REBusinessOnline

Nation's capitol weathers the storm.

While the recession has impacted NOIs in the Washington area, the local apartment market has weathered the economic downturn better than in most metros. The 60 basis point year-to-date rise in vacancy to 6 percent is the most glaring effect of the recession. Although rents remain resilient, asking rents inched up 0.4 percent in the most recent 3-month period, while effective rents declined for only the second quarter since 2004.

Job losses have weighed the most on Class A asking rents, particularly in areas where rent gains were sizable recently, such as Pentagon City/Crystal City, the Connecticut Avenue Corridor and Rockville. The district’s Dupont Circle, Logan Circle and Columbia Heights neighborhoods, however, are notable exceptions to this trend, as these areas remain desirable to renters. Lower-tier asking rents have managed to push higher in many locations, although softer rents and vacancy rents have been recorded in the Anacostia/Northeast D.C. and Stafford County submarkets. Development completions are accelerating this year, and the construction pipeline is expected to remain relatively full through 2010, posing a further threat of concession increases. A metro-leading 9,000 units are under consideration in Virginia, while there are 6,600 units planned in the district and 3,900 units proposed in Maryland.

Compared to operating fundamentals, significantly more fluctuation has been recorded in investment trends, particularly property pricing. While the metro’s gross revenue declined by approximately 0.2 percent during the 12-month period ending in the second quarter, the median sales price fell 27 percent. The wide gap between revenues and price trends indicates that recessionary fears have created an opportunity to acquire local apartment assets at a discount. Buyers have hedged their risk by targeting historically strong areas such as Capitol Hill and Mount Pleasant as well as infill properties near the Prince George’s/Montgomery counties border. Meanwhile, a lack of on-market assets in Northern Virginia has discouraged activity, despite healthy investor interest.

This year, tepid demand will depress asking rents 0.7 percent to $1,355 per month, while effective rents will retreat 1.9 percent to $1,282 per month. Asking and effective rents gained 3.6 percent and 3.3 percent, respectively, in 2008. Top-tier asking rents in the first half of 2009 fell 0.7 percent to $1,636 per month, while Class B/C asking rents receded 0.2 percent to $1,168 per month.

Moderating demand for Class A apartments has driven vacancy 40 basis points higher to 6.9 percent. Employment losses in lower-paying sectors have forced vacancy for Class B/C apartments up 100 basis points to 5.7 percent. Through the end of the year, inventory expansion and waning residential demand will push metrowide vacancy to 6.8 percent.

For investment sales, distressed-asset acquisitions and sales involving REIT-owned properties are expected to put further upward pressure on initial yields, which currently stand at 6.75 percent for most properties brought to market at this time. Prospective buyers should be aware that prices will fluctuate less in Logan Circle, Dupont Circle, Bethesda and Arlington due to the cities’ long-term viability and proximity to district employers.

— Ramon Kochavi is the regional manager of Marcus & Millichap’s Washington, D.C., office.

Content Partners
‣ Arbor Realty Trust
‣ Bohler
‣ Lee & Associates
‣ Lument
‣ NAI Global
‣ Northmarq
‣ Pavlov Media
‣ Walker & Dunlop

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