Taking stock of Washington’s apartment boom

January 20, 2013

It was a busy year in Washington’s apartment market in 2012, one that produced a mix of good news and troubling trends.

In the positive column, apartment leasing demonstrated solid demand, despite an increasingly competitive marketplace.The region’s development pipeline has also plateaued and new construction returned to more reasonable levels as of the fourth quarter of 2012.

Rents continue to increase in most parts of the region, albeit at much more modest rates than at earlier points in this cycle, and the vacancy rate for high-end (Class A) projects declined from 5 percent last year at this time to 4.2 percent in December of 2012.

However, there are clouds on the horizon for building owners in 2013: Rents have begun to markedly decline in several neighborhoods, particularly in those that are burdened with high levels of new supply. The development pipeline also remains over-sized compared to projected demand, and the future of our regional economy, in light of federal austerity measures, remains a large question mark.

In the long term, the region’s apartment market prospects appear bright, given lifestyle, economic and demographic trends.

A major factor driving Washington’s apartment market performance in 2013 will likely be the arrival of a record-setting number of new apartment units in the region. In 2012, the region received more than 9,300 new units — the second-highest annual total on record. In 2013, that number is slated to grow to over 15,000.

Measured against historical and recent demand levels of just over 5,000 units annually, the stage is set for a more competitive landscape and movement toward a renter’s market this year.

Renters should begin to notice a change in the relative strength of their bargaining position when they extend leases in 2013, or particularly when they scout out specials being offered in a crowded field of newly leasing projects.

Overall, rents for investment-grade apartments continued to edge up 1.7 percent during 2012, with Class A rents rising 1.9 percent, slowing from an increase of 2.4 percent during 2011. But we project that by the end of 2013 rent growth will disappear locally, as supply outpaces demand across many parts of the region.

Construction continued at its elevated pace in 2012 with 14,383 units breaking ground, just off the record-setting level of 2011, when 14,827 units broke ground — the largest number recorded by Delta Associates since we began tracking the market 18 years ago. As market performance comes under pressure this year, expect the pace of groundbreakings to cool as well.

Renters shouldn’t get their hopes too high, however, as this imbalance will likely be a temporary one. The Washington area continues to be one of the best-performing apartment markets in the nation for owners and investors, and its intermediate and long-term prospects are bright. There is a large cohort of renters nationally expected to emerge from 2011 through 2015 (9.1 million), nearly three times the increase the nation experienced during the period from 2006 to 2010. This pool of renters should power a strong national and local rental market over the intermediate to long term. By 2016, we expect landlords in the Washington area apartment market to be back in control of the market.

Grant Montgomery is senior vice president at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.

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