Spokane Multi-Family Market Report - June 2024

OVERVIEW 

12 Mo. Delivered Units-2,014

12 Mo. Absorption Units-1,547

An uptick in demand in the first quarter pushed absorption higher, and the more than 500 units absorbed that quarter nearly matched the number delivered. In contrast, developers added about 2,000 units in Spokane over the past year, while households absorbed about 1,500. That pushed the vacancy rate from 5.5% to 6.4% over that stretch.

Deliveries and absorption have been roughly evenly split between mid-tier and luxury-tier communities. That marks a shift from a few years ago when most new construction was in the mid-tier category. Luxury units comprise only about a fifth of the overall inventory. As such, the 1,000 units added to that tier over the past year make up a larger share, causing the 4 & 5 Star vacancy rate to rise faster. Including new properties still leasing up, the vacancy rate for that segment sits at 7.5% compared to 7.0% one year ago. In contrast, the mid-tier vacancy rate sits at 7.0% today, compared to 5.4% one year ago.

Competition from new construction last year put pressure on rents, and the Spokane market saw falling rents in the middle of the year. That said, stronger leasing volume has returned to the market over the past few months. In turn, rent growth has returned. Over the past 12 months, average asking rents in Spokane rose 1.4%, with rent growth strongest in mid-tier properties.  

The difference in rents between 3 Star and 4 & 5 Star tiers is less than in larger coastal markets like Seattle. In Spokane, 3 Star units average $1,370/ month, while those rated 4 & 5 Star average $1,610/month. That compares to a national figure of $1,560/month for 3 Star properties and $2,120/month for 4 & 5 Star properties.

A slowdown in construction starts over the past year will translate to a slowdown in deliveries next year, providing less competition among rental communities. That should push rents higher, and rent growth over the coming year is expected to move above the all-time average of about 2.6%, even as it comes in below its post-pandemic average of nearly 5%.

The market has seen steady population growth, and public policy has shifted in favor of multifamily as the source of new housing. For example, Spokane recently passed legislation allowing multiple units in all residential land throughout the city and other density-oriented policy changes. There are headwinds. For one, the development of smaller rental properties may compete with more traditional apartment communities for renters. Slowing economic growth, including slower job growth, could also impact demand.

VACANCY 

Vacancy Rate-6.4%

Continued population growth and policies favoring multifamily development have led to a strong demand for apartments in the Spokane area. However, a slowing immigration of new residents and a general economic slowdown could temper demand. Due to a slowdown in construction activity, supply and demand should see a rebalancing, and the overall vacancy rate will likely move closer to its long-term average as the recent wave of construction deliveries leases up.

Over the mid-term, the pace of absorption has not kept up with this rapid pace of deliveries. Developers added about 2,000 units over the past year, and households absorbed about 1,500. The disconnect between supply and demand increased vacancy in the short term. Over the past year, the vacancy rate rose from 5.5% to 6.4%. The increase in vacancy has been almost entirely due to the pace of new construction. The vacancy rate for properties that have completed their lease-up period is much lower, remaining below 6%.

Performance has varied by tier. More luxury 4 & 5 Star units have seen 920 units of absorption against 1,000 delivered, and vacancy has risen to 7.5% in that segment. While that tier saw a disconnect between supply and demand, construction slowed dramatically, and 230 additional units are under construction. That should lead to a tightening vacancy rate over the coming year.

While the 3 Star tier has seen demand and supply more or less in balance over the past, it has also seen an increase in the number of units under construction. Those under construction are enough to increase the 3 Star inventory by 4.6%. That could mean a higher vacancy rate for that tier a year from now.

While development has outpaced demand over the past year, absorption has ticked up in the past few months. At the same time, the number of units breaking ground has decreased. Even if demand reverts toward its long-term average, Spokane should see vacancy decrease in the coming months as construction slows.

RENT 

12 Mo. Asking Rent Growth-1.2%

As of the second quarter of 2024, year over-year rent growth sits at 1.2%, a return to rent growth after the market saw annual growth flatten in mid-2023. The current figure compares to an annual rent growth rate of 1.4% one year ago and a five-year average of 4.6%.

Rent growth in Spokane is coming in stronger than that of the nation. Rents in the submarket are significantly lower than the national average but strong population growth over the past few years propped up demand, and the market saw outsized rent growth compared to the national benchmark. Rent growth in the most recent 12- month period came in at 1.2%, compared to the national benchmark of 1.0%.

Rent growth has been strongest in 3 Star inventory, which has seen its vacancy rate remain relatively low compared to luxury tier units. Annual rent growth for midtier properties came in at 1.2% over the past 12 months. The 4 & 5 Star tier has seen slower rent growth and higher concession levels. The luxury tier has seen more rapid inventory growth when measured as a percent of existing inventory, putting more pressure on rents.

Areas outside of the more central cities of Spokane and Spokane Valley have seen the strongest rent growth of late. South Spokane saw a significant jump in inventory over the past year, and the pricing of these units was enough to push the average asking rent higher in the submarket, particularly for its 3 Star inventory. In contrast, downtown Spokane saw negative annual rent growth over the past year. In down - town, the vacancy rate has risen above the historic norm due to the pace of new construction and conversions, and new communities are taking longer to lease up. 

Slowing construction and strong demand should keep rent growth positive in the Spokane metro going forward. We expect rent growth to accelerate through the end of the year, rising above the Spokane market's long-term average, even as it falls below its pandemic-era average of close to 5%.

Some potential headwinds could change this outlook. A weaker performance on population growth or jobs could impact apartment demand and rents. Spokane was among the first metropolitan areas to see a year-over - year decline in total employment over the past year, pointing toward weakness in the local job market.

CoStar market and submarket reports focus on market rate communities, but affordable housing is an import - ant component of the inventory not included in these market statistics. As incomes are lower in the area, afford - ability is a major issue. Much of the new development in the area take ad - vantage 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.

© 2024 CoStar Group – Licensed to Rental Housing Association of Washington – April 11, 2024