During the first quarter, rent for Class B apartments continued to edge up and vacancy remained at chronically low levels, with little significant movement when compared with 2011.
The Washington area Class B apartment vacancy rate was 2.2 percent at the end of first quarter, barely changed from 2.3 percent one year ago. Vacancy has decreased steadily since its peak at 5.6 percent in the third quarter of 2009 and remains unusually low at 2.2 percent.
For the same period, average rent for Class B apartments in the area increased to $1,542, an increase of only 1.9 percent from one year ago. This small rent increase despite such low vacancy speaks to two factors: uncertainty over economic conditions and low turnover, which is limiting landlords’ ability to raise rents.
Upper Northwest D.C. apartments had the second-highest average rent per square foot at $2.30, followed by Southwest D.C. at $2.26 per square foot. Mt. Vernon Square boasted the highest rent per square foot for the first quarter of 2012 at $2.58.
We expect constrained Class B rent growth during 2012.
The differences in rental rates between high-end apartments and Class B properties should continue to favor investors who take advantage of renovation opportunities. These investors should look to invest in neighborhoods with the greatest spread in rents between Class A and Class B apartments.
Several contributing factors should keep vacancy low this year:
Job losses appear to be waning in those industries employing workers most likely to live in Class B apartments — retail, construction, warehousing, transportation and other lower-paying jobs. As job growth in these lower-paying categories rebounds, Class B apartment demand will follow.
High overall housing prices and stricter underwriting standards leave rental housing as the only alternative for many households.
As new Class A buildings open in 2012, pressure on the Class B market could mount if concessions are introduced in the Class A market to lease the projects quickly. This will likely restrain Class B rent growth.
Job losses among lower wage earners and excess supply of Class A units in several communities had dampened the Class B apartment market across the area in 2008 and 2009. This trend abated in 2010 and early 2011.
We expect chronically low turnover and the uncertainty about future economic conditions to lead to lower rent increases than would normally be expected at current levels of occupancy.