The Washington apartment market is growing ever more competitive.
Renters have more than 50 newly delivered projects to consider across the region. This elevated number of choices should translate into a temporary period of increased negotiating power for tenants as owners seek to fill 17,000 units that will be arriving in the market over the next 12 months. However, the surplus of units may be short-lived, as demand grows to record levels for Class A projects.
From an owner’s perspective, the second quarter has been a mixed bag of good news and troubling trends. In the positive column, Class A absorption levels (the change in the number of occupied units) and absorption pace per project (the number of net units leased) point to solid demand, despite an increasingly competitive marketplace. The region’s development pipeline of new units has also plateaued—construction starts are back down to more reasonable levels—and the stabilized vacancy rate for Class A projects declined from 4.6 percent last year at this time to 4 percent today.
However, there are clouds on the horizon for the remainder of the year: Rents have begun to markedly decline in over half of the region’s submarkets, particularly in those that are burdened with high levels of new supply. The development pipeline also remains oversized compared to projected demand, and the near-term future of the regional economy, in light of federal austerity measures, remains a question mark.
The major factor currently driving Washington’s apartment market performance is the delivery of a number of new apartment units in the region. In the 12 months ending in June 2013, the region added more than 9,700 new units — the third-highest 12-month total on record. Over the next 12 months, that number is slated to grow to more than 17,000. Measured against historical and recent demand levels of just over 5,000 units annually, the change toward an excess of units will be felt across the region.
This overhang of units may be short-lived, however, as demand for Class A properties dramatically improved over the past year, rising to 9,371 units — the highest level Delta Associates has ever recorded in the Washington region. Continued strength in demand, driven by a resumed trend toward renter households in the region, should go a long way toward minimizing an excess of new units in the market. Two of the neighborhoods to watch: Columbia Heights/Shaw, which includes the U Street corridor, where nearly 1,000 units are delivering over the next six months; and the Rosslyn-Ballston Corridor, with more than 2,000 units set to deliver over the next 15 months.
Across the region, renters have likely noticed a change in the relative strength of their bargaining position, particularly as they scout specials being offered in a crowded field of newly leasing projects. Rents for all investment-grade apartments declined over the past 12 months, down 0.8 percent, dipping for the first time since 2009. Class A rents also declined 0.8 percent over the past year, reversing from an increase of 3 percent during the prior 12-month period. Over half the submarkets Delta surveys in the Washington metropolitan area reported rent declines this quarter. We expect this trend will spread to additional submarkets in the latter half of this year as supply outpaces demand elsewhere.
Eventually, balance should return to the market. Construction starts have drifted back down to levels over the past nine months that will allow the market to take a breather — in 2015 — from record deliveries. More than 2,200 units broke ground in the second quarter of 2013, in line with the region’s long-term level of production.
Despite the fluctuations, 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 because of the strength of broader demographic and housing trends in the United States. Because of a confluence of factors, including the Generation Y demographic bulge and the increased preference to rent rather than own following the national housing collapse, there is a large cohort of renters expected to emerge from 2011 through 2015 (9.1 million nationally) — nearly three times the increase the nation experienced during the period from 2006 through 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.