The Washington apartment investment market is one of the strongest performers in the nation, driven by strong market fundamentals and an outlook of continued growth in rents amid restrained supply. Local investors as well as national real estate investment trusts and foreign investors are searching the market for buildings and complexes. Per-unit sales prices have rebounded to their 2007 levels, as cap rates have continued to decline.
Last year saw continued strength in investment sales. We noted $2.15 billion of multifamily Class A building sales (17 low-rise properties, and nine mid- and high-rise properties). Sales of note as the year closed out in December include 1301 Thomas Cir. for more than $527,000 per unit in the District, and The Chase at Bethesda Metro in Maryland for more than $467,000 per unit.
The average per-unit price for 2010 sales was 23 percent higher than 2009 for low-rise units (at $179,000) and 31.5 percent higher for high-rises (at $335,000). In the current business cycle, market capitalization rates, the ratio of net operating income to a property’s value, appear to have peaked in the spring/early summer 2009 at 7.30 percent (for Class A high-rise) and declined at year-end 2011 to 4.94 percent.
The 2011 average per-unit price for closed sales was 22.7 percent higher than year-end 2010 for low-rise units (at $219,000) and 32.0 percent higher for high-rises (at $442,000). We believe that cap rates will likely stabilize or nudge up only slightly in 2012, as market conditions become more competitive amid increased supply and muted job growth in the region. The comparative strength of the Washington market and real estate compared to investment alternatives will help maintain strength in demand for this asset class among investors.
The Class B investment market is booming. In 2011 there were 56 Class B apartment sales noted; 14 mid- and high-rise properties and 42 garden properties, totaling 16,571 units and more than $2.3 billion. In 2010 there were 17 Class B garden sales and seven high-rise sales posted, comprising a total of 3,454 units and $712 million at an average price per unit of $97,237 for garden properties and $155,130 for high-rise properties. In 2010, prices were up and cap rates were down. This trend continued throughout 2011, with the average price per unit for garden properties increasing to $131,832 and high-rise properties increasing to $165,894 per unit.
Fifteen multifamily land sales closed in 2011, totaling $257.1 million, with the capacity to construct more than 4,900 apartment units. Over $181 million in multifamily land sales traded in 2010, with the capacity for more than 4,100 units. The increase in sales volume is an indicator of the increasing pipeline of multifamily supply in the area over the past two years.
Grant Montgomery is vice president at Delta Associates. Staff at Delta Associates contributed to this article. For more information, please visit www.deltaassociates.com.