Delta: Apartment market is still sizzling, but rent drop is likely

January 15, 2012

The Washington metropolitan area continues to offer one of the best performing apartment markets in the nation and its intermediate and long-term prospects appear bright because of broader national demographic and housing trends.

Living at home has always been a fallback for younger workers during tough economies, but young professionals are choosing that option more than in any recession and recovery in the past 25 years. As the economy continues to recover, this national group of more than 5.5 million people represents a huge pool of likely future renters to keep filling buildings.

Due in part to the demographic bulge and the preference for renting, 9.1 million renters are expected to emerge from 2010 through 2015, nearly three times the national increase from 2005 to 2010.

They’ll have plenty of buildings to fill. Construction of new apartments set a record in 2011.

The Washington area has the third-lowest stabilized vacancy rate in the nation for Class A and Class B properties combined, at 3.8 percent, behind New York and Philadelphia. The vacancy rate for Class A apartments in the Washington area at the end of 2011 edged up slightly to 5 percent from 4.6 percent a year ago. Vacancy in mid-rise and high-rise properties was unchanged at the end of 2011 at 4.5 percent, while vacancies in low-rise apartments increased to 5.2 percent from 4.7 percent a year earlier.

The net absorption — or net gain in apartments rented — continued to drop in Washington. The area absorbed 3,873 Class A apartments in 2011, down from the long-term average of 5,699. Strong performance in previous years had been fueled by the trend favoring renting over owning. This trend has likely run its course in the Washington area, despite continuing on a national level. Softening job growth in the region is also partly to blame for the recent reduction in Class A absorption.

Rents for all Class A apartments were up 2.4 percent during 2011 but were still below the previous year’s increase of 7.8 percent. Approximately two-thirds of this increase in rent was derived from an adjustment in rates with the balance coming from a reduction in concessions offered. Mid-rise and high-rise Class A property, almost exclusively inside the Beltway, experienced rent increases averaging 3.3 percent. Class A low-rises, largely outside the Beltway, increased 2 percent.

Concessions at Class A projects edged lower. At year-end 2011, concessions were 2.6 percent of face rent compared with 3.5 percent at year-end 2010. Concessions for projects in initial lease-up, although declining over the year, remain higher than the total market average, at 5.0 percent.

Local Class A rents will face downward pressure in 2012 due to all the new units being built and modest rent declines are likely by the end of 2012. Better projects in stronger neighborhoods should outperform these market averages, but we expect the regionwide Class A vacancy rate to increase from 5 percent today.

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