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D.C.’s Multifamily Market Sees Strong Demand for its Healthy Development Pipeline

JBG Smith’s West Half apartment community will feature 465 units. The property will overlook Nationals Park and will feature street level retail space. (Rendering courtesy of JBG Smith)

Washington, D.C.’s multifamily market has enjoyed success in recent years, and 2018 has been no exception. The regional economy continues to function at an extremely healthy level, adding 77,100 new jobs in the trailing 12 months ending July 2018, much more than the annual average of 41,000 since 2010.

The region has outgrown its previous dependence on the federal government, which contracted by 4,800 jobs over the same period, further highlighting the strength of the region’s private sector. This sustained economic upside is only further enhanced by the looming possibility of Amazon’s HQ2, Apple and other large tech contracts.

Walter Coker
Managing Director,
HFF

The strong job growth has been matched by a steady increase in population, which has grown 10.44 percent since 2010, to roughly 6.25 million people. To accommodate such growth, the supply pipeline has been equally as robust, delivering nearly 13,000 units per year for the past five years. In addition to all the recent deliveries, absorption has remained steady and strong, with the market absorbing a net positive of 7,570 units over the trailing 12 months.

Furthermore, Class A rents have still managed to grow 1.4 percent over the past year, while overall market rent growth has grown an even higher 1.7 percent.  All of these economic factors have positioned the market for long-term growth.

A hotspot for multifamily development has been the D.C. Southwest Waterfront, where it is clear that despite supply, demand continues to push new rents higher in the recently delivered projects. The SW Waterfront has delivered nearly 1 million square feet of office space in the past two years and almost 450,000 square feet of retail in the past five years, and is quickly becoming one of the most active submarkets in Washington, D.C.

Brian Crivella
Senior Director,
HFF

Jair Lynch is currently developing 1250, a 430-unit project across the street from a JBG Smith’s West Half project that is set to include 465 units. Both communities will overlook Nationals Park and feature ground-floor retail. The properties will also be adjacent to Forest City’s Yards West development, which will drive development in and around the submarket.

The velocity of investment sales in the market is nearly at all-time highs, with more than $6 billion in volume, or 125 assets, having traded in 2018 year-to-date. In the third quarter alone, 40 assets traded for almost $2.5 billion in volume. Value-add continues to be the hottest product type in the marketplace, with a significant majority of transactions falling into this bucket. These deals are bringing in the deepest buyer pools with the most liquidity, driving extremely competitive bidding processes.

The most active buyer groups in the marketplace have been Harbor Group, Brookfield, Mid-America Apartment Communities and Morgan Properties, all of which have invested more than $500 million in acquisitions in the past two years in a combined 53 transactions. Buyers continue to pursue value-add plays with significant amounts of upside, as evidenced by the lack of core deals on the market. With much of the development taking place on core assets within the District itself, we expect to see these value-add plays only become more and more competitive.

Furthermore, the spending appropriations from the Congress-approved 2018 budget, which is at a high since fiscal year 2011, will continue to drive investors’ enthusiasm for the metro’s potential growth.

Additionally, there has been a significant increase in demand to buy into the market from foreign capital. This year has already seen $1.2 billion in foreign investments within the metro area, making up 20 percent of the activity so far this year. In contrast, foreign capital made up 15 percent of 2017 investments in the metro, 6 percent in 2016, 9 percent in 2015 and 11 percent in 2014.

The desire to invest in the United States from foreign investors varies greatly between those that are hesitant due to foreign relations concerns and others that are bullish because of strong financial indicators. But, demand has increased in Washington, D.C., for investors that view it as a desirable, core coastal market.

The sustained population growth, strong job growth, diversified economy and impressive absorption have served to keep the Washington, D.C., multifamily outlook positive. Investment sales have remained busy, nearly passing 2017’s volume already while new core developments and a robust pipeline will drive rental growth for years to come.

— Walter Coker, Managing Director HFF, Brian Crivella, Senior Director, HFF. This article originally appeared in the November 2018 issue of Southeast Real Estate Business.

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