Building an apartment in Washington, D.C.? If you want to hit the sweet spot, you better open your doors soon, according to Alexandria, Va.-based market research firm Delta Associates.
“You can be delivering over the next three years or so,” says Gregory H. Leisch, founder and CEO of Delta. “But if you want to hit the next sweet spot of the market, you would need to hit it now or in the next year.”
Leisch defines the sweet spot as being when rents are rising to the greatest levels. That will be in 2011 and 2012, when Leisch sees rents jumping 8 percent to 10 percent. After that, vacancy rates will go up, but Leisch doesn’t see it moving more than 5 percent in the next three years (which is the longest timeframe that it projects out). Delta only projects it moving above that threshold at one point in the past 18 years (in 2009). That prediction turned out to be correct.
Dwight D. Dunton, president of Arlington, Va.-based Bonaventure Realty Group is developing projects in Norfolk and Chesapaeake, Va. and working on a couple more properties in the greater D.C. area. The deals face financing and entitlement questions before they can become reality, though. He says that if one or two projects goes up in the submarkets those projects are in, these deals become a lot less attractive.
“I think that, as developers, it’s our nature to overdo a good thing,” he says. “To the extent that we can’t bring one of these deals out of triage and into the ground before another project in the submarket, we probably would stop going forward.”
McLean, Va.-based Jefferson Apartment Group (JAG) has started three projects in the D.C. area last year with another five scheduled for this year. While JAG CEO Jim Butz admits in a “perfect” world those projects would deliver right now, things still look pretty good.
“The deals we got started last year or in the first six months of this year, will enjoy the benefit of the rent increases more than the ones we start next year,” Butz says. “But it’s truly submarket by submarket. Generally speaking, the overall deliveries are still well below where they were five years ago. Even with nominal growth in D.C., it’s a healthy market.”
Leisch isn't so sure: “In late 2012 or 1013, we will go into the cycle where vacancy rises. We’ll see how high it goes. It will also depend on that unpredictable factor of condo conversion, which will remove product from inventory.”
If you’re eyeing condos, Leisch says the sweetspot won’t be for another 18 to 30 months behind the apartment market. “As soon as those dog units are diluted enough, then we will see condo markets move up,” he says.