Washington apartment market metrics continue to be affected by a rising tide of supply but are proving to be quite resilient due to surging absorption.* A more competitive landscape will continue into 2016, due to a wave of 28,000 units delivering to market over the next 24 months.

  • Class A** rents were unchanged over the past 12 months metro-wide.
  • Due to record setting absorption, the Class A stabilized vacancy rate*** was almost unchanged as well, edging up slightly to 4.1% from June 2013 when it stood at 4.0%.
  • The already oversized 36-month development pipeline remained steady at 39,962 units at June 2014, with 33,848 currently under construction.

The bright spot:

  • We are experiencing record setting Class A absorption, as 9,336 Class A units were absorbed over the past 12 months, 58% ahead of our long term average, despite weak job growth over the past year.

The downer:

  • Construction starts ratcheted back up this quarter, extending the more competitive period of this cycle into the latter half of 2017.

Other good news? We think it lies in two factors:

  1. The current condition is a supply problem and not demand driven. This problem will dissipate as the pipeline shrinks.
  2. In the long term, the region’s apartment market prospects remain extremely bright, given lifestyle, economic, and demographic trends. These prospects and trends are discussed in detail later in this report.

MID-YEAR 2014 HIGHLIGHTS

  • Stabilized vacancy for investment-grade apartments (Class A and B) in the Washington metro area rose to 4.1% from 4.0% a year ago.
  • Rents for all investment-grade apartments were up 0.3% over the past 12 months.
  • Class A rents were unchanged over the past year, up from the 0.8% decline posted at mid-year 2013.
  • Class B rents were up 0.7% over the year.
  • Annual Net Absorption, at 8,639 Class A and B apartments (166% of our long-term average), remained strong this quarter, with lower levels of disabsorption of Class B units more than compensated for by the recent surge in Class A absorption.  Washington recorded 9,366 Class A units absorbed over the past 12 months.
  • Absorption of Class A units over the next 36 months will likely be significantly higher than the region’s long-term average of 5,846 units per annum. This projection is predicated upon the “de-nesting” and “un-coupling” of potential renters currently living with parents or roommates, along with improved job growth and reduced uncertainty in the region over the intermediate term.
  • Average monthly absorption of new projects declined over the past 12 months from 16 to 15 units per project per month. This decline in pace is reflective of the number of projects in lease-up growing from 52 to 68 over the past 12 months, with more to come over the next 18 months.
  • The development pipeline reached a cyclical low of 16,606 units as of year-end 2009. Subsequently, improving market fundamentals and improving financing pushed the pipeline to 34,449 units at year-end 2011. At mid-year 2014, the number stands at 39,962 units, as production ratcheted up in the latter half of 2013, with the market continuing to discount the threat of overbuilding. Unfortunately, starts ramped up this quarter, with 3,442 units breaking ground, compared with the historical quarterly absorption pace of 1,481 units.

* The rate at which available homes are sold in a specific real estate market during a given time period.

**Properties in class A are the newest, most recently built apartment buildings. These units have higher rent per square foot and feature the latest amenities.

***The term stabilized vacancy rate in real estate refers to the rate of available units in stabilized properties. A property is considered stabilized when it reaches 95% capacity. The property is still considered in the pool of stabilized properties even if it drops below 95% capacity afterwards.