For the past couple of years, the Washington, D.C., market has been the star of the apartment business. Low supply and a strong job picture mean that apartment owners in the nation’s capital have enjoyed some staggering rent gains in the past 18 months. But new commentary from REIT conference calls and Alexandria, Va.–based commercial real estate consulting firm Delta Associates indicate that may be changing.  

Houston-based REIT Camden got a lot of attention earlier in the third quarter for indicating it was seeing issues in the market because it had a lot of leases expiring at once. Arlington, Va.–based REIT AvalonBay Communities (AVB), located in the Washington market itself, said the market began to “show signs of deceleration” with same-store revenue growth moving up only 1.7 percent, which was below both the portfolio average of 2.5 percent and the 2.3 percent sequential growth posted in the second quarter.

“After having outperformed other markets over the last few years, employment growth in D.C. has been flat of late, as the impact of increased public spending from the fiscal stimulus has worn off,” said Tim Naughton, incoming CEO of AVB in a conference call transcribed by

In its third-quarter numbers, Delta said year-over-year rent growth in the D.C. area was 3.6 percent in the third quarter, after hitting 5.6 percent midyear. In contrast, at the end of 2010, year-over-year rent growth for the Washington area came in at a whopping 7.8 percent.

Chicago-based Equity Residential (EQR) still sees strength in the D.C. market, however, with occupancy at 95.5 percent and rents up more than 5 percent year to date.

“All the indicators are looking good,” said Fred Tuomi, executive vice president of property management at EQR, in transcription from “Demand is there. Nobody is buying homes, traffic is still strong, and there's a very good rent demographic there.”

Grant Montgomery, a vice president for Delta, says there are a lot of factors behind the slowdown in Washington. For one thing, the region had enjoyed an “abnormal” shift from owning to renting to boost its strong 2010. But he says job growth falling off has been a major reason behind the deceleration in D.C.

“Through August, the area has grown by a net of 100 jobs,” Montgomery says. “That definitely impacts it.”

Tuomi acknowledged that things change in the market. “If the government really does absolute cuts and we see some leading indicators of that in the jobs numbers, they're softening,” Tuomi says. “But if they do absolute cuts instead of relative cuts, they're slowing the growth rate. If that happens, then it could be some downward pressure on D.C., I think in late '12 and into '13 and '14.”

Future supply is also a huge issue in the market, which the REITs acknowledged was a concern. Montgomery projects the market will see a surge in openings next year, which will affect rental demand. He sees 3,500 units coming on line in the second quarter and 3,000 more in the third quarter. Normally, the area delivers 1,400 a quarter. From 2008 to 2010, it underproduced by 7,500 units, but Montgomery says developers “quickly turned that back around.”

“We’re telling our clients next year that we're entering a phase where they’ll need to be smarter than the next guy,” Montgomery says. “The market will be getting more competitive.”