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A slight decline in vacancy this year confirms that Washington, D.C.’s apartment sector is in a new phase, where a closer alignment in tenant demand and completions will maintain vacancy within a tight range. Solid rental absorption promises to persist as employers hire workers who create new households and homeownership remains out of reach for many who cannot qualify for mortgages. However, potential cuts in defense spending might dull future housing demand in Virginia.
The difference in the multifamily market at mid-year 2012 and one year ago shows the revival of residential construction as developers have cranked up production of all types of housing. Multifamily starts have jumped and represent more than 40 percent of all residential groundbreakings over the past year, approximately two times the typical proportion. All sections of the market will receive new multifamily stock this year, with only modest growth expected in Maryland offset by significant completions in Virginia. Meanwhile, most of this year’s production in the district will come online in the second half of 2012, limiting the extent of vacancy declines in the third and fourth quarters.
Positive job growth supported growth in D.C.’s multifamily sector. Employers added 25,200 workers in the first six months of the year, expanding total employment in the metro 0.8 percent. Job creation slowed in the second quarter, when 9,100 positions were added. Eight of 10 private-employment sectors expanded payrolls during the first six months of 2012.
Nearly 1,100 market-rate rentals came online in the second quarter, the largest three-month output in a year. However, 2,130 rentals were delivered over the past 12 months, marking a decline from more than 3,500 apartments in the preceding one-year span. Projects containing 802 rentals were delivered in Virginia from April to June. The largest of the completed projects is the 281-unit Broadstone at Laurel Highlands in Western Fairfax County. The district and Maryland each counted one new property during the quarter. The pipeline of planned projects continues to grow. Nearly 58,000 market-rate rentals are planned in the metro, an increase from approximately 53,000 rentals in the first quarter. Additional projects are planned in each section of the metro, led by a gain of 4,200 units in Maryland.
Completions increased, but vacancy in the metro held steady in the second quarter at 4 percent. The vacancy rate has ticked down 20 basis points year to date and 90 basis points from one year ago. Relatively strong demand persisted in Virginia, where the bulk of new rentals were delivered. Vacancy declined 10 basis points in the second quarter to 3.7 percent; the current reading is also 10 basis points less than the level at the end of last year. The vacancy rate in the district slipped 10 basis points from April to June to 4.3 percent and has also declined 40 basis points year to date. In Maryland, the vacancy rate rose 10 basis points to 4.3 percent in the second quarter, but is down 10 basis points over the past two quarters.
The strong local economy and strengthening operations of most properties continue to elevate investor demand for assets across the metro. Well-located properties with solid recent performance typically elicit multiple offers when listed for sale, and additional owners with sound equity positions will increasingly bring properties to the market in the months ahead. The expected increase in development in the near term could potentially affect the performance of individual properties, but tenant demand and cash flows will likely steadily improve due to the continuing emergence of new rental households. Virginia remains a focal point for institutions due to its large stock of relatively new Class A assets. Apartment sales in this section of the metro have contributed to average metro cap rates of less than 6 percent. Properties in the district near Metro stops and in neighborhoods with good residential services can also trade at less than 6 percent, though assets in secondary locations will require cap rates of around 7 percent to attract bids.
— Bryn Merrey is a vice president of Marcus & Millichap Real Estate Investment Services.