Like many other markets across the country, the Washington, D.C., multifamily market was hit hard by the COVID-19 pandemic. Vacancy is up and asking rents are down. However, Washington’s unique renter class, made up heavily of students and young professionals, and the region’s main economic drivers will fuel a quick post-COVID-19 recovery. As we close out 2020, multifamily investors have reason to remain confident in a quick bounceback in 2021.
Once the virus hit, many offices switched to a remote work environment, and many of the local universities switched to remote learning. We know that this fueled an exodus of renters from the city to their parents’ basements, to greener pastures in the suburbs or to areas with a lower cost of living. At one of our market-rate listings in a core neighborhood of Northwest D.C., property managers reported an immediate 10-basis-point increase in vacancies the day that George Washington University closed its campus for the fall 2020 semester.
Herb Schwat, Greysteel
Entering the fourth quarter, the Washington MSA recorded the highest vacancy rate on record, breaking 6 percent for the first time, according to research from CoStar Group. Average asking rents are down approximately 3 percent this year, and the pain is felt hardest in the core submarkets of Northern Virginia and downtown D.C. In these neighborhoods, Greysteel has underwritten several properties experiencing vacancy rates approaching 25 percent and rents falling 10 to 15 percent below pre-pandemic levels.
Despite these challenges, multifamily investors in D.C. have good reason to anticipate a stronger and faster rebound than other major cities in 2021.
Our city is overwhelmingly young, professional and well-paid, thus mobile. Within the District’s lines, 32 percent of the population falls between the ages of 18-34, according to DC Health Matters. And the Bureau of Labor Statistics reports that 76 percent of non-farm employment in D.C. is in the information, financial, professional/business services, education/health and government sectors.
Additionally, residents of the city benefit from an $85,000 average annual income, which is 38 percent higher than the national average, indicating a mostly professional workforce with the capability to work from anywhere.
Students at the undergraduate or graduate level make up 10 percent of the city’s population, the highest share of any major city in the country, according to the Office of the Deputy Mayor for Planning and Economic Development.
This demographic proved toxic during the once-in-a-generation pandemic because these renters have the means of relocating. But these same demographics will also lead to a stronger, quicker recovery. These renters were more likely to move in with their parents than buy a house in the suburbs. In contrast with family households or blue-collar workers, their relocation is less permanent and the individuals more incentivized to return to the urban environment once offices and campuses reopen.
Washington’s economy, while increasingly robust and diversified, maintains a strong reliance on the federal government as a pillar. The government sector makes up 33 percent of non-farm payroll jobs, which is the District’s largest employment sector.
A new presidential administration bodes well for the local housing market as it creates demand from “Potomac Fever,” a trend of people moving into the D.C. area to serve for the new U.S. president. We can expect to feel the effects of Potomac Fever in first-quarter 2021 as the new administration begins to build out its team.
We also know that Democratic administrations tend to spend more than fiscally conservative Republican-led governments. “Big government” spending flows to the many security contractors and professional/financial service providers that are headquartered in and around Washington, D.C.
We must await the results of the Georgia senatorial runoff elections before determining whether big government policies will be enacted, but in the event of a Democratic win at the U.S. Senate level, we can reasonably expect a boost for the local economy.
— By Herb Schwat, Director of Mid Atlantic Multifamily, Greysteel. This article originally appeared in the November 2020 issue of Southeast Real Estate Business.