Over the last year, metropolitan Washington, D.C.’s multifamily market has seen staggering amounts of new construction deliver, with net absorption levels that have surpassed all expectations. This is likely a result of similarly unexpected rates of job growth in the area and the remarkable resiliency of the metro D.C. economy as a whole.
Among the major metropolitan markets around the country, metro D.C. — with the sense of permanence lent by the presence of the federal government — has historically been the most stable year to year, making it one of the safest bets for investors. Yet, given the massive amount of supply in the pipeline in recent years, the multifamily market has suffered a degree of hesitancy from investors fearing supply would outpace demand.
However, this trend has reversed in the last 12 months, during which a record-setting 13,800 Class A multifamily units were absorbed. That figure jumps to 16,484 with Class B product in the mix. For all investment-grade apartments, stabilized vacancy has dropped 50 basis points to 3.7 percent. Class B units in particular have experienced excellent rent growth, rising 3 percent annually, while Class A maintains a growth rate of between 1 and 2 percent.
Christine Espenshade, JLL
Although new construction has fallen 26 percent in the same time frame, in the last 12 months, an astronomical 14,231 units delivered, compared with a typical average 3,000 to 4,000. Currently, the market has 37,247 units in the ground, leasing up or planned during the next 36 months, though supply is beginning to flatten and is expected to drastically decrease after 2015.
In the past, metro D.C. job growth was never high enough to support such a large number of units, but absorption levels are soaring above the 10-year average of 7,469 units per year. While forecasts predict a significant rise in vacancy in coming months, this elevated absorption is expected to curb actual vacancy rates.
It seems the factors that brought D.C. out of the recession earlier than other U.S. cities are the same that continue to spur new development and maintain steady tenant demand. Unemployment in metro D.C. hit 4.6 percent in July, down from 6.3 percent the same time last year. With 73,800 jobs added in the last year — a 2.4 percent increase and well above the 20-year annual average of 41,700 — it’s no wonder absorption rates are so high. The presence of the federal government brings a continuous stream of relocations to the area, but over the past year it was education and health services that led job growth — with 23,500 jobs — followed by the professional and business services sector, with 21,300 jobs.
Accompanying this tenant activity and job growth, investment sales levels as of mid-2015 are the highest since 2011. Smaller funds and investors are especially drawn to D.C. as a reliable source of consistent cash flow given the market’s reputation for stability. Private investors have dominated buyer activity thus far in 2015, accounting for 65 percent of multifamily deal flow and driving the market. Institutional investors represent 20 percent, while REITs claim only 9 percent.
The complete revitalization of D.C.’s Capitol Riverfront has launched this submarket to the top in terms of activity and available units, and the district’s NoMa submarket leads with sheer absorption numbers. Even with these outliers, Northern Virginia has emerged as the most favorable for investors over D.C. proper and suburban Maryland. The reason for this is linked inexorably with each market’s legislative environments — namely, TOPA (Tenant Opportunity to Purchase Act) laws. Both D.C. and Maryland grant multifamily tenants the right to purchase in the event an investor sells, which can severely delay closing and deter potential new investors.
Overall, and in spite of any legislative complications, metro D.C.’s multifamily sector is on track to see more sales of all product types and across every corner of the market. Thus far 2015 has been tremendously active and signs point to this trend continuing for the near future.
— By Christine Espenshade, Managing Director, JLL’s Mid-Atlantic Capital Markets. This article originally appeared in the November 2015 issue of Southeast Real Estate Business.