AN OVERVIEW OF THE WASHINGTON APARTMENT MARKET

First Quarter 2014

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 2015, due to a wave of 26,400 units delivering to market over the next 24 months.

  • Class A rents** declined metro-wide by 0.4% over the past 12 months.
  • However, record setting absorption improved the Class A stabilized vacancy rate*** to 4.5%, down from March 2013 when it stood at 4.9%.
  • The already oversized 36-month development pipeline grew to the highest level we have ever recorded in the Washington region, 40,120 units in March 2014.

There are a couple of bright spots:

  • We are experiencing strong Class A absorption, as 9,166 Class A units were absorbed over the past 12 months, 57% ahead of our long term average, despite weak job growth over the past year.
  • There has been a recent slowdown in construction starts to a more reasonable level that, by 2017, should aid a return to more positive performance metrics.

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 a bit later in this article.

FIRST QUARTER 2014 HIGHLIGHTS

  • Stabilized vacancy for investment-grade apartments (Class A and B) in the Washington metro area declined to 4.5% from 4.9% since last year.
  • Rents for all investment-grade apartments were largely unchanged over the past 12 months
    • Class A rents declined by 0.4% over the past year, down from the 0.6% growth posted at first quarter 2013.
    • Class B rents were up 0.5% over the year. (For more information, please see our Washington Metropolitan Area Class B Apartment Market Report, available by subscription under separate cover.)
  • Annual Net Absorption, at 7,720 Class A and B apartments (149% of our long-term average), remained strong this quarter, with disabsorption of Class B units contrasting a recent surge in Class A absorption.  Washington absorbed 9,166 Class A units over the past 12 months, as the trend toward renting vs. owning continued its upward path.

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 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 13 units per project per month. This decline in pace is reflective of the number of projects in lease-up growing from 45 to 74 over the past 12 months,  with more to come over the next two years.

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 first quarter 2014, the number stands at 40,120 units as production ratcheted up in the latter half of 2013 and the market continued to discount the threat of overbuilding. The good news: Starts declined this quarter, with 1,682 units breaking ground, compared with our historical quarterly absorption pace of 1,462 units.

 

* Absorption = The rate at which available homes are rented 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.