Washington, D.C., multifamily market update

The Washington, D.C. multifamily market has enjoyed success in recent years, and 2018 was no exception. The regional economy continued to function at an extremely healthy level, having added 54,100 new jobs in the trailing 12 months ending November 2018, which is higher than the annual average of 41,000 since 2010. The region has outgrown its previous dependence on the Federal Government, which contracted by 4,800 jobs in the year ending July 2018, further highlighting the strength of the region’s private sector. This sustained economic upside is only further enhanced by the recent amazon HQ2 announcement and looming possibility of Apple and other large cyber contracts.

The strong job growth has been matched by a steady increase in population, which has grown 10.44 percent since 2010 to roughly 6.25 million people. To accommodate such growth, the supply pipeline has been equally as robust, delivering nearly 13,000 units a year for the past five years. In addition to all the recent deliveries, absorption has remained steady and strong with the market absorbing a net positive of 7,570 units over the trailing 12 months. Furthermore, Class A rents have still managed to grow 1.4 percent over the past year, while overall market rent growth has grown an even higher 1.7 percent. All of these economic factors have positioned the market for long-term growth.

Location! Location! Location!

A hotspot for multifamily development has been the D.C. Southwest Waterfront, where despite supply, demand continues to push new rents higher in the recently delivered projects. The Southwest Waterfront has delivered nearly one million square feet of office in the past two years, almost 450,000 square feet of retail in the past five years and is quickly becoming one of the most active submarkets in Washington, D.C. Jair Lynch is currently developing 1250, a 430-unit project across the street from a JBG Smith’s West Half project, which is set to include 465 units. Both projects will overlook Nationals Park with dynamic ground-floor retail. These are both adjacent to Forest City’s Yards West development, which will drive development in and around the submarket.

Washington, D.C. Commercial Real Estate

The velocity of investment sales in the Washington, D.C. market is nearly at all-time highs, with more than $6 billion in volume, or 125 assets, having traded in 2018 as of October. In the third quarter alone, 40 assets traded for almost $2.5 billion in volume. Value-add continues to be the hottest product type in the marketplace, with a significant majority of transactions falling into this bucket. These deals are bringing in the deepest buyer pools with the most liquidity, driving extremely competitive bidding processes.

The most active buyer groups in the D.C. marketplace have been Harbor Group, Brookfield, Mid-America Apartment Communities and Morgan Properties, all of which have invested more than $500 million in acquisitions in the past two years in a combined 53 transactions. There is a significant amount of demand for buyers to acquire in the Washington, D.C. area. Buyers continue to pursue value-add plays with significant amounts of upside, as evidenced by the lack of core deals on the market. With much of development taking place on core assets within the District itself, we expect to see these value-add plays only become more and more competitive. Furthermore, the spending appropriations from the Congress approved 2018 budget, which is at a high since fiscal year 2011, will continue to drive investors’ enthusiasm for the D.C. Metro’s potential growth.  

The Role of Foreign Capital

Additionally, there has been a significant increase in demand to buy into the market from foreign capital. 2018 has already seen $1.2 billion in foreign investments within the D.C. Metro area, making up 20 percent of activity so far this year. In contrast, foreign capital made up 15 percent of 2017 investments in the metro, six percent in 2016, nine percent in 2015, and 11 percent in 2014. Desire to invest in the United States from foreign investors varies greatly between those who are hesitant due to foreign relations concerns and others who are bullish because of strong financial indicators. But, demand has increased in Washington, D.C. for those who view it as a desirable, core coastal market.

In Conclusion

The sustained population growth, strong job growth, diversified economy and impressive absorption have served to keep the Washington, D.C. multifamily outlook positive. Capital markets have remained busy, nearly passing 2017’s volume already while new core developments and a robust pipeline will drive rental growth for years to come.