Urban Igloo recently chatted with Grant Montgomery, a VP at Delta Associates and leading expert on the DC apartment market.
Thanks for joining us Grant. What would you say about the health of the rental market in the DC area now compared to a year ago?
Washington is the best performing market in the nation, as evidenced by:
- A turnaround from the recessionary period faster than in other markets
- A&B vacancy was 3.4% at year-end 2010, down from 4.3% at year-end 2009
- Absorption of over 12,000 units in 2010 – more than half in Class B apartments
- Monthly lease-up pace up to 18 units per month vs. the long-term average of 17 per month
- Rents are up 8.2% for A & B apartments
- In the second half of 2010, construction started back up to the long-term average of 1,900/quarter. Construction on only 1,073 units was started in all of 2009.
Concessions do not seem as prevalent as they were in 2009, but they are still out there. What are your predictions going forward?
Concessions have been cut in half over the past 12 months, from 7.2% to 3.5%. Concessions for projects in initial lease-up also eased – down to 11.0% at year-end 2010. As we enter a period of restricted deliveries in 2011, expect to see further declines.
Let’s talk about the dynamics of the new renter. At Urban Igloo, we have seen an increase in out of town renters coming to work here. Does this align with your findings?
Yes, we have seen a large number of renters coming to the area from outside the region. You can see their impact in the elevated absorption numbers. Washington has the strongest job growth of any metro in the nation and while the for-sale market is still slow, the workers have to live somewhere.
Also, many renters have come to expect certain amenities like washer/dryers in units and granite countertops. What can developers do to differentiate their product today?
Yes, the last development cycle changed renters’ perception of what Class A is. Renters now take granite counters, stainless steel appliances and, to some extent, wood floors as a given — even though many of those projects owe their luxury finishes to the original plan for condominiums.
Place making is the key going forward – no longer are properties with a dry cleaner and a deli on the first floor considered “mixed-use”. Renters are expecting more.
What submarkets would you say are poised for growth?
- The Rosslyn-Ballston Corridor – a perennially strong market. Due to the construction slow down, this hot market will only have one delivery from early 2009 through 2012.
- Tysons Corner – Northern Virginia’s downtown is receiving $3B in Metro infrastructure and $2B in HOT lane infrastructure. The future looks bright for new development here.
- B-W Corridor – BRAC will add 10-15,000 jobs to the corridor, while Ft. Meade is already the second largest jobs concentration in the state of Maryland. Only issue will be watching oncoming supply.
What are the implications of your findings for developers?
To develop and time the market right you need to be in a hurry up offense. Either expedite the entitlement process or acquire a site that is poised to break ground soon.
Alternatively, look at value add opportunities in Class B properties located in strong submarkets with a large gap between Class A and Class B rents.
If you had a chunk of money to invest for twenty years with a sit and hold approach, where would you put it?
The Washington market definitely. NCREIF’s 3Q report shows total returns in the Washington region’s apartment market to be over 19% – the highest in the nation. Washington’s returns have consistently outpaced the nation as a whole.
Secondly, I would invest in differentiated product in highly accessible areas – either to Metro or other forms of transportation.
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Read Urban Igloo’s 2-part interview series with Grant from a year ago, when he spoke about DC apartment trends for landlords and DC apartment trends for renters.
