The 88,848-unit market-rate investment-grade Washington, D.C. apartment market reached the middle of 2012 with continued low vacancy and solid quarterly rent growth. Construction has eased, but net absorption remains positive, and the market has benefitted from a generally positive economy.
The vacancy rate for the District is 4.2% in the second quarter of 2012 according to Reis, down 20 basis points from the prior quarter and down 110 from a year earlier. The rate has been in the 4.0%-to-5.0% range for much of the past decade, with the exception being 2009’s 6.1%. The vacancy rate for Class A apartments is 4.2%, unchanged over the quarter and down 170 basis points over 12 months. Class B vacancy is 4.3%, down 20 basis points for the quarter and 60 over 12 months.
“The vacancy rate decreased 0.1 percentage points over the quarter ending at 3.9% metrowide,” according to Cassidy Turley. According to Marcus & Millichap’s third quarter report, “the vacancy rate in the District slipped 10 basis points from April to June to 4.3% and has also declined 40 basis points year to date.” “Metrowide vacancy will decline 30 basis points in 2012 to 3.9%, less than the plunge of 90 basis points recorded last year. The vacancy rate in the District will end this year at 4.4%, 30 basis points less than the level at the end of 2011,” according to this source. Reis estimates that vacancy will end 2012 lower that it is now, at 3.9%. Any rate at or below 5.0% is generally considered statistically full occupancy, so the current forecast indicates only strength for the D.C multifamily market. According to Cassidy Turley, “certain submarkets may see vacancy rates rise in the short term,” but the “Washington Metro continues to boast one of the lowest multifamily vacancy rates in the U.S.”
SUPPLY AND DEMAND
Net absorption has been modest but positive so far in 2012, recording 274 units the first quarter and a slightly smaller 161 units the second quarter, for a year-to-date total of 435. This is actually down somewhat compared to the total recorded 12 months earlier, when second quarter 2011 saw 292 units absorbed. Demand continues to vary in strength here. The decade 2002 to 2011 saw absorption average 397 units per year, for a total of 3,968 for that time span. There were some negative years in the early 2000s, although the only truly “negative” year of the current cycle was a scarcely-recordable minus 50 units in 2009, during the economic downturn. Given the markets’ ups and down, demand has been generally solid the past few years.
There were no completions in the first or second quarter, after 488 units completed in all of 2011, according to Reis’ latest construction data. With no completions thus far in 2012, the year has marked a development slowdown for the District. Over 9,000 units were added from 2002 to 2011, an average of 901 per year. Reis currently reports six multifamily projects under construction with 2012 completion dates, totaling 1,597 units. The projects under construction are still led by the 469-unit Archstone NoMa (North of Massachusetts Avenue), set to complete in December of this year. Moving forward, Reis forecasts annual completion totals to just surpass 3,000 units in 2013 and reach over 4,000 in 2014, followed by more modest totals, in the 1,000 to 2,000-unit total range, towards the end of the forecast period. Metrowide, “developers will complete 4,700 units in the metro this year, an increase from 2,448 apartments in 2011,” according to Marcus & Millichap. “Multifamily starts have jumped and represent more than 40% of all residential groundbreakings over the past year, approximately two times the typical proportion,” this source notes. According to Cassidy Turley new construction added 327 units and net absorption posted 894 metrowide in the second quarter, with zero added and 161 absorbed in the District.
Rents continued to post gains in 2012, according to Reis. The second quarter asking and effective averages rose 1.0% and 1.2%, respectively, to $1,501 and $1,471 per month. The year-over-year gains are 3.3% and 4.0%, asking and effective, a solid performance for any market. Asking and effective rents increased by 2.3% and 2.6%, in 2011, so D.C. has been fairly positive on the rental front recently. Class A asking rents increased 0.9% in the second quarter to $1,937 per month, up 2.3% year-over-year. Class B/C asking rents posted an increase of 0.9% to $1,189 per month, up 4.1% year-over-year.
“Average asking rents will rise 4.0% to $1,467 per month in 2012 and effective rents will advance 4.7% to $1,401 per month,” according to Marcus & Millichap. “Asking rents rose 2.4% last year, while effective rents tacked on 2.8%. “Asking rents in the District have climbed for 12 consecutive quarters following a 0.9% jump in the second quarter to $1,467 per month,” according to this source. “Property operators trimmed concessions further as effective rents advanced 1.0% from April to June to $1,410 per month.” “Average asking rental rates were $1,476 per month across the region, a 0.9 percentage point increase over the quarter,” according to Cassidy Turley. “Rents in the District increased $14 to $1,500.”
Reis forecasts solid asking and effective rental gains of 3.9% and 4.5% for all of 2012. Annual increases in the 3.5% to 4.0% range are forecast for the following years, solid but below the U.S. and South Atlantic region averages for the period. The Districts rent gains had been above average in the 1990s and 2000s, according to Reis.