Here Comes the Supply

Multifamily builders have been flocking to the Mid-Atlantic region of late.

By Keith Loria, Contributing Editor

At the beginning of 2014, there was a fear by some in the industry that too much development would create some challenges in the multifamily market in the Mid-Atlantic, but those fears seem to have been put to rest.

Scott Melnick, managing director of Jones Lang LaSalle’s Mid-Atlantic multifamily group, says the Mid-Atlantic region was the first place in the country to have supply after the downturn because it was the first place that developers could justify building in.

“A lot of concerns about supply have been totally updated with very strong leasing. Some properties in emerging parts of D.C., for example, are leasing at a pace of 60 a month,” he says. “The overall theme is that whatever the worst that people expected didn’t happen and the new deliveries have already started decreasing.”

Melnick feels there are good headwinds within the Mid-Atlantic and the new developments are bringing with them more young residents in the urban areas than ever before.

“We are seeing in general, very positive scenarios, with properties having stronger growth on renewals than new move-ins, and that has something to do with the new construction,” he says. “Big picture, from Richmond/Tidewater to Philadelphia, the region is boosting because of the young people heading to downtown areas.”

The number of properties and units under construction remains strong. According to Doug Ressler, manager, department of operations, at Pierce-Eislen Inc., Washington, D.C. has 70 developments with 17,707 units in development; Northern Virginia has 41 with 12,200 units; Baltimore has 26 with 5.964 units; Richmond/Tidewater has 29 developments with 5,480 units; and Philadelphia has 33 developments with 6,857 new units.

“The area is experiencing rising land prices which are impacting first-time buyers and limiting household formations,” Ressler says. “Job Growth has seen a marked decline recently, and demonstrates the lack of the area’s deterioration in relation to the national economic indicators.”

DeanSigmon, executive vice president of Transwestern’s Mid-Atlantic multifamily group, says there has been strong performance with Class A markets throughout the region.

“In D.C., we have seen record-setting absorption and demand nearly twice the long-term average,” he says. “Despite a wave of new construction in the pipeline, it’s really supported by the absorption and demand. On that same level, Baltimore markets have been extremely strong, both downtown and in the suburban areas.”

Industry insiders agree that the biggest factor in the rise of the Mid-Atlantic region—from Richmond-Tidewater to Philadelphia—are the young people heading to downtown areas in droves.

“Clearly, what’s driving the sector is the emergence of these young people out of college, young attorneys who want to live in urban D.C., Baltimore and Philadelphia,” Melnick says. “There weren’t many options in terms of nice new products but look at the 14th St. corridor. Some trailblazers came in with condos or apartments, and now it’s become a hub where people are moving to be there.”

Washington metro happenings

The District, Northern Virginia and Suburban Maryland are all looking strong heading into the end of 2014 and 2015. While the area saw a large slate of deliveries and stabilized vacancy rose 160 basis points over the year, rents edged upward. According to JLL’s 2014 second quarter report, Washington apartment market metrics continue to be affected by a rising tide of supply but are proving to be quite resilient due to surging absorption. Melnick says this competitive landscape should continue over the next two years, with the expected 28,000 new units hitting the market.

Ressler says that a great deal of new product is in emerging markets such as Mt. Vernon Triangle, NoMa, H Street, Shaw and the Capitol Riverfront. He adds that defense and security spending, specifically in cybersecurity, has brought more people to the District.

Robin Williams, executive vice president for Transwestern’s Mid-Atlantic multifamily group, says up until recently, there weren’t a lot of live-work-play developments in the District, but