The Washington, D.C., market is hot. And it’s easy to see why. Driven by federal spending, unemployment is at 6.3 percent in the nation’s capital, while unemployment hovers at 9.6 percent in the rest of the country. The disparity has created powerful demand in D.C. and its suburbs.
And that demand could grow. There’s a rise in the number of people making more than $150,000 in the area, many of whom moved from New York in order to support the federal regulatory structure, according to Evan Regan-Levine, a research analyst for Jones Lang LaSalle.
That’s the sort of news apartment developers and owners want to hear. “With the lack of starts, we’ll start to see some rent spikes,” said R. William Hard, executive vice president of the Washington, D.C. office of LCOR in Bethesda, Md., at Tuesday's ULI meeting, “Trends in Multifamily Development."
This sort of optimism has led to a feeding frenzy. That has some people concerned.
Panel moderator Jim Butz, president and managing partner of Tyson’s Corner, Va.-based Jefferson Apartment Group, says his group wanted 80 percent of its growth to come through acquisitions. But now, he’s pegging 80 percent of his growth from development. “We can’t compete with 4.5 percent cap rates from the REITs,” he says.
And a number of panelists believe that cap rates will continue to go down in the market. Jones Lang LaSalle saw a continued downward movement. Toby Bozzuto, president of Greenbelt, Md.-based Bozzuto Development Co., agreed. “It’s Economics 101,” he said. “A lot of money is chasing very few projects in one metro area.”
The Development Option
The challenging acquisition market has led these and other people to look at development. Bozzuto secured an equity partnership with Chicago-based Pritzker Realty Group to give the company dry powder to start working on deals again. “We’re trying to buy land and get things started again,” Bozzuto said.
But Bozzuto has discovered that he’s not alone and lots of other developers are trying to tie up opportunities in the D.C. area. With the expectation of 7 percent returns on costs for new construction, Bozzuto says he is less interested in competing as returns trend closer to exit caps.
Since the company has already added significant land positions to its pipeline earlier this year, Bozzuto doesn't feel like he needs to overpay for dirt. "We are not intetested in pursuing land at "any" cost, only opporuntities where the price makes sense,” Bozzuto said.
In many cases, a lot of the same developers, fortified with statistics like the ones that Regan-Levine at Jones Lang LaSalle quoted, are chasing the same plots of land under assumption that they’re building communities that will eventually become like the bustling U Street area.
Members of the panel did have concerns that renters wouldn't respond to a build-it-and-they-w
Regan-Levine agreed, wondering if once the recovery flattened out, oversupply wouldn’t be a problem. “Will there be enough demand to support these projects?” he asked.