The Washington market for buying and selling apartment buildings is slowing, as local investors, national real estate investment trusts and foreign investors hunt harder for deals.

Class A market

In 2011 there was $2.41 billion in sales of high-end (Class A) multifamily buildings, including 19 low-rise properties and 10 mid- or high-rise properties. So far this year, however, we have not seen the same level of activity, with only $960 million in multifamily Class A sales, including six low-rise properties and five mid- or high-rise properties. Low-rise units are selling for less: the year-to-date 2012 average per-unit price for closed sales (at $195,000) is 13.1 percent lower than for all of 2011 for low-rise units, due in part to the geographic composition of sales. High-rise prices (at $402,000) are off 5 percent compared with all 2011 sales.

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 solid 9.77 percent 12-month total return, it is significantly off the peak of 28.64 percent in 2010. The breather is to be expected after such a huge run-up earlier this cycle in area prices.

Class B market

The picture is brighter for the Class B, or second tier, investment market, which is on pace to surpass 2011 sales volume. Through August there have been 26 sales totaling 10,100 units and $1.6 billion. The properties include nine mid- and high-rise properties and 17 garden properties. In 2011 there were 44 Class B garden sales and 14 high-rise sales posted, comprising a total of 17,816 units and $2.5 billion in value.

Rents should climb over the remainder of 2012 due to low vacancy, but by 2013 and 2014, downward rent pressure may be felt as a large pipeline of Class A apartments is delivered.

Among the opportunities for Class B owners are renovation or expansion. Look for areas with the largest spread in rents between Class A and Class B apartments to provide the greatest opportunity for renovation of older buildings.

Land sales

So far in 2012, 12 multifamily land sales have closed, totaling $190 million, with the capacity to construct more than 2,800 apartment units. More than $280 million in multi-family land sales closed in 2011, with the capacity for more than 5,600 units. Land sales may decline in the period ahead given the high level of complexes coming on line, though investors should look ahead to 2015-16 when the market may again be undersupplied.

Justin Donaldson is an associate at Delta Associates. Staff at Delta Associates contributed to this
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