Q4 DC Apartment Market Highlights by Delta Associates

If you’re a Washington DC area landlord, there is a mix of good news and troubling trends in the apartment market as we closed out 2012.

In the positive column:

• Class A absorption* levels and absorption pace per project despite an increasingly competitive marketplace point to solid demand.
• The region’s development pipeline has plateaued and construction starts are back down to more reasonable levels this quarter.
• Rents continue to increase in most submarkets, albeit at much more modest rates than at earlier points in this cycle.
• The Class A (luxury) stabilized vacancy rate declined from 5.0% last year at this time to 4.2% in December 2012.

However, there are troubling trends for rental owners and landlords:

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

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

Year-End 2012 Highlights

• Stabilized vacancy for investment grade apartments (Class A and B) is one of the lowest in the nation at 4.3%, up from 3.8% a year ago.

• Rents for all investment grade apartments were up 1.7% during 2012. Class A rents rose by 1.9% over the past year, down from the 2.4% growth posted in 2011.

• Annual Net Absorption, at 360 Class A and B apartments (7% of our long term average), declined significantly this quarter, measuring well below the region’s long-term average. This reduction is due to an increase in Class B vacancy, moderating job growth and a flattening of the trend toward renting vs. owning in the Washington metro area.  However, the Class A market absorbed 5,073 units.

• Concessions at Class A projects halted their declines for the first time since first quarter 2010. At year-end 2012, concessions increased slightly to 2.7% of face rent compared to 2.6% of face rent at year-end 2011.

• The development pipeline reached a cyclical low of 16,606 as of year-end 2009. Since then improving market fundamentals and improving development prospects have pushed the pipeline to 34,449 units at year-end 2011. At year-end 2012, the number stands at 35,767, as the market seemed to discount the threat of overbuilding.

• Construction starts eased this quarter with 2,518 units breaking ground, compared to 6,205 units in third quarter 2012. As job growth has moderated and deliveries are expected to accelerate during 2013 into 2014, market fundamentals will likely ease as well.