Banners hanging from roofs, flyers stuck on parked cars and signs on street corners are all delivering the same message: All those fancy new apartments going up in and around Washington? The rents may be going down.
The booming Washington apartment market, which a few years ago ran hotter than ever before, has slowed. In some neighborhoods there are so many new units in the works that developers have lowered their rent expectations or even put construction plans on hold.
Many of the new buildings are going up in neighborhoods that are subject of high-profile economic development efforts. In Tysons Corner, 1,721 apartments were recently completed or are under construction (not counting subsidized units). In NoMa, north of Union Station, 1,820 units were recently completed or are under construction. Around Nationals Park, the boom is even bigger, with 2,242 units recently opened or on the way.
All those new units might suggest a glut is building in the market, but that doesn’t necessarily mean everyone’s rents will be pushed down. In fact, rents across the board went up 1 percent in 2014 and rent increases for lower income earners have rapidly outpaced earnings, according to a new report by an advocacy group, the D.C. Fiscal Policy Institute. In a decade, the number of apartments in D.C. renting for less than $800 fell about 42 percent, the report said. Mayor Muriel E. Bowser has made affordability a central focus of her administration.
But most experts see a growing number of soft spots in the market for high-end units — think floor-to-ceiling windows, stainless steel appliances and roof-top pools — that have driven the region’s commercial real estate boom. Real estate services firm Cushman & Wakefield, for instance, reported at the end of last year that the building boom “could induce modest declines” in rents in 2015.
Some building owners are aggressively discounting rent by 10 percent or more or giving a month or two free up front, not to mention gimmicks such as putting a communal English bulldog in the lobby.
White Flint, an evolving stretch of Rockville Pike north of Bethesda, offers a case study of what happens when competition gets tight.
The one-and-a-half mile section of Rockville Pike is Montgomery County’s answer to Tysons Corner when it comes to offering recent college graduates and other apartment seekers a neighborhood with the promise of Metro access and coming attractions like farmer’s markets, beer gardens, sidewalk cafes and dog parks. With the support of county officials and members of the community, a collection of like-minded developers banded together and began plotting a series of more urban neighborhoods around a Red Line Metro station that could attract condo buyers and luxury apartment renters.
As the area emerged, a debate ensued over what to brand it, with developers finally agreeing on Pike District, a name that Ed de Avila of Lerner Enterprises, has said would “drive economic-development results.”
For all the planning, marketing and enthusiasm, however, rents at high-rise buildings in the North Bethesda-Rockville area (which includes White Flint) fell 1.6 percent last year, according to Delta Associates.
One of the newest offerings, PerSei, a 174-unit building that is part of the Pike & Rose development, is 97 percent leased but the developer behind the project, Federal Realty Investment Trust, has had to lure people in with lower rents. Chief executive Don Wood told investors on a conference call last week that the company “missed our leased-up per-square-foot numbers by 9 percent” in PerSei.
On the call, Wood attributed this to two culprits: added competition and all the construction happening around the building he was trying to rent:
“Now that I think is pretty indicative of not only supply coming on in the market, but if I were asking you to move into that apartment, with all the cranes and the concrete that is being poured, and the construction site that it is, I suspect you would be in a better negotiating position too in terms of being able to lease it that way.”
Developers of another new building in the neighborhood, the Aurora, have had to discount rents as well. “The rental rates aren’t quite where we wanted them to be. There’s a little bit of a fall off there,” said Bill Hard, executive vice president at the company, LCOR.
Hard said the project leased up quickly but many apartment-seekers were waiting on more shops, restaurants and entertainment to arrive. “To the extent that amenities build up in the neighborhood, we think that’s a plus,” Hard said.
A third company, the JBG Cos., built an apartment tower featuring a Whole Foods store that did so well the company planned a second apartment building featuring striking architecture and a luxury movie theater.
Instead, as other units began arriving in droves on competitors’ properties, JBG put the brakes on the project and has begun marketing the land to interested buyers.
More developers in the area will likely be putting their projects on hold, said Delta Associates researcher William Rich. Another 4,194 units are either under construction or planned for the next three years in the area, third most in the entire region, behind only Tysons and Southeast-Southwest D.C.
“It is likely that not all of these proposed units will be built within the next three years due to the large amount of supply coming online,” Rich said.
Wood, the Federal Realty chief executive, is not among the developers backing off. In an interview, he said that PerSei is getting great rents despite the ongoing construction. Online, the company lists small one-bedrooms (763 square feet) for $1,795 and two-bedroom units with a den for $3,175 — prices that are comparable to some apartments near Nationals Park and NoMa, where developers are facing similar challenges.
Wood said the revenue downgrades he mentioned on the investor call were off of the company’s “most aggressive” goals and that the apartments are likely to become more attractive as his company adds more restaurants, entertainment and shopping. The recently completed iPic movie theater, he said, had the strongest opening of any iPic in the country.
“We’re actually ahead of where we wanted to be,” Wood said.
Things are going so well in White Flint, Wood said, that he has begun construction of a second residential building, Pallas, that will bring another 319 units next door, including 100 condominiums.
“We fast-tracked the second phase,” he said.
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