The Washington apartment investment market continues to draw capital, driven by strong market fundamentals and a long-term outlook of growth in rents, notwithstanding more immediate concerns of too much new construction. Local investors as well as national real estate investment trusts and foreign investors continue to buy Washington apartment assets, though volume in 2012 was off the robust pace of 2011.
In 2011, the region recorded $2.41 billion of multifamily Class A building sales: 19 low-rise properties and 10 mid-rise or high-rise properties. In 2012 (through November), it posted $1.27 billion of multifamily Class A building sales (seven low-rise properties and seven mid-rise/high-rise properties).
The 2012 average per-unit price for closed sales is 12.5 percent lower than in 2011 for low-rise units (at $196,000), in part because of the geographic mix of complexes trading hands. High-rise prices are off 10.8 percent from the end of 2011, at $377,000. Of major note in the Washington region in 2012 was the break up and sale of stalwart developer and operator Archstone to AvalonBay and Equity Residential.
Capitalization rates trended lower during the first half of 2012, but they have stabilized since. We believe that cap rates will likely stabilize or nudge up slightly in 2013, as market conditions become more competitive amid increased supply and job growth is muted in the region.
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, a not-for-profit trade association representing institutional real estate professionals. While this index reports a solid 7.33 percent 12-month total return, this measure is significantly off the cyclical peak of 28.64 percent in 2010. This breather is to be expected after such a huge run-up in area prices earlier this cycle.
Through November 2012, the region recorded 30 Class B apartment sales: nine mid-rise and high-rise properties and 21 garden properties, totaling 11,597 units and approximately $1.8 billion. Garden properties sold at an average price of $135,419 per unit and mid-rise and high-rise properties sold at an average of $230,164 per unit. 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 at an average price of $134,417 per unit for garden properties and $165,894 per unit for high-rise properties. We expect slow and barely positive Class B rent growth in 2013 due to the delivery of a large pipeline of Class A apartments. However, low vacancy in the region in Class B properties indicates that there is still a strong demand created by limited supply that will continue to affect concessions and enable owners to increase asking rents. Also, the addition of low-wage jobs to the area in 2013 and 2014 should increase the demand for Class B apartments. We look for submarkets with the greatest spread in rents between Class A and Class B apartments to provide the greatest opportunity for renovation, currently a popular strategy for owners of Class B apartments.
Seventeen multifamily land sales have closed through November 2012, totaling $190.3 million, with the capacity for over 3,700 apartment units. More than $280 million in multifamily land sales were completed in 2011, with a capacity for more than 5,600 units. The slowdown in sales volume from 2011 to 2012 is indicative that the peak of the current multifamily development cycle may be behind us. Land sales may decline given the high level of near-term deliveries, 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 article. For more information, please visit www.deltaassociates.com.