In last week’s blog post, I discussed the impact of rising interest rates on real estate. Another consideration is supply vs. demand, with the relative attractiveness of the rental market a major factor in pricing. And that’s especially true for the rental market in and around Seattle: Rents in the Puget Sound are at historic highs. As all these shiny new apartment buildings are going up, they are quickly being filled by tenants. Consider that the regional vacancy rate is now just 3.5%, well below the 20-year average of nearly 5%.

However, a recent report by Kidder Matthews indicates that although the Puget Sound region continues to be stronger than most rental markets in the US, there are signs that local rental trends are likely to change in the next few years.

Kidder Matthews’ latest outlook is that the Puget Sound rental market “remains on a plateau at the top of this cycle.” We’re already starting to see a slowdown in rent increases in close-in areas (although some suburban areas continue to see increases since they started to recover later). And this trend is expected to continue over the next few years for this key reason:

Lots of new supply coming. As the chart below shows, the number of new apartment units available in our five-county region (based on latest delivery timelines) is expected to keep rising, peaking in 2018. In the next four years, 87% of the new units will be in King County (Pierce and Snohomish Counties will account for about 6.5% and 5.6%, respectively). Based on these forecasts, Kidder Matthews expects the regional vacancy rates to peak at about 7.2% in late 2019, then fall back down closer to the historical average of about 5%.

Offsetting factors: The Puget Sound rental market could be steadier than what Kidder Matthews is forecasting based on supply/demand. As I noted in my blog post last week, rising mortgage rates tend to slow house sales, and this could keep Puget Sound rents stable (or allow them to even rise slightly) as more renters stay put. In fact, the 30% jump in Puget Sound home sales this November, is likely driven by new buyers wanting to lock in low mortgage rates.

Perhaps more important is that both renters and buyers continue to be attracted to the Seattle area because of our vibrant local economy. Since economic indicators continue to point to local growth, demand for housing — from buyers and renters  —  is likely to remain stable in the near future.

Other factors that could keep local rents relatively high: Lack of affordable homes/condos in high-in-demand neighborhoods; growing preference for urban living by young and old (empty nesters); more people opting to rent for the flexibility it provides; lots of Millennials (24 to 35 year olds) forming households and renting.

What all this adds up to: Those deciding whether to buy, rent or sell real estate in the Seattle area will continue to face a difficult choice.