Investment in any class of asset requires significant understanding of myriad fundamentals shaping the investment environment, especially pricing risk in the form of the daunting tasks of predicting stability and plotting growth expectations. The study of both macroscopic and granular trends is the key to prescient investment strategies and market-leading returns.
In 2015, attempting to find an acceptable level of risk-adjusted return is formidable, regardless of asset class. Treasuries pose a risk of interest rate appreciation and commensurate bond depreciation in light of resetting rates. Current equity markets seem mispriced in light of historical levels of market capitalization to GDP ratios. See the following two graphs for insights on both points:
Commercial real estate investment professionals speak in the same parlance of risk-adjusted returns and are squarely focused on, one, the durability of an asset’s income stream and, two, the predictability of growth. High-growth potential markets are often shrouded in risk, and “durable” markets generally offer yield levels appropriately matched to lower risk.
Times are unique in Seattle. The city is experiencing a true renaissance across many sectors of the economy and populace. It is for these reasons that investment in commercial real estate assets in the Seattle region — specifically apartment investment — offers investors an uncommon risk profile: low risk with high-growth potential.
The following four points offer a glimpse into Seattle’s thriving economy and long-term prospects for sustained economic growth. Investment in any market is not without risk, yet the ability to counterbalance risk with proven and sustainable fundamentals will help any investor sleep better at night.
Job growth a stability leads the nation
As of today’s news, the U.S. unemployment rate fell to a low of 5.4 percent. Although this is fantastic news, Seattle’s unemployment rate fell below this mark over three years ago in Q1 2012.
Currently, Seattle’s unemployment rate is at a low of 4.1 percent. Across the nation, it is hard to find another MSA with a blended unemployment rate below 4.5 percent, especially one adding the type of high-wage earning jobs as those offered in the Seattle region.
Seattle tech workers literally send people to the moon
Seattle jobs have literally gone from aerospace to outer space. Back in the 1970s, concern for Seattle as only a Boeing Town was warranted, forever memorialized with a 1971 billboard reading “Will the last person leaving Seattle turn out the lights?” That memory symbolized the city’s dependency on the aerospace industry.
Today, SpaceX is adding nearly 1,000 outer space-related engineering jobs to the loacl economy. Blue Origin in Kent, Wash., is competing to send rockets (and people) into orbit. Kirkland-based Systima Technologies Inc. is providing integral technology for the endeavors of SpaceX, Blue Origin and others.
Although we spend a lot of time in Seattle talking about Amazon.com (appropriately so!), the region’s job sector is more diverse than ever. Over the last decade the region experienced a critical shift from a company/industry-specific job base to an ecosystem job base – much like that of the San Francisco Bay Area.
In the end, the critical elements are stable jobs and high-paying jobs. A recent Dice.com survey concluded that Seattle’s tech salaries are within 13 percent of those found in the S.F./Bay Area ($99K/year vs. $113K/year respectively). Placing the net differential in context, California’s marginal tax rate for these earners is 9.3 percent, and the state’s highest earners are taxed at 13.3 percent, which wipes out nearly all advantage to California wages.
Seattle rather affordable
The other side of the coin is affordability. Although we have heard much ado about the housing affordability crisis, the empirical data illustrate that, from a comparative rental housing standpoint, Seattle is more affordable than cohort cities.
In a recent study, Seattle Times writer Gene Balk reported that Seattleites pay the lowest percentage of of their salaries on rent, compared to other major U.S. cities.
Rental housing is not the only measure of affordability. Yet it is a good bellwether of the ability for people to sustain a lifestyle and grow a family in a region. Overall, housing is comparatively affordable in the Seattle region. In King County, average home prices are below $400,000. The median home price in San Francisco tops $1,000,000.
The ability to earn a good living, provide housing for yourself and family, and have a prospect of home ownership all contribute to the attractiveness of our region. Attracting and retaining a citizenry looking to travel such a path ensure long-term stability and growth in Seattle.
We have water!
When commercial real estate investors decide to invest in a market, decisions are often clouded by near-term phenomena and news-worthy headlines. Yet, for value investors with long-term investment horizons, certain fundamentals must come to bear. Water is certainly one such factor.
Issues with water and riparian rights have impacted many investment markets including Los Angeles, Reno, Phoenix, Las Vegas and Atlanta. The issues generally come to light at the top of real estate cycles where densities increase and municipalities plan for the future. We are again at one of those precipices.
Seattle has all of the great attributes of a constricted market. It’s what I often call the “Manhattan Effect,” where geographic barriers and entrance barriers lead to scarcity of land and assets, resulting in pricing premiums. Unlike New York and other Manhattan-esque markets, Seattle has room for further growth, asset pricing that is not yet obscene and water to support continued growth.