Spring brings tourists to Washington to see the cherry blossoms, but this year it also is bringing a sense of hope to developers and brokers that the housing correction of 2006 is a thing of the past. After a record-setting pace of new condo contract sales in 2005—about 13,700 units sold—sales activity slowed in 2006, especially in the second half of the year. As a result, only 6,600 new units sold in the Washington metro area, which includes the District of Columbia, Northern Virginia, and suburban Maryland. Contract cancellations played a large role in the sales drop-off, as previously sold-out buildings started to deliver and several buyers got skittish near settlement.
So far in 2007, sales activity has started to rebound, but it's still too early to tell whether the recovery has staying power. During the past 12 months, new condo sales prices in the metro area dropped nearly 3 percent after concessions. Resale prices in 2006 were stagnant metro-wide, but declined more than 5 percent in the District itself. Prices did not budge in Northern Virginia, while in suburban Maryland, prices increased more than 5 percent. Back in March 2006, the 36-month pipeline peaked at more than 53,000 condo units in the metro area. Since then, the pipeline has dropped more than 20 percent, due to project cancellations and reversions back to rentals. Consequently, the 36-month apartment pipeline has ballooned to 35,000 units, compared to about 20,000 units last year.
Despite the rise in the apartment pipeline, other factors contribute to the overall health of the Washington-area apartment market, including a solid job market with a large pool of transient workers who rent by choice. Also, a condo market in flux has turned would-be condo purchasers into renters. The stabilized vacancy rate for investment-grade apartments in March 2007 was 3.4 percent, which compares favorably to the national rate of 5.9 percent. Rents are increasing near the long-term average of 4 percent, albeit at a slower pace than a year ago. As of March 2007, the average rent, after concessions, for an average apartment in the metro area was $1,405. High barriers to entry have kept the oncoming apartment supply in check, up to now, but the timing of deliveries will be crucial in determining the impact of such a large influx of apartment units to the market.
COLUMBIA HEIGHTS GROWS UP Several District neighborhoods were hit hard in the riots following the death of Martin Luther King Jr. in 1968. Among them: Columbia Heights. Once a thriving area, this community suffered in the decades following the riots, which left vacant storefronts, a fleeing populace, and a decline in the local quality of life. Columbia Heights' fortune began to change after a new Metrorail station opened here in 1999. The National Capital Revitalization Corp., a quasi-governmental agency, held several parcels in the neighborhood and created partnerships with developers to help get the redevelopment ball rolling.
Today, Columbia Heights is in the midst of a construction boom. In recent years, the historic Tivoli Theater was refurbished and a new Giant grocery store opened. DC USA, a 540,000-square-foot shopping center with retailers including Bed, Bath & Beyond, Target, and Washington Sports Club, is under construction across from the Metro station. Several older apartment buildings have been converted to condominiums during the boom years of 2004 and 2005. In addition, more than 1,100 multifamily units have either been recently built or are planned in the short-term in Columbia Heights.
In late 2005, Triangle Ventures, a developer based in the District, opened Park Triangle, a 117-unit mid-rise apartment building with 18,000 square feet of ground-floor retail space. Retailers include a Guatemala-based franchise restaurant, an environmentally friendly drycleaners, and a vegan bakery. Apartment rents range from $1,500 a month for efficiencies more than $2,600 for two-bedroom units.
Bethesda-based Donatelli Development is responsible for two condominium developments at NCRC-controlled land adjacent to the Columbia Heights Metro station. Kenyon Square is a 122-unit mid-rise under construction with delivery scheduled for late 2007. Prices average about $560 per square foot with about 80 percent of the units sold. At Highland Park, the second Donatelli project under construction, about 40 percent of the 160 market-rate units had been sold by March 2007 at prices averaging $550 per square foot. Highland Park should deliver by the first quarter of 2008. Ground-floor retail is planned at each of the buildings, offering a total of 43,000 square feet of space.
