Spokane-area apartment vacancy rates have stabilized at a normal rate this year as multifamily construction projects are completed and new units are added to the housing supply.

Affordability concerns, however, are straining the market, some market observers here say. 

Spokane County's apartment vacancy rate is 5.8% as of the third quarter, up 0.7 of a percentage point from a year earlier, according to data from the Washington state Apartment Market Report, by the Washington Center of Real Estate Research. Statewide third-quarter vacancy rates averaged 5.2%, and are up 0.2 of a percentage point from a year earlier. 

Comparatively, in spring 2021, Spokane County's multifamily vacancy rate reached a historic low of 0.5%, according to information in the apartment market report.

Grant Forsyth, chief economist at Avista Corp., says a normal vacancy rate for the Spokane market is between 3% and 5%, an indication that the county's vacancy rates have been showing signs of stability for about a year. A tight market occurs when vacancy rates dip below 2%, he says.

Spokane County vacancy rates this year are rising primarily due to an increased supply of housing, says Steve Scranton, Washington Trust Bank economist, who adds that about 510 new units have been brought online through the second quarter this year.

In Spokane Valley, the $12.9 million 4th Avenue Apartments complex, developed by Spokane developer Jordan Tampien, at 6020 E. Fourth, in Spokane Valley, was completed this fall, bringing 107 units online.

In the city of Spokane, 15 occupancy certificates have been issued for a total of 313 multifamily units between January and October this year, including 118 units at the 508 Building, at 508 W. Sixth, permit data provided by the city of Spokane shows.

"The units that have been permitted in the past are starting to come online, and our vacancy rate has finally started to really normalize," Forsyth says.

Multifamily vacancy rates also are trending higher across the U.S. this year, Scranton contends. The national vacancy rate is 1.1 percentage points higher than the vacancy rate in the Spokane area, he says.

"We're nowhere close to the levels that we saw just after the financial crisis back in 2009, where we had vacancy rates all the way up to 11.1%, but clearly the trend is rising," says Scranton. 

Affordability also is impacting increased vacancy rates here, says Forsyth.

Higher multifamily vacancy rates typically benefit tenants as units become more affordable, says Forsyth. However, even with an increased housing supply, there are some underlying issues of affordability that remain obstacles for some renters here.

Between spring 2021 and spring 2022 during the pandemic, there were a lot of people in-migrating to the area, resulting in a 14% increase in rent per square foot at the time, explains Forsyth.

Rents have since slowed to an increase of about 2% per square foot between spring 2023 and spring 2024, however, rents are still relatively expensive for incomes in the region due to the initial jump two years earlier, Forsyth says.

"The good news is the rate of increase has clearly slowed. The bad news is the level of rents is still relatively high," he says.

The third-quarter average rent for all types of apartments in Spokane County is $1,307 per month, according to information in the research report. One-bedroom apartment rents average $1,133, up 2.1% from 2023. The average rent for two-bedroom units is $1,339, an increase of 2.2% from a year earlier.

Insurance and maintenance costs of multifamily properties also are impacting affordability, as rising costs are being reflected in higher rents that are passed on to consumers, says Forsyth.

"Insurance is often a requirement for these projects, and it was just assumed that insurance was available through the private market, but that market is really struggling because of increased risks," says Forsyth. Insurance costs are either rising significantly to handle current market risks or policies are being cancelled altogether because insurers aren't willing to accept the risk, he adds.

High construction costs are creating another set of affordability challenges within multifamily development, especially for low-income housing, Forsyth says.

The costs of land, labor, and most raw materials remain elevated, which Scranton says is influencing the types of apartment projects under development in the Spokane area.

Many multifamily developers typically are interested in building luxury apartments, since those are the projects that builders can break even or make a profit on, Scranton says. 

"There's more vacancies for high-end apartments," says Scranton. "Essentially, we don't have as many high-paid employees coming in."

A characteristic of real estate development is to build enough units to meet the current demand for housing, however, by the time those apartments are completed, the demand may not be there, Scranton explains.

Affordability also is being impacted by the demand for housing, which is stimulated each time the Federal Reserve lowers interest rates, Forsyth says. The Fed's decision to lower rates has helped spur housing demand by bringing more people to the market, but lower federal rates also are contributing to elevated prices because it brings increased competition coupled with a constrained housing supply.

"Excluding some extraordinary events, the overall price level for housing is going to remain relatively expensive, and we're just going to have to wait for incomes to gradually catch up," says Forsyth.

In the city of Spokane, permitted multifamily units have grown year over year since 2022, when 438 units were permitted from January to October, followed by 937 units permitted in the first 10 months of 2023, market data shows.

This year, 1,007 multifamily housing units have been permitted from January to October, according to permit data compiled by the city.

Two projects, the 44-unit Garland Apartments and the 30-unit South Freya Multifamily complex, have been approved this year and will continue to impact the housing supply as units are completed and are brought online, city permit data shows.

Going forward, both economists say that additional collaboration is needed to focus on building housing that meets the needs of the community at attainable price points.

"You've got to bring all the stakeholders together to understand what we need and then build what's actually needed here," Scranton says. "That means neighborhoods have to be willing to support new development. ... Governments have to be willing to reconsider how they can lower costs of permitting and regulations. And developers have to figure out more efficiencies. "