There is a mix of good news and troubling trends for DC area landlords as we begin 2013.

In the positive column:

  • Strong Class A absorption* levels and absorption pace per project point to solid demand, despite an increasingly competitive marketplace.
  • The region’s development pipeline has plateaued and construction starts are back down to more reasonable levels this quarter.
  • Rent growth is registered in most submarkets, albeit at much more modest rates than at earlier points in this cycle.
  • Concessions remain low, registering just 2.8% of face rents, compared to 2.6% one year ago.
  • The Class A stabilized vacancy rate declined from 5.1% last year at this time to 4.9% in March 2013.

However, there are trends that portend a troubling intermediate future:

  • Rents have begun to markedly decline in several submarkets, particularly in those that are burdened with high levels of new supply.
  • The pipeline remains oversized compared to historic levels of demand.
  • And the future of our regional economy, in light of Federal austerity measures, remains a large question mark.

In the long-term, the region’s apartment market prospects remain extremely bright, given lifestyle, economic and demographic trends.

FIRST QUARTER 2013 HIGHLIGHTS

  • Stabilized vacancy for investment grade apartments (Class A and B) is one of the lowest in the nation at 4.7%, up from 3.8% a year ago.
  • Rents for all investment grade apartments were up 0.7% over the past 12 months.
  • Class A rents rose by 0.6 % over the past year, down from the 2.3% growth posted at first quarter 2012.
  • Class B rents increased by 0.1%.
  • Annual Net Absorption, at 1,965 Class A and B apartments (39% of our long term average), edged up this quarter, but remained well below the region’s long-term average.  This moderated absorption level is due to several factors including:
    • Increase in Class B vacancy from its extremely low vacancy rate of 2.2% one year ago to 4.4% at first quarter 2013.
    • Job growth has moderated since early 2011.
    • However, Washington recorded 6,645 Class A units absorbed over the past 12 months, as the trend toward renting vs. owning appears to have resumed its upward trend in the Washington metro area in 2012.
  • As predicted by Delta Associates, and demonstrated by the latest U.S. Census Bureau data, the structural shift toward renting appears to have played out in the Washington area. This trend is further illustrated by Washington’s nation-leading for-sale housing market performance. Absorption over the next 36 months may be somewhat higher than the region’s long-term average of 5,095 units per annum. This projection is predicated upon the “de-nesting” and “un-coupling” of potential renters currently living with parents or roommates, and improved job growth and reduced uncertainty in the region over the intermediate term.
  • Average monthly absorption at new projects ticked up over the past 12 months from 15 to 16 units per project per month.  This pace bodes well for projects delivering in 2013, as the number of projects in lease-up begins to climb. The number of projects in lease-up has increased from 23 to 45 over the past 12 months and there are more to come in the period ahead.
  • Concessions at Class A projects ticked up slightly due to the large increase posted in Northern Virginia. While still extremely low, overall concessions increased slightly to 2.8% of face rent at first quarter 2013 compared to 2.6% one year earlier. Over the past year concessions for projects in initial lease-up increased from 6.9% to 8.3%, driven by a particularly large increase for projects in Suburban Maryland.
  • The development pipeline reached a cyclical low of 16,606 as of year-end 2009. Since then improving market fundamentals and improving financing pushed the pipeline to 34,449 units at year-end 2011. At first quarter 2013, the number stands at 35,802 as production moderated over the past two quarters. This pause has occurred before during this development cycle, only to be followed by record setting levels of ground breakings. Future quarters will demonstrate whether the market continues to discount the threat of overbuilding. Starts eased this quarter with 2,671 units breaking ground this quarter compared to 2,518 in fourth quarter 2012.

*Absorption = a measure of the total square feet leased in the market taking into consideration office space vacated during that period