7 Reasons D.C. Is Experiencing a Strong Multifamily Market

By Jeffrey Kottmeier, Vice President, Director of Research, Cassidy Turley

Washington, D.C.—Multifamily investment in 2011 has been the golden child of commercial real estate. With strong economic and employment fundamentals, large metros such as Washington, D.C., have attracted investors. Through the third quarter of 2011, the D.C. metro market saw over 17,500 multifamily units trade hands for $3.2 billion, thus ranking this market just behind number one ranked Manhattan, based on total sales volume. Washington, D.C., investment sales are on pace to match those of D.C. metro from 2006, second only to the record $8.5 billion in sales recorded in the D.C. metro area in 2007.

So, why has multifamily investment been so hot, especially in Washington, D.C.?

There are a number of reasons that stimulate a strong appetite for multifamily assets. At a macro level, U.S. homeownership rates reached their apex in 2004 and have continued to decline. By the end of 2010, ownership rates were slightly under 67 percent. At the end of the third quarter of 2011, the homeownership rate was 66.1 percent—still higher than rates in the mid-1980s to 1990s. Further, renting has been a viable alternative to owning a house. On a regional level, D.C.’s underlying economic and demographic trends are driving a strong multifamily market. In particular:

Incomes and affordability are squeezed. Real household incomes have decreased, driving demand for rental properties. Despite record low mortgage rates, decreased home affordability has fueled rental demand in a number of markets. The 25-year average home price-to-income ratio in Washington, D.C., was 1.8; since 2001, it has increased to 2.5. Until price-to-income ratios fall back towards more historical levels, there will still be an impetus to rent in the D.C. market. Most likely, affordability will remain under pressure for some time, as regional home prices are on the rebound and incomes are held in check by a slow economic recovery.

There is a diversified renter pool. The Washington, D.C., region attracts a young, highly educated workforce. Still, almost the same number of apartment units are occupied by those younger than 35 as those aged 35 to 64. Varying age groups support the need for communities geared toward both young individuals out of college and also experienced professionals.

Incomes support buying, but some are renters by choice. D.C.’s median income is $84,500, which is 70 percent more than the U.S. median. Factoring in the tax advantages of purchasing, buying a house is cheaper than renting long-term. Still, many in the D.C. region rent by choice.

Many market to the average (median) Joe. Seventy five percent of D.C. rentals are for households at or below the median income. Approximately one-third of these rentals are for households with annual incomes below $35,000, with the second largest group falling in the $50,000 to $75,000 income range. This supports demand for properties located across the D.C. metro area, especially targeted to those at or below the median income.

It is looking less like Mayberry. Demographics are evolving, especially in urban areas such as Washington, D.C. The previous household composition, or, “norm,” of a married couple with 2.2 children, a dog and a house in the suburbs has changed. Single person households are on the rise and occupy the largest percentage of rental units in the region. Shifting demographics in favor of non-family households and singles point to strong rental demand.

People drive demand. The influx of people into the D.C. metro area has been strong, especially during the recent recession. An estimated 67,000 net additional people will be added to the region over the next five years.

Washington, D.C., is getting both younger and older. D.C.’s population has changed over the years, and this impacts housing choices. The 25 to 34-year-old age group has increased, and consequently so has the number of potential renters. This bodes well for projects in urban areas and those with Metro (subway and bus) accessibility. The number of people over 45 years old continues to grow as well. This age group has the highest incomes and thus can likely afford to live where they want, as renters or owners. If these people choose to rent, they gravitate towards the best locations, as they can afford higher rents.

Market fundamentals remain strong for the Washington, D.C., multifamily market. With uncertainties in the economy and political climate, investment dollars will be attracted to stable metro markets, such as D.C.

As the apartment supply pipeline ramps up, be aware of possible oversupply, especially as new projects deliver in 2013 and beyond. Further, population supports demand in the DC metro. Varying product types across the region will be needed to accommodate different types of renters. Additionally, strains on the current transportation infrastructure will not improve sufficiently, thus demand for transit-oriented locations and those close to major work centers will drive demand.

Homeownership rates peaked several years ago. Will they continue to gravitate to the historical average, or dip below it for the long-term? Expect more households to rent by choice (especially true of the Gen-Y population). At least in the short-to-medium term, many will continue to have difficulties qualifying for a mortgage and saving for a down payment.

And finally, multifamily rentals will need to target a varying range of ages and incomes. It isn’t only the fresh-out-of-college 22 year old or the “downsizing empty nester” any more looking for rentals. Many mid-career professionals are renting, especially in large urban areas. Multifamily projects will need to tailor marketing and amenities to multiple groups.