An Overview of the Washington Apartment Market

Third Quarter 2014

Largely due to favorable demographic and lifestyle trends, the region has been able to weather the onslaught of supply with record setting absorption* – thus far. This increase in supply has been building up in intensity since the credit markets began lending again in 2011.  Whether the region can continue on this track is questionable, given an additional 26,500 units that will deliver over the next 24 months and projected job growth that is slower-than-average for a recovery cycle.

2014 Trends

  • The 36-month development pipeline edged up slightly to 40,175 units, with 32,081 of those units currently under construction.
  • Metro-wide, the stabilized vacancy rate** for all classes of investment grade apartments remained unchanged over the past year – at 4.1%. However, Class A vacancy edged up to 4.6%.

The good news:

  • Metro area Class A*** rents rose by 1.1% over the past 12 months, due to unprecedented absorption levels.
  • We continue to experience record setting Class A absorption, as 10,663 Class A units were absorbed over the past 12 months – 77% ahead of our long term average, despite weak job growth over the past year.  This is due to demographic and lifestyle changes that favor apartment living.
  • Construction starts in the 3rd quarter are at their lowest level in 3 years, but an elevated amount of units are expected to start construction before the end of the year.

THIRD QUARTER 2014 HIGHLIGHTS

  • Stabilized vacancy for investment-grade apartments (Class A and B) in the Washington metro area remained unchanged at 4.1% from a year ago.
  • Class A vacancy increased .7% to 4.6% at September 2014.
  • Rents for all investment-grade apartments were up 1.0% over the past 12 months.
    • Class A rents increased 1.1% since September 2013.
    • Class B rents were up 0.9% over the year. (For more information, please see the Delta Associates Washington Metropolitan Area Class B Apartment Market Report, available by subscription under separate cover.)
  • Annual Net Absorption, at 13,234 Class A and B apartments is record-setting for the region (154% above the long-term average) with positive absorption of Class B units coupled with the recent surge in Class A absorption.  Washington recorded 10,663 Class A units absorbed over the past 12 months (also a record for the region).
    • Absorption of Class A units over the next 36 months will likely be significantly higher than the region’s long-term average of 5,925 units per annum. This projection is predicated upon the “de-nesting” and “un-grouping” of potential renters currently living with parents or roommates, along with job growth and the ratio of renters to owners staying the same or increasing.
    • Average monthly absorption of new projects stayed the same over the past 12 months at 16 units per project per month, despite the number of projects in lease-up growing from 60 to 76 over the past 12 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 the end of the third quarter of 2014, the number stands at 40,175 units, as production ratcheted up in the latter half of 2013, with the market continuing to discount the threat of overbuilding. Fortunately, starts this quarter fell to 1,615 units breaking ground, the lowest quarterly total in three years.  However, an elevated amount of units are expected to start construction before the end of the year.

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

**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.

***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.