Conversely, Washington has experienced tremendous growth in population, with more people living and working in the District than before the recession hit. (The city’s population was 658,893 in 2014, up from 574,404 in 2007, according to the Census Bureau).
The how and why
In the Washington region, officials are always lobbying to bring large companies and their workforce to the area — often with great success — leaving us in what seems like a regular housing shortage and subsequently an overwhelmed infrastructure that hasn’t been adequate for our population since the early 1980s. On top of that, I can rattle off the names of 10 large universities in the area that supply a huge 20-something-year-old population year after year — many of whom stay put after graduation and get apartments. Oh, I haven’t even mentioned the federal government or the military, which, as everyone knows, is a huge and stable (sans a government shutdown) slice of the workforce.
So that means we need housing — lots of housing. But the influx of new construction has not led to a great rise in the home ownership rate in Washington. So what gives?
With the median home price in D.C. about $460,000, before factoring potential condo fees and utilities, many younger professionals working in the city are forced to turn to the rental markets for their housing, which has local developers and real estate investment trusts (apartment companies) paying close attention.
Earlier this year I attended a closed-door meeting with executives from a real estate investment trust (REIT) with some 30 properties (and counting) in our market, who all agreed that the current conditions nationwide are perfect for growth in the apartment industry. I was told by a high-level officer of the organization that there has never been a better time in our country’s history to be in the rental business, and after pondering that statement for a few days, I would have to agree.
According to RentJungle.com, the average apartment within 10 miles of Washington rents for just over $2,000 per month, before factoring utilities or parking costs. For neighborhoods close to job hubs, mass transit and nightlife, you can expect that figure to multiply two or three times for the same apartment, making those opportunities for developers even better (Adams Morgan, U Street, Georgetown, Dupont, Logan Circle, parts of Arlington and Alexandria, etc.). Being ranked consistently in the top 10 most expensive rental markets in the United States is a logical explanation for REITS and developers to continually invest in D.C., but it is not the only reason.
According to the Brookings Institution, the average 24-year-old with a college degree working in Washington earns $42,000 per year, which equals roughly $3,500 per month before taxes. Using that math, young professionals living within 10 miles of the city would need to spend roughly 58 percent of their total income to simply afford the average apartment.
Even if the same 24-year-old increased their income by 10 percent year over year, it would take them somewhere between years eight and nine to reach an income level (about $90,000) in which living alone they could spend less than the industry recommended 33 percent of their total income on rent, allowing them to regularly contribute to savings.
Using D.C.’s median home price, a first-time buyer would have to save $23,000 just to get a minimal 5 percent down payment. This doesn’t include their closing costs, though they still would need to likely pay an outrageous amount in private mortgage insurance (PMI) until they save no less than 10 percent in down payment (in this example, $46,000). With lower savings opportunities due to the high cost of living, many people are forced to rent longer, adding time to the process of saving up for a down payment.
So financially the reasons for more people (especially younger people) renting could easily be linked to the fact that saving anything and living in this area are often mutually exclusive, though sky-high home prices are not the only factor.
Mobility and flexibility
Younger people under the age of 40 experienced devastating consequences from the recent recession, which left a lot of them unemployed and considering new careers. According to a study conducted by Future Workplace, 91 percent of millennials (born 1977 to 1997) plan to stay at their current job for less than three years. To that end, under-40 people are looking for flexibility with their living arrangements and view home ownership as a potential costly barrier to their next professional endeavor, which makes the ease of renting look more appealing. You need to transfer jobs quickly? No problem – pay the lease termination penalty and keep it moving.
I’ve also encountered a growing sentiment among my peers living in the city, who believe in “doing more with less” — that living longer in a smaller energy-efficient space is not the hardship it once was for previous generations desperate to trade crammed city living for larger suburban houses.
If the “affordable” housing for purchase is 30 miles out of town (think Gaithersburg, Fairfax), then some are willing to stay put longer in their inside-the-Beltway dwellings and deal with the burdensome rents. Also the ease of living where you work — to be able to walk or bike to local shops and restaurants, and the ability to ditch the monthly car payment for the occasional taxi or Metro trip are common reasons I hear from people living longer in rental communities in D.C.
So for these factors and others, we are naturally watching developers pour into the city, desperate to find new opportunities to take advantage of our growing population with an appetite for renting, and our aging infrastructure and housing that is long overdue for new investment.
As this trend grows, we will continue to see large amounts of construction and development destined to change the look and feel of D.C. one block at a time. If you want proof, just take a long walk up 14th Street from Logan Circle to Columbia Heights and count the number of brand new apartment communities and businesses that tower over old gas stations and vacant parking lots.
That said, the unfortunate consequence for people looking for rentals in D.C. is that many of the new housing developments are being deemed “luxury” and therefore come with luxury price tags, forcing people who want to live downtown to allocate more of their monthly budget toward housing.
Lack of affordable housing has been a long-known and debated problem in the District, but the last decade of housing has ushered in an unprecedented level of new luxury development in Washington, with no end in sight.
With the population only projected to go up over the next 10 years, we can expect a lot more growth in our housing markets fueled largely by new rental projects and businesses eager to take part in the emerging opportunities they bring.
The challenge will be balancing new development in the city with affordability and opportunities everyone can take part in – not just developers and investors.
Catch up with Fox’s previous column: