To say 2010 was a good year for apartment owners in the Washington, D.C., area is a bit of an understatement. The region absorbed a record 12,000 units, which was the highest annual total ever recorded in the region. Not surprisingly, rent growth followed with effective rents jumping 8.2 percent in the year.
That wasn’t the only good news for apartment owners at last week’s Trendlines DC research presentation in Washington, D.C., hosted by Houston-based Transwestern and Alexandria, Va.-based Delta Associates. For example, the city's metro-wide vacancy rate is 3.4 percent, nearly half the national rate of 6.6 percent. Indicators suggest this robust performance will continue through 2013.
A number of factors drove the growth, but job growth was at the forefront. While much of the country struggled to record measurable job growth, the D.C. area grabbed 49,200 jobs through November, pushing the number of available jobs up 1.7 percent, which tied D.C. with Minneapolis for first in the nation. Furthermore, the unemployment rate declined to 6 percent last fall, down 10 basis points from a year ago, which makes the local unemployment rate among the lowest rate in the nation among major metros.
Many of those jobs are taken by young people, who are prime candidates to fill a number of the region’s 523,800 units. “We are undergoing a structural shift from ownership to rental,” said Gregory H. Leisch, founder and CEO of Delta Associates at Trendlines. “It is remarkable how it is occurring here in the Washington, D.C., metropolitan area."
In fact, Leisch said the preference to rent jumped 450 basis points in the past three years in the D.C. area. Nationally, the shift was only 130 basis points. “This is because the older demographic thinks renting is throwing away money vs. the younger folks, who have migrated here in the tens of thousands looking for work and finding it, thinking that owning is throwing away freedom,” he says.
However, this wasn’t the only reason for what Leisch called “explosive” growth in the apartment sector in the nation’s capital. Rapidly shrinking supply also played a role. The 26-month pipeline is 2,300 units. That’s down from 36,000 units in 2007.
But in a market where banks want to make construction loans, that equation won’t stay the same forever. In fact, Leisch expects the regional vacancy rate to move from 3.4 percent to 4.1 percent as deliveries outstrip demand. But rents will continue to grow. That’s particularly true in growing submarkets such as Tyson’s Corner, the Rosslyn-Ballston corridor, Upper Northwest Washington, and the Fair Oaks area of Virginia (for garden-style properties).
Condos are also in much better shape in the Washington area than most areas of the country, but the recovery isn’t as far along. While Leisch suggests apartment owners should be delivering new units right now, condo owners will find their sweet spot in 2012 as the poorer units (which are often facing the dumpster or have poorly designed floorplans) that have been dragging prices down, are absorbed.
Leisch predicts the price traction that comes with these units being burned off will happen in by the end of 2011. “We have a condo market that is stabilized and poised for the next round of development,” Leisch says.
In fact, the pipeline of units being marketed has fallen 25,000 units in 2006 to 1,200 units currently. But like apartments, condos perform better in certain submarkets. Leisch likes areas of the city north and west of the Capitol, the Rosslyn-Ballston corridor, and the Wisconsin Avenue corridor.
“As with other product, we think submarket selection is the key to maximizing profit and minimizing risk,” Leisch says.