Demand for Class B apartments in Washington area should remain steady

May 5, 2013

The start of 2013 brought a rise in vacancy for the mid-tier (Class B) apartment market that could signal changes to come on rents.

For now, however, the vacancy rate remains relatively low, and rents overall are fairly stable.

Vacancy increased metrowide to 4.4 percent at first quarter 2013, from 2.2 percent at first quarter 2012. Vacancy increased in the suburbs but decreased slightly in the District.

The average effective rent (after concessions) across the region still managed to increase 0.1 percent from one year ago to $1,540. As with vacancies, there were differences across the metropolitan area. Suburban Maryland rents are up 0.2 percent, and rents in the District climbed even more, up 1.5 percent. Northern Virginia rents, meanwhile, dropped by 0.2 percent over the year.

Several factors will likely keep vacancy low for the remainder of the yearbut may exert some downward pressure on rents.

Despite sequestration, the Washington area continues to add jobs and conditions should improve after the first half of the year, as the outcome of the federal budget becomes clearer. At the same time, low-wage jobs are expected to grow at a rapid pace, particularly in the retail trade and the construction sectors, increasing demand for Class B apartments.

As deliveries of Class A units increase in 2013, pressure on Class B market rents could mount if owners of the higher-end buildings offer concessions to lease their new projects quickly.

Some Class B building owners have responded by refreshing their units. Nearly 32,000 units are under renovation at this writing, at an average renovation budget of $21,000 per unit.

Opportunities continue for renovating existing mid-tier (Class B) and lower-tier (Class C) properties. In our view, these opportunities can be the most profitable where the rent spread is widest between Class A apartments on the one hand and Class B or even Class C apartments on the other hand. When Class B or C units are renovated, rents can be raised correspondingly and still represent a discount to the prospective tenant compared to Class A rents.

In sum, the Class B apartment market in the Washington area faces obstacles in the near-term because of the amount of new supply being added to the Class A market. However, Class B vacancy should remain low, driven by demand from newly created jobs in modest-wage industries.

Maeve Gallagher is a senior associate at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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