Inside the rush to build Washington apartments, early signs of a bubble
It has attracted developers from out of town, developers with other specialties and developers who previously had very different plans.
It is the Washington market for apartment buildings, by most accounts the strongest in the country. After a period when very few new units were built due to the sagging economy, developers are now erecting dozens of apartment buildings, with others hustling to finalize financial agreements and approvals from local governments so they can join in. Builders broke ground on 4,400 new units in the second half of 2010, according to the Alexandria research and advisory firm Delta Associates, more than five times the total in the second half of 2009. Work on another 4,200 units began in the first quarter of 2011.
But while many developers, researchers and analysts say the apartment projects getting underway now are likely to quickly lease up and attract high rents thanks to historically low vacancy rates and Washington’s job growth, the market has become so hot so quickly that questions are arising about when the area will go from having not enough apartments to having too many.
One of the companies currently building an apartment tower is Camden Property Trust, a publicly traded firm from Houston that does more business in the Washington area than in any other market. Camden started excavation work in 2007 on a 276-unit, $88 million project on South Capitol Street, directly across the street from the Washington Nationals Park — only to shelve the project as the recession arrived. Work restarted this month.
“We sort of put the dirt back in and waited for a sunny day,” said Ric Campo, Camden chairman and chief executive. “And we have a sunny day today.”
Camden’s project is slated to open in the second half of 2013. “The first new properties, as they come on line, which they’ve already started [doing], are going to lease up well,” said Scott Melnick, a managing director at the services firm Jones Lang LaSalle.
Campo said that Camden will start another, slightly larger project in NoMa, in Northeast Washington, later this year. But after that, he said, caution may be necessary as so many other firms rush to get into the apartment game.
“Just looking at the tea leaves right now, 2011 to 2014 will probably be some of the best apartment markets we’ve seen in the last 20 years,” he said. “And then when you start laying on the fact that everybody knows that and wants to get into it, then you might have some extra supply in 2015.”
Similar to Camden, Jefferson Apartment Group of Tysons Corner is busy building and renovating hundreds of apartments in Washington neighborhoods right now. Jim Butz, president and managing partner, said the company will rehab 404 units on Rockville Pike and is building another 206 near the Braddock Road Metrorail station in Alexandria and 230 on 14th Street NW in the District. That project, called Jefferson 14, will feature a new 44,000-square-foot YMCA.
But Butz said he is already seeing some potential signs of over-exuberance.
“You’ve got office developers whose market is slow and they’re turning their attention to multifamily, perhaps without the expertise, and you have out-of-town developers trying to jump into Washington, D.C., and those two items are of some concern,” he said.
Butz said that rather than simply rushing into the fray, developers ought to keep a close eye on the economy.
“If job growth increases as everybody hopes that it will, then I don’t think you will see significant overbuilding. However, if we have a flat recovery or a jobless recovery, then you need to be a little careful,” he said.
In all, Jones Lang LaSalle expects more than 15,000 new apartments to be completed locally during the next two years. If too many units open at once it could drive down rents and potentially leave those whose projects follow to struggle for renters. Some might decide they are better off converting to condominiums if that market returns in earnest.
For the moment, however, Melnick and his partner, Al Cissel, said they are eager to take advantage of market conditions. “The dynamics are so good now that the sooner somebody starts the better,” Melnick said. “But it’s not the corollary that building later isn’t a good idea.”