Second-tier apartment vacancy remains chronically low but rent growth is limited

Washington area employment gains are expected to continue — though at a moderating pace — in the second half of 2012, which should support a sturdy market for second-tier, or Class B, apartments.

As job growth in lower-paying sectors (such as retail, construction, warehousing and transportation) rebounds, Class B apartment demand will follow.

High overall housing prices and stricter underwriting standards leave rental housing as the only alternative for a growing number of households. The ratio of renters relative to owners has increased substantially in the Washington region over the past few years, though this trend is moderating.

The Washington area Class B apartment vacancy rate rose slightly to 2 percent at the end of second quarter 2012, from 1.9 percent one year earlier.

Garden and low-rise apartments posted a 1.9 vacancy rate as of mid-2012, unchanged from this time last year. The vacancy rate for garden and low-rise properties increased 70 basis points from a year earlier in Northern Virginia to 2.3 percent and fell in suburban Maryland by 90 basis points to 1.5 percent.

Vacancy for mid-rise and high-rise buildings is 2.2 percent, slightly up from the end of the second quarter of 2011. Geographically, Class B mid-rise and high-rise vacancy rates at the end of the second quarter of 2012 were 2 percent in Northern Virginia, 2.4 percent in suburban Maryland and 2.7 percent in the District.

Accounting for discounts, rents at Northern Virginia properties grew 2.3 percent over the past year, with growth in a majority of neighborhoods. Suburban Maryland performed less well, with an increase of just 0.2 percent, and the District’s 5.7 percent growth rate was the strongest. The average effective rent for all Class B property types was $1,580 per month.

Class B mid-rise and high-rise rents are growing at a mixed pace throughout the area, with the average effective rent now at $1,818 per month. The District had the best high-rise rent performance over the past year, with a 6.7 percent increase since this time last year. Effective rents in Northern Virginia are up 2.8 percent from this time last year, and high-rise rents in suburban Maryland decreased by 6.7 percent year-over-year. Effective rents are the highest in the District at $1,892 per month, and continue to be the highest on a per-square-foot basis at an average of $2.37.

Turnover

Turnover at Class B properties is lower than for Class A communities, slowing rental growth. With so few units available, rent growth is statistically under-reported and appears to be lower than might otherwise be expected.

Outlook

Class B rent growth is likely to be constrained in 2012 due to extremely tight vacancy in the region, allowing for little turnover and thus fewer opportunities to raise rents. With more high-end apartments arriving on the market, there may be pressure to lower rents in 2013.

Chris Dubberly 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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