The Washington, D.C., metro area continues to be one of the nation’s strongest-performing apartment market. But with the potential for government job cuts and an oversupply of apartments and condos looming, uncertainty prevails, Greg Leisch, CEO of Alexandria, Va.–based commercial real estate research firm Delta Associates, said Thursday. Giving his annual review at the 2012 TrendLines Conference at the Ronald Reagan Building and International Trade Center in Washington, Leisch reported Washington’s stabilized vacancy rate for investment-grade apartments (Classes A and B) at 3.8 percent, up from 3.4 percent last year. The national vacancy rate is 5.8 percent. But those numbers could soon change. Within 36 months, supply will sap rental-rate increases, according to Leisch.


Another concern for Leisch is the potential for government job cuts. In 2011, the federal government was responsible for 40 percent of the D.C.-area economy. Leisch says that number will fall to 36.3 percent in 2015, and the private sector will have to compensate. He expects that to happen.


Net absorption continues to drift downward from the record-setting pace of the summer of 2010. It’s currently at 3,303 Class A and B apartments. Leisch expects Class A apartment vacancy in the Washington metro to edge up to 5.4 percent by the end of 2014, from 5 percent today. However, he thinks vacancy rates will remain low enough to allow for rent growth during that period.


Leisch said the D.C. condo market is picking back up. Toward the end of 2011, new product was 50 percent of what was marketed. He expects condos to increase in price by 1 percent to 2 percent in 2012.


Despite the uncertainty, with fixed long-term debt at today’s low interest rates and the opportunity to develop condos for the short run, plus the chance to reposition B buildings into As, Leisch sees opportunities for commercial real estate owners in the district. “Washington will likely remain among the top investment markets in the country,” he said.


With 533,000 apartment units, the D.C. metro has the third-largest apartment market in the country, behind only New York and Los Angeles. For condos, it’s the fifth-largest market, with 223,000 units.