia this year. Last month, Governor Jay Inslee announced that he and local lawmakers are working to bolster density flexibility for more affordable housing statewide, projected to create hundreds of thousands more homes in the central Puget Sound and many more throughout Washington. Inslee articulated his support for a statewide policy to overturn local bans on “missing middle” housing, to effectively end single-family zoning. If passed and implemented, smaller-scale multifamily housing (think courtyard apartments, multiplexes, and townhouses) could see a significant boom. And when opportunity knocks, we’ll be here.
If you’re looking for multifamily zoned land or multifamily development or any quality commercial real estate investments throughout the Pacific Northwest, we’re here to help. Juniper Capital provides private real estate financing, including hard money loans for commercial, construction, multifamily residential opportunities, and more. If you would like more information on this topic, call us today.