Spotlight on D.C.: Apartment Assets Resist Economic Turbulence
The Washington, D.C. metropolitan area has been a perennial favorite for multifamily capital, particularly pension funds, life companies, family offices and other institutional investors and is often regarded as “recession-proof.”
However, as we all know, 2020 was a year like no other. What impacts have COVID-19 and recent economic turmoil had on this market’s luster, and what do the prospects look like for investors, owners and operators in the long term?
An Economy Buffered by Government and Technology
The D.C. Metro’s response to the crisis has been one of the most robust, with local the economy currently 90 percent + open for business and no signs of a dip back into lockdown. From the initial shutdowns in March 2020 to the continued uncertainty of today, cities with heavy representation in retail, tourism and service sectors have experienced significant economic repercussions from COVID-19. In Washington, D.C., by contrast, having the federal government as the city’s largest employer has served as a major buffer. D.C. experienced a particularly acute government-mandated economic shutdown from March to May. While payroll performance in the District of Columbia’s leisure and hospitality sector declined nearly 60 percent from May 2019 to May 2020, jobs in this sector account for less than 5 percent of the city’s workforce. Jobs in government account for roughly one-third of the District’s workforce.
In addition to dozens of federal agencies and departments, the greater metropolitan area is home to private sector employers like Fortune 500-ranked Capital One Financial and Freddie Mac, defense contracting giants like Lockheed Martin, global consulting firms like Booz Allen Hamilton and Deloitte and, of course, the 4 million square feet of Amazon’s much-coveted, energy-efficient HQ2, expected to employ over 25,000 people.
Workers in the metropolitan area also tend to be well compensated. In 2019, Loudoun, Fairfax, Howard and Arlington counties and the Virginia city of Falls Church reported the nation’s highest median household incomes, with Loudoun topping the list with a median household income of $129,588. As unemployed workers struggle to make ends meet, the metropolitan region’s well-compensated, white-collar professionals — many of whom were able to continue business as usual from remote offices — keep paying their bills.
Short-Term Speed Bumps, Historical Steadiness
Vacancy rates for multifamily properties that have been open for leasing at least a year remain low, peaking at just over 6 percent earlier in the year. That being said, bolstered by diversified job growth, the market has a substantial supply pipeline with 12,000 units already delivered in the past 12 months and another 31,000 under construction, which will increase inventory by another 6 percent. That’s the third largest pipeline in the country. However, the luxury apartments in the area have been influenced by the pandemic-induced slowdown, with the average rent of a luxury, Class A, D.C. apartment falling from $2,649 a month in June 2019 to $2,561 a month in June 2020.
As the pandemic turns the corner into its eleventh month, D.C. residents put a significant amount of value into where they live. Pet-friendly, light, bright, airy open spaces have become the preferred living situation, and renters and homeowners are putting more stock into the home itself rather than the location. As the world continues to shelter in place, residences that can support a work-from-home strategy while offering an improved quality of life are in favor. The median home price of D.C. rowhomes exceeded $800,000 in July, and the value of homes in the region are 13 percent above the median value in July 2019. Meanwhile, D.C. still retains its status as the forefront of the national apartment market. Renters by choice are opting to spend more time at home than ever before. Where Metro-served locations were once the favored assets, properties that prioritize open spaces, outdoor areas, a keen focus on indoor air quality and expanded living spaces with a sense of place are now strongly in favor. Washington, D.C. is a consistent “safe-haven market’” and historically thrives during downturns, relative to the rest of the country. This is due to the strength of the federal government employers and contractors; the expansion of the federal budget shows no signs of slowing down.
Manageable risk, with low volatility and a focus on the long game, is a hallmark of the Washington, D.C. market. Cap rates have remained at 5.7 to 5.8 percent over the past five years. At the beginning of the year, secondary and tertiary markets were picking up yield with their shorter commutes, lower taxes and costs of living. Steadiness wasn’t as big of a selling point. Now investors are rediscovering its appeal. While investors took a break in the second quarter to ascertain the impact of the pandemic, sales began increasing early in the third quarter, albeit some with income guarantees.
Affordable Housing Is More Active Than Ever
According to an analysis by the Metropolitan Washington Council of Governments, the metro area needs 320,000 housing units by 2030 — and these units need to be in price ranges residents can afford.
Fortunately, affordable housing remains active in Washington, D.C. Much of this is due to Mayor Muriel Bowser, who has a six-pronged strategy for affordable housing in the District of Columbia and set a goal of 36,000 new units by 2025, with 75 percent for middle and low-income families. Also providing vital support are the many programs of Fannie Mae, Freddie Mac and the Federal Housing Finance Agency (FHFA).
On April 30, Walker & Dunlop closed on a $2.4 billion Fannie Mae credit facility to refinance 67 multifamily properties in the Washington, D.C., area — the largest facility in Fannie Mae’s history. The portfolio of the borrower, Southern Management Corporation, includes 22,439 units total, over 60 percent of which qualify as mission-driven affordable housing under FHFA guidelines.
Affordable housing is being financed in a variety of neighborhoods, including those making headlines for mixed-use/Class A development. One example is 1550 First Street. Future residents will live close to the new soccer and baseball stadiums, the Waterfront and Navy Yard Metro stations and new luxury developments like RiverPoint.
Hot Neighborhoods Old and New
The region’s biggest story for new development, of course, has been National Landing neighborhood, home to Amazon HQ2, the Virginia Tech Innovation Campus, over 50,000 jobs and over 15,000 residential units with another 6,800 in the development pipeline.
As people spend more time at home, they tend to crave more living space and outdoor space, keeping an eye on suburban submarkets with access to public transportation, such as Dunn Loring-Merrifield in Virginia and Largo in Maryland. Meanwhile, big marquee projects remain a Washington, D.C. staple. The Wharf at the Navy Yard/Waterfront, for example, is entering Phase 2 of development, with 255 apartments, 95,000 square feet of retail and 549,000 square feet of office space underway.
— By Will Harvey, director, Investment Sales; Nicole Brickhouse, director, Capital Markets; and Colin Coleman, director, Multifamily Finance, Walker & Dunlop. Walker & Dunlop is a content partner of REBusinessOnline. For more articles from and news about Walker & Dunlop, click here.
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