The Washington apartment investment market continues to draw capital, driven by a strong market and a long-term outlook of continued growth in rents.
The apartment market is holding up well in light of the large slate of new buildings arriving in the region. Local investors as well as national real estate investment trusts and foreign investors continue to buy Washington apartment assets. Volume in 2012 was off the robust pace of 2011. So far in 2013, we have seen volume similar to 2012. In the long term, though, the region’s apartment market prospects remain extremely bright, given lifestyle, economic and demographic trends.
Through May, the transaction volume for multifamily Class A buildings totaled $403 million, and included four low-rise and two high-rise properties, plus the major sale of Archstone to AvalonBay and Equity Residential. That transaction, covering 138 existing properties nationally plus development sites throughout the region, closed in February. Although total sales for the year have been down, we have seen an improvement in price per unit for Class A sales. While caution is warranted because of the small sample size, high-rises have sold for 33 percent more per unit in 2013 than in 2012, and Class A garden apartment buildings are selling for 26 percent more per unit.
Total return on apartment investment (cash flow plus appreciation) in the Washington market continues to track below the national average, as reported by the National Council of Real Estate Investment Fiduciaries. While this index reports a 6 percent 12-month total return for Washington, the U.S. return is 11 percent for the same period.
Through early June, there were 19 Class B apartment sales – five high-rise properties and 14 garden/mid-rise properties – totaling 7,139 units and approximately $1.4 billion. Garden/mid-rise properties sold at an average price of $177,444 per unit and the high-rise properties sold at an average of $237,686 per unit. During the same period in 2012, there were 13 Class B property sales totaling $512 million.
In 2013 and 2014, we expect Class B vacancy to continue to rise as the large pipeline of Class A buildings is brought to market. With vacancy edging up, rents are likely to continue to edge down during the second half of this year and into 2014. However, these negative trends should be mitigated by the addition of low-wage jobs to the area in 2013 and 2014. These jobs support demand for Class B units. Commercial real estate moves in cycles, and this down cycle is likely to be shallow and short-lived.
Six multifamily land sales have closed through May, totaling $139 million, with the capacity for more than 1,850 multifamily units. Over $338 million in multifamily land sales were completed in 2012, with the capacity for more than 5,600 units. The multifamily development community appears to remain bullish on the long-term prospects for this region, given its history of stable and robust economic growth.
Justin Donaldson is an associate at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.