Thanks for reaching out on this interesting forum thread, @Troy Fisher.
I agree with your comments about cashflow opportunities are almost entirely gone from the Seattle metro at this time, and any decent returns are on the outskirts or beyond. Tacoma is an interesting market because of its proximity and growth potential, yet it has some stigma, uncertainty, and spotty neighborhoods in the minds of Seattlites, and that helps keep its cap rates up in comparison. Spokane, as you mentioned, also has some interesting momentum to it due to increasing in-migration and gradually diversifying economic base. Other eastern Washington strongholds for value and cash flow can be Tri-Cities and Yakima.
On the western side of the state, there are strong dynamics going on in several I-5 corridor communities north of Seattle (such as Bellingham and pockets of Mount Vernon). Better cash flow can be found with good properties in several south I-5 communities since they have some moderately declining populations and less diversified economies, and therefore demand a higher risk adjusted return. Olympia is a strong market for rentals, but the market has been getting picked over and the cap rates / COC is generally low. There are a few other small cities of note, such as Port Angeles, which is enjoying very high residential occupancy and demand, though the office and retail market there has been on a slower lagging growth curve.
The main problem I am seeing in all of these markets is consistent in many other states as well: There is a lot of capital chasing fewer and fewer deals. So the primary markets are saturated, and investors there are basically parking money with minimal immediate COC return. To get return and find something that at least moderately cash flows, other investors are going into markets they never knew about: first to secondary markets and now to these tertiary markets. This has compressed the cap rates even "out in the sticks", and its a great time to be a seller in these slow but steady outlier cashflow communities.
Many properties are now selling with current financing such that the COC return actually becomes less than the cap rate for a property, which defeats the arbitrage advantages of financed leverage. The investors are also taking on a lot of market risk: prices are high, eventually there will be a down cycle again, and the first buyer pools to dry up tend to be in the tertiary markets (especially with the current urbanization trend among millenials). If there is a local economic shock, or if interest rates ever increase, or if the general US economy and investor sentiment declines, then the cap rates will go back up and the value of their properties will drop quite a bit.
So, the moral of the story is to investigate these interesting outer edge markets, but make sure you know what you are doing and get a proportionately higher risk-adjusted return. I'm personally ready and eager to buy new multi-family/commercial properties as always, but by not lowering my investment criteria I'm needing to be a lot more patient now as compared to a few years ago.
Scott
