Rent Growth, Leasing Activity to Remain Robust in D.C.’s Apartment Market

by John Nelson

There are many things to be optimistic about in metropolitan Washington, D.C.’s multifamily market.

Here are some facts to consider:
— The D.C. metro multifamily vacancy averages 3.4 percent compared to the national average of 4.5 percent.
— The D.C. region has seen $3.174 billion in multifamily sales activity year-to-date with an average cap rate of 5.2 percent.
— Private investors are leading multifamily sales activity in the D.C. metro region and responsible for 64 percent of the deal flow.
— Multifamily investment sales are up by 4.5 percent compared to the first half of 2015.
— An influx of new workers to fill the 92,500 new jobs added in the last year has heightened demand for multifamily units despite an abundance of new supply.

With a low unemployment rate of just 4.1 percent and job growth far exceeding the national average, and at its highest point since December 2000, the Nation’s Capital is humming with activity. Last year, D.C.’s multifamily market saw staggering amounts of new construction deliver with net absorption levels that surpassed all expectations.

Christine Espenshade, JLL

Christine Espenshade, JLL

Many of the young workers are interested in an urban live-work-play environment ripe with amenities and relish the opportunity to decrease commute times by living near their jobs. Submarkets such as NoMa and the Southwest Waterfront are in great demand. The opening of the Metro’s Silver Line and its eagerly anticipated expansion past Reston-Wiehle East is making the Northern Virginia suburbs more accessible and connected to workplaces. The sustained desirability of metro-proximate locations means these new stations can be expected to drive future demand and development along that corridor will likely be brisk.

All of these factors contribute to a 3.4 percent average vacancy rate and an average effective rent of $1,862 within the metro area. While there is some variation between submarkets, the market-wide absorption level is higher than the 10-year historical average and rent growth is projected to remain above 2 percent through 2020.

This aggressive growth has driven renewed investment interest in the region. Historically, large New York-based institutional firms have been the primary buyers of multifamily developments in the Mid-Atlantic and uncertainty in the stock market and global instability are motivating them to increase their allocations for domestic real estate and invest in D.C. buildings.

Likewise, rising rents coupled with the security that comes with a market steadied by the reliability of government contracts — and the continuous stream of relocations they generate in both the public and private sectors — have induced many of the private buyers who previously invested mostly in properties across the Sunbelt to expand their purchasing to D.C. Indeed, a majority of the deal flow in the metro area has come from private investors, bringing increased competition to the market.

Multifamily investments areas are up in the first half of the year compared to 2015 and experienced the largest second-quarter figure on record. Despite this sustained extraordinary deal flow and the enthusiastic building activity, cap rates have remained stable suggesting a confidence in the market that is very encouraging.

As the development pipeline starts to slow down over the next few years, owners will need to rely less on concessions to attract renters, thereby narrowing the difference between asking and effective rental rates across the market.

— By Christine Espenshade, Managing Director, JLL’s Mid-Atlantic Capital Markets. This article originally appeared in the November 2016 issue of Southeast Real Estate Business.

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