$6.00 per Square Foot Rent in Seattle?

With a pronouncement like $6.00 per square foot rental rates, most assume this is a post about the future of Seattle.  “One-day Seattle will hit $6.00 rents!”  Well, that is not the case.  We are talking about today, and we are not discussing luxury rental units – quite the opposite.

Over the last decade – yes, decade – a group of developers have built thousands of micro apartment units and SEDU apartment units.  The latter acronym standing for Small Efficiency Dwelling Units.  Buildings containing these units are located all over the city, mostly in dense urban locations.  And guess what – they are performing very well, with $6.00 per square foot rental rates not at all uncommon.

The Seattle Multifamily Team just released our inaugural 2017 Efficiency Report, a comprehensive study of the efficiency unit market in Seattle, covering micro apartment units and SEDUs. In this report, you’ll find an aggregation of data and analysis on rent & vacancy, sales & development, and income & expenses.

The SMT Report – 2017 Efficiency Unit Report

Just as open one-bedrooms were once a new unit type, so are efficiency units – and they are here to stay.  Keep reading to get the full scoop!

As developers of tens of thousands of traditional market-rate apartment units fight for their share of Seattle renters’ income, owners of buildings containing micro apartments and SEDUs on average are getting a higher rental rate for each net rentable square foot.

This unit typology is often maligned or dismissed – and in some cases, statutorily outlawed.  However, we are believers, and we see a future where micro apartments and SEDUs are just another unit type that become part of tomorrow’s typical rent roll.  As the traditional market rate apartment unit continues to stray from what the average Seattleite can afford, efficiency housing is hitting its highest demand ever.

This week, I’ll review some of the core trends we uncovered in this study:

  • Efficiency Units Remain Seattle’s Most Affordable Option
  • Efficiency Units Will Become New Unit Typology
  • Sales Pricing is Extremely Strong Despite Investor Skepticism

 

Efficiency Units Remain Most Affordable Option

Efficiency apartments are a successful and growing product type because residents want a new, clean, efficient and affordable place to live close to Seattle’s core.

Our research shows the average asking rent in Seattle for micro apartments is $998 per month, while the average asking rental rate for a SEDUs are a little more than $1,250 per month.  Both options are a discount to market rate studios ($1,546 per month on average) and both building types average a 3.9% vacancy rate.

Source: Colliers Research, Dupre+Scott

The delta between rental rates provide owner of efficiency units substantial room to raise rental rates while remaining the market’s most affordable option.  While SEDU pricing is gradually approaching market rate studio unit pricing, micros remain affordable for renters while still giving investors nearing $6.00 square foot rental rates.

It’s interesting to note that efficiency units in Seattle are running the same vacancy rate as market rate studios. Some people believe that micro apartments and SEDUs have higher vacancy rates and higher turnover; however, our research and experience with this product type is busted this myth!

 

Efficiency Units Will Become a New Unit Typology

There are a lot of new efficiency units planned in the next four to five years, and the city is set to absorb more than 3,900 new units. Yet our team predicts that efficiency units are not only a successful product type – they will also become part of any market rate apartment’s unit typology over time, right alongside the traditional studio, one-bedroom and two-bedroom unit type.

This trend is already happening in new buildings.  For example, Shelton on Eastlake has approximately 10% of its rent roll comprised of SEDUs. Mixing smaller, more affordable yet well-built units into a market-rate apartment building helps investors increase overall rental rates, and offer a more affordable entry-level unit.

 

Sample Floorplan for Mixed Market Rate Apartment

Source: Shelton on Eastlake Design Proposal

 

Sales Strong Despite Skepticism

Despite myths abounding about efficiency apartments, savvy investors see the value in this product type. Three micro apartments and three SEDU apartments have been sold over the past two years, and more owners are interested in selling as they see prices climb.

Source: Real Capital Analytics, Dupre+Scott, Colliers

Source: Colliers Research, Real Capital Analytics

The Seattle Multifamily Team sold all three micro apartment buildings – with the latest sale achieving a sales price of $790 NRSF – higher than any other market-rate, podium building sale in Seattle.

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Just as renters are sustaining efficiency units by keeping rental rates high and vacancy low, investors are catching on to the fact that efficiency apartments produce outsized cashflow compared to market rate apartment buildings.  Our 2017 Efficiency Unit Report provides the basis of the durability of efficiency units as a true apartment unit type.  They are here to stay – so might as well stay informed!

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