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D.C.’s Apartment Market Remains Healthy

CoStar Market Insights: Analyzing the D.C. Metropolitan Area in 2018
September 6, 2018

The Barton at Woodley apartment complex in Washington, D.C.

Rebounding job growth and consistent population growth has given way to record levels of absorption and supply. Occupancies remain above the 10-year average, contributing to healthy rent gains, near-record pricing and compressed cap rates.

Leading the surge in apartment demand and supply is the rapid population and job growth over the past 24 months. Year-over-year job gains totaled more than 50,000, beating out cities such as Boston and Los Angeles, but still behind New York and Seattle. Population growth, however, was strongest in D.C. among gateway cities, at almost 60,000 new residents to the metro.

This influx of new jobs and new residents directly impacted the multifamily market in the Washington D.C. metropolitan area. The 12-month absorption ending early September was the highest four-quarter total since the peaks in late 2015. Among other gateway cities, the D.C. total demand ranks third behind New York and Los Angeles. When Dallas-Fort Worth is factored in, D.C. ranks fourth.

Demand remains a leading factor for development. The past 12 months recorded the second most deliveries among gateway cities, and again, ranked behind DFW in all cities. However, compared to the 12 months ending this time last year, deliveries were down a little more than 10 percent. But this doesn’t indicate a slowdown. As of September, there was still another 30,000 units under construction behind only New York and DFW.

These D.C. developments continue to saturate the area’s most prominent submarkets. Southwest/Navy Yard has the most units under construction, at more than 4,000. This relatively new submarket has been inundated with new supply, as 1,300-plus units delivered in the past 12 months. In total, more than 40 percent of the submarkets inventory is under construction. H Street/NoMa and Tysons Corner -- the second- and third-most construction heavy submarkets -- have a similarly higher percent of inventory under construction. Crystal City/Pentagon City, Bethesda, Rosslyn, Fairfax City/Oakton, Capitol Hill and Fredericksburg also rank among the most at-risk for high levels of construction relative to the submarkets current inventory.

Strong absorption and a recent slowdown in deliveries gave way to strong rent gains. Among other gateway cities, D.C.’s 12-month rent gains of more than 2.6 percent is more than 2.5 times higher than the 12 months ending in the third quarter of last year. This strong growth ranks D.C. in the ballpark with New York and Seattle, but well below Boston and Los Angeles, which enjoyed exceptionally strong 12-month gains.

Submarket rent growth continued to come from outer-ring submarkets that are experiencing robust population growth and investments in the way of value-add acquisitions. Areas like Spotsylvania, Rosslyn, Frederick County, Fredericksburg and Falls Church/Vienna experienced above-average gains.

While these submarkets are making strong gains in the way of increased rents, the most expensive submarkets are still found in urban parts of the city. H Street/NoMa, Southwest/Navy Yard and Downtown D.C. command a significant premium at about $2,500 per unit. Crystal City/Pentagon City, Rosslyn and Bethesda command about $2,000 per unit.

Strong population and employment growth, surging demand, and rising net operating incomes contributed to another 12 months of strong sales volume. Ranked fourth in total 12-month volume, alongside Atlanta, D.C. attracted capital away from other gateway cities such as Seattle, Boston and San Francisco.

Consistent with this cycle’s investment activity, outer-ring submarkets continued to see the most investment. Alexandria/I-395, Huntington/Springfield, Outlying Fairfax County and Falls Church/Vienna led volume on the Virginia side of the D.C. metro area. And Gaithersburg and Outlying Montgomery County led on the Maryland side. Connecticut Avenue/Northwest had the highest District volume because of the $106.5 million deal for the 4-Star Barton at Woodley.

Approaching the fourth quarter of the year, a slowdown in absorption should be expected, as proven by the fourth quarters in the previous three years. Because of the stronger-than-average demand recently, new supply could be met with ample demand. However, deliveries should only ramp up, and sustaining absorption of 12,000 units year-over-year should prove difficult, even for a metro like Washington D.C.

CoStar Market Insights provides a snapshot of recent real estate trends. The CoStar Market Analytics team monitors commercial and multifamily real estate across 390 metro areas, with a granular understanding of the projects, players and economic trends that move these markets.

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