John Mullen, Greysteel
The eagerness of developers to capitalize on the absorption and flowing capital markets of the D.C. multifamily market has left some speculators concerned that the established strength of the fundamentals will be eroded by oversupply and ultimately lead to flat or negative rent growth and high vacancy rates. While 2014 has come with a stream of new developments hitting the D.C. metro, absorption remains steady and in some cases outperforming expectations.
New product has been consumed as quickly as new developments are delivered. The D.C. metro market absorption is on track to exceed its record of units absorbed in a year, which was reached in 2010, already absorbing 4,904 out of the 6,516 units delivered year-to-date, according to Reis. This continued strength of the multifamily market is further evidenced by higher levels of demand for Class A luxury units, as shown by their rapid development and strong absorption. The long-term effect of the robust demand for these Class A units and their continued construction may cause the weakening of the absorption of Class B and C units. This trend demonstrates a clear consumer preference toward higher quality properties, but not a long-term weakening of absorption.
So while the development pipeline may have experienced some slowing due to concerns of diluting demand, it is clear that the D.C. metro area remains a strong prospect for multifamily investors. This is evidenced by the District’s year-to-date inventory growth of 0.7 percent, which is well above the national average of 0.3 percent. Additionally, the District’s vacancy rate is holding at 5.6 percent year-to-date, according to Reis.
A prime case of the enduring strength of D.C. multifamily investments is the new Insight Property Group development, Fenwick Apartments in Silver Spring, which has long been thought to be one of the most oversupplied submarkets of the D.C. MSA. In January 2013, Insight Property Group began the demolition of the old U.S. Post Office at the location and constructed a $74 million high-end apartment complex, which includes 310 units, a swimming pool, clubroom, fitness center and business center. The development was delivered in July and is already enjoying occupancy of 31.9 percent. Fenwick Apartments initially offered residents a $1,000 gift card for leasing-up and currently conceding $750 off first month’s rent for less-desirable apartments, which is normal and not excessive whatsoever.
The Insight Property Group is also developing another luxury apartment building in Alexandria nearby the Huntington metro known as The Shelby. Similarly to Fenwick Apartments, The Shelby is a Class A development that features a host of amenities and manicured outdoor space. The apartment community consists of 240 units and began leasing on Sept. 1. The development currently has occupancy above 10 percent and is currently waiving the $350 amenity fee for all apartments leased before Nov. 30 to attract new residents. Accounting for a slight slowdown over the winter holidays until the springtime, the property should be fully occupied and stabilized well within a year. That is an impressive lease-up in a market that is supposedly oversupplied.
This aggressive development of Class A apartments should not cause investor anxieties of oversupply and slowing growth trajectories. Instead, it should highlight the growing preference of D.C. renters for upscale product. Should investors carefully project rent growth in modeling future cash flows? Yes. Should they altogether depart from the market? No. The demonstrated strength of the Washington, D.C. metro multifamily market and success of the featured properties should serve as an indicator of the multifamily market sustainability and the persistent demand for new high-quality product. All will be well in D.C. in the short- and long-runs.
— John Mullen, Director, The Greysteel Co. This article originally appeared in the November issue of Southeast Real Estate Business.