The Washington Post

More signs of an apartment bubble

After the economic crisis hit, Washington real estate was kept afloat by a stretch of aggressive leasing activity by the federal government — a period that by most accounts has come to an end.

Office leasing “lost considerable velocity in the first three quarters of 2011,” says a Jones Lang LaSalle press release this week. The vibe was similar at a Bisnow conference this morning on investments, where Victor K. Tolkan, managing partner at Penzance, summed things up by saying that, “Leasing markets continue to weaken or at least stay stagnant.”

Even developers who were planning office buildings are turning to apartments as quickly as possible, at least those with properties that allow it. The shift is happening so quickly that there are already early signs of a bubble that the leasing problems are only likely to exacerbate.

Apartments are so attractive right now that Jones Lang LaSalle’s Scott Homa said he expects some developers who are renovating existing office buildings to begin considering conversions to apartments. “It’s something we have not seen historically, but it is something we are likely to see more often going forward,” he said.

JBG is one of the firms bringing hundreds of new apartments to the area, but Matt Kelly, a JBG managing director, said at Bisnow this morning that the number of units planned for the area is troubling.

“There is just a flood of potential supply coming. In certain areas I think there will be spot oversupply, and what that does to the market is a question,” Kelly said.

A question indeed. If leasing continues to slide and the apartment market overheats, what’s next?

Jonathan O'Connell has covered land use and development in the Washington area for more than five years.

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