Although the District of Columbia is a city with two rivers, most of the attention has focused on the Potomac. Meanwhile, the District had largely neglected its other river, the Anacostia, which is located in an economically depressed section of the city and is one of the most polluted waterways in the nation. That mentality has started to change thanks to the Anacostia Waterfront Initiative, a pact created in 2000 between the city and federal governments to help guide sustainable development and environmental clean-up along the Anacostia River.
A centerpiece of the initiative is the controversial new $611 million publicly financed stadium for the Washington Nationals baseball team rising near the waterfront just one mile south of the Capitol dome. Though the stadium won't be complete for another year, it has joined the new headquarters for the U.S. Department of Transportation next door and a HOPE VI project north of M Street to help bring more than a billion dollars of private investment to a once-forgotten industrial area of the city. Thousands of multifamily units are planned in the neighborhood by several developers, including Forest City Washington, JPI, Monument Realty, and Camden Property Trust.
One such project is The Yards, a massive 44-acre redevelopment of the Southeast Federal Center being undertaken by Forest City Washington. Some of the historic buildings on site will be converted to housing, as well as new office and retail buildings. The Navy Yard Metrorail station is within walking distance of The Yards, making the project transit-friendly. In total, about 2,800 residential units are planned over a 10-to 20-year time frame. Infrastructure improvements to the site will get underway in 2007, with the first residential buildings—a mix of condos and apartments—to deliver in 2009.
Meanwhile, Texas-based JPI has four apartment projects planned in an area about four blocks north of the stadium, totaling just over 1,350 units. Two of these projects, Jefferson at 70 Eye Street and Jefferson at 100 Eye Street, are under construction and expected to deliver in 2008. A third project, Jefferson at New Jersey Avenue, is slated to begin construction in the second quarter of 2007. Designed by Falls Church, Va.-based The Preston Partnership, this 237-unit high-rise will be a welcome addition to the Near Southeast skyline. The fourth project, at 421 units, will deliver in 2010.
NATIONAL HARBOR SETS SAIL Further down the river, just beyond the Capital Beltway and the Woodrow Wilson Bridge, is National Harbor in Prince George's County, Md. Fairfax, Va.-based The Peterson Cos. is in the process of transforming this 300-acre site into a 7.3 million-square-foot master planned mixed-use community, featuring 2,500 residential units, the Gaylord National Resort and Convention Center, 4,000 hotel rooms, 1 million square feet of retail, dining, and entertainment space, and half a million square feet of office space. The first multifamily building—a 253-unit high-rise condominium called One National Harbor—is now under construction with sales to begin this summer. Condo prices at One National Harbor range from $300,000 to $600,000.
Capitalizing on its location along the Potomac River, Peterson will offer water taxi service from National Harbor to destinations in Old Town Alexandria and Mount Vernon in Virginia and Georgetown. Future stops include Ronald Reagan National Airport and the Ballpark District.
INVESTMENTS PAY OFF Building sale activity has been just as robust as development activity, with an unprecedented increase in volume in recent years. In 2006 alone, there was more than $3.7 billion of investment-grade multifamily sales activity in the Washington metro area. At the same time, prices have steadily increased, with the metro area breaking the $400,000 per unit barrier in 2006. At least three multifamily properties have now sold at more than $400,000 per unit, whereas back in 2004, no buildings were trading above $300,000 per unit.
Land has also been changing hands at a feverish pace, with prices now reaching more than $100,000 per unit. Washington's real estate market has attracted an increasing amount of capital from outside the metro area as well.
These newcomers to the market have adopted a few guiding principles when investing in the Washington multifamily market: First, there is not a better alternative investment vehicle than the multifamily market, either within the real estate sector or even across other asset classes. Second, there are strong prospects of improved operating performance as rents rise, yielding even better net income. And finally, the prospect of increasing interest rates suggests a closing window of opportunity to purchase higher-performing assets with capital as reasonably priced as it is currently. So now, evidently, is the time to buy.
William Rich is vice president and director of Delta Associates' condominium practice in Alexandria,Va.