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Rental boom provides life preserver for developers

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By Jonathan O'Connell
Monday, October 11, 2010

In 1904, brothers Guy and L.P. Steuart went into business together selling ice and coal from a mule-pulled cart. The two got into the real estate business in the 1920s and Steuart Investment has owned property between New York Avenue and L Street near Mount Vernon Square in Northwest D.C. ever since.

The company resisted developing the site when Metrorail came to Mount Vernon Square and when the city's new convention center opened in 2003, but now, Guy Steuart II says it is finally time to develop the property, a generation after his grandfather and great uncle acquired it. He recently finalized a partnership with Arlington housing developer Paradigm Development, secured an insurance company as a lender and applied for excavation permits so work can begin this month.

And what prompted him to finally get the shovel? A surprisingly strong market for apartments that has pushed vacancy rates to new lows.

Steuart is not alone. Despite one of the biggest construction slowdowns in decades, Washington area developers and investors are hustling to get new apartments out of the ground as quickly as possible, looking to take advantage of a growing stream of young job seekers who are moving to Washington. In a typical year, the Washington area fills about 5,200 more apartments than it empties. In the past 12 months it has filled 16,476, according to the Alexandria research firm Delta Associates.

Like most urban neighborhoods in the area, Mount Vernon Square is attracting more than apartments. Steuart himself plans office buildings for land he owns nearby and other owners are pushing hotels to feed off the Walter E. Washington Convention Center. But as he watched apartment buildings elsewhere quickly find takers and then discovered that lenders had money ready for projects, he decided to move. His 390-unit, 14-story complex will be called the Meridian at Mount Vernon Triangle.

"To a certain extent, it fits the demographic profile of what a lot of the city is," he said. "You've got a lot of that 25- to 35-[year-old] profile who may not want to own their own place and don't want to own a car."

BIG SHIFT TO RENTING

Since the housing market atrophied and plunged the economy into recession, a national shift toward renting has been predicted. A 2005 CNNMoney headline read "Rent or Buy? The answer may surprise." Soon thereafter, Time magazine wrote about "The surprising case for renting" and USA Today ran a piece called "For some, renting makes more sense."

But the paradigm shift from buying to renting comes nowhere near explaining the boom in Washington area apartment leasing, according to data from Delta. Of the nation's 57 largest apartment markets, Washington's 2.5 percent vacancy rate for the third quarter was the lowest and easily bested the 6.6 percent average for all markets. Otherwise strong real estate markets have vacancies that far outpace Washington. Dallas-Fort Worth, for example, considered one of the country's strongest areas for commercial real estate, had a 9.3 percent apartment vacancy rate in the second quarter.

"These are the best of times that we've seen in the 20 years that we've been compiling statistics on it," said Delta chief executive Gregory H. Leisch.

He cited the shift away from homeownership and the area's stronger-than-most economy in leading tens of thousands college graduates and young professionals to move here in search of their own places.

"We've never seen this kind of sudden shift from ownership to rental in a three-year period," he said.


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