Apartment market shows sign of a coming slowdown

July 29, 2012

With a surge of new apartment projects scheduled to open during the next 18 months, the Washington apartment market continued its strong performance in the second quarter of 2012.

Some signs, however, show that the large number of new units coming online will likely knock some of the wind from the market’s sails, tilting the market by the end of the year in favor of renters. The main market indicators reflect a strong but slowing market:

Vacancy

Stabilized vacancy for investment grade apartments (Class A and B) is pacing the nation at 3.5 percent, up slightly from a year ago but still strong when compared with the vacancy rate of other metropolitan areas. With the national vacancy rate at 5.4 percent, Washington has the third-lowest vacancy rate of any major metro area in the nation. The tight Class B market of older, more modestly priced units, has an even lower vacancy rate — 2 percent.

Rents

Rent increases have already begun to slow from their pace one year ago. Rents for all investment-grade apartments were up 2.5 percent for the 12 month period ending June 2012. High-end (Class A) rents rose by 3.0 percent over the past year, compared with an increase of 5.6 percent during the preceding 12 months. Class B rents rose by 1.9 percent in the 12 months ending June 2012.

Absorption

The region’s landlords filled about 3,580 apartments over the past year, about 65 percent of the area’s long-term average. With fewer people shopping for units, owners have had to pull back on rent increases, but this has not yet spilled over into larger rent specials, as concessions continued to decline. Average monthly absorption at new projects declined slightly over the year to 16 units per project per month. This number is likely to remain flat or decrease in the coming months as the number of new projects being completed and entering the leasing phase jumps.

As the rental market turns in favor of renters, rental growth is likely to slow and concessions will rise. As of mid-year 2012, concessions stood at an average of 1.9 percent of face rent. At new projects, where concessions generally run higher, they are 7.7 percent. Both of these numbers should increase as new projects open and landlords try to fill units with renters.

Renters should not get their hopes too high though, as the imbalance in the market will be a temporary one, and long-term prospects for developers and investors look bright. By 2015, we expect the Washington apartment market will turn to the landlord’s favor again.

Steven Reilly is an associate at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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