TACOMA MULTI-FAMILY MARKET REPORT

Overview

Tacoma is the largest multifamily submarket in the Seattle metro with more than 36,000 units. It is a dynamic submarket, with strong demand keeping the vacancy rate low despite a steadily increasing inventory. The vacancy rate sits at 6.1%, having risen somewhat as a wave of new construction arrives. That said, new communities typically lease up quickly.

The area has long been seen as a more affordable alternative to Seattle, both for renters and homebuyers. This has driven up the cost of housing in recent years. As a result, the gap between Tacoma and Seattle rents has tightened. That said, rents are still significantly lower in Tacoma and rent growth has started to decelerate. Annual rent growth sits at 2.5%, compared to a recent all-time high of 10.2%.

In addition to a general slowdown that is being felt nationwide as households tighten their belts, new construction may be one-factor impacting rent growth in Tacoma. About 680 units were delivered to the submarket in the past 12 months and another 3,200 remain under construction. Most activity has been clustered in and around downtown, where residents can take advantage of access to nightlife, transit, and other urban amenities.

Tacoma City Council recently passed an ordinance eliminating most single-family zoning and allowing at least three units per lot, with some zones allowing more density than that. This measure will allow higher-density housing in most of the city. An update of zoning and design standards is expected to take place soon. This may help boost development, but many already take advantage of incentive programs such as the state's multifamily tax exemption program. According to players in the submarket CoStar spoke to, this may do more than zoning to spur activity.

The submarket's 12-month trailing sales volume slowed recently but is still above the long-term average. A total of 54 market-rate apartment communities traded hands in the past 12 months, totaling $304 million in volume.

12 MO. DELIVERED UNITS

563

12 MO. ABSORPTION UNITS

153

Vacancy

A popular alternative to Seattle and other more expensive submarkets in King County to the north, Tacoma is the largest city in Pierce County and has seen strong in-migration, including households relocating from King County and is a draw due to affordability but also proximity to parks and nature and a growing array of urban amenities such as transit, nightlife, and museums.

Tacoma also has several large institutions that create a built-in draw.

Several large universities dot the area, including a satellite campus for the University of Washington in Downtown Tacoma. University of Puget Sound and Pacific Lutheran University also have large campuses nearby. Most of the students attending these schools live on or near campus.

Proximity to Joint Base Lewis-McCord is also a driver of apartment demand. The base hosts approximately 60,000 troops, along with their families and many decide to settle in the region after deployment.

Tacoma has one of the largest populations in the metro, but the median household income is roughly 25% below the metro median. This means the submarket has a high share of rental households, at over 45% (compared with about 40% metro-wide).

With a large lower-income population, lower-rent properties tend to have tighter vacancy rates than others in the submarket. Also, while not included in CoStar market reports, about one in 10 apartment units are in low-income apartment complexes. For those buildings, vacancy is nearly nonexistent. In contrast, the vacancy rate for market-rate units has risen recently and now sits at 6.1%.

Incomes are growing, as residents move from more expensive places like Seattle and the Eastside. White-collar jobs are also increasing in the city as companies look to Seattle's neighboring cities as more affordable places to do business with fewer regulations. Due to this migration, Pierce County consistently ranks among the fastest-growing in the nation.

Sound Transit is in the process of expanding the Tacoma Link light rail line, adding six new stations between downtown and the Tacoma Dome, attracting a wave of new development. A future extension to Tacoma Community College will expand the line further, and the additional service will run 8.4 miles across the city with 18 stations, connecting users to local destinations as well as the coming regional light rail at the Tacoma Dome Station.

Investors are also showing interest in other neighborhoods and development is likely to spread to other parts of the city in the long run. The city council recently passed an ordinance that will allow multifamily development throughout the city, increasing development potential.

The area is home to several Opportunity Zones, including Hilltop and South Tacoma. Opportunity Zones were created as part of the Tax Cuts and Jobs Act of 2017 in order to entice investment in lower-income neighborhoods. The program allows investors to defer, reduce, or even eliminate capital gains taxes on real estate investments.

VACANCY RATE

6.1%

Rent

At $1,480/month, Tacoma has one of the lowest average asking rents in the Seattle region; the metro norm is $1,940/month and rents are even higher in Seattle and cities on the Eastside. Tacoma's rent growth has begun to slow from a recent double-digit high. Annual rent growth sits at 2.5%, down from 10.2% within just the past few years.

This follows a trend in the region and across the nation, where rent growth is falling due to slowing household formation as the economy slows and the pandemic-era stimulus winds down. In Tacoma, this is exacerbated by a large amount of new inventory, particularly at the high end of the price range. As such this tier has seen slower rent growth than more affordable market-rate properties. The lowest tier, 1 & 2 Star properties, have seen 3.8% growth over the past 12 months, compared to 2.4% for 4 & 5 Star and 1.7% for 3 Star properties. Renters looking for high-end units in Tacoma will see a notable difference in rates for 4 & 5 star units ($1,840/month) compared with their 3 Star counterparts ($1,570/ month). However, these are still much more affordable and typically larger than 4 & 5 star units in Seattle and Bellevue.

2.5%

CoStar market and submarket reports focus on market rate communities, but affordable housing is an important component of the inventory not included in these market statistics. As incomes are lower in the area, affordability is a major issue. Much of the new development in the area take advantage of a multifamily tax exemption that requires a certain number of units to be set aside for lower-income families, restricting the rents that can be charged for those units.

© 2023 CoStar Group – Licensed to Rental Housing Association of Washington – February 9, 2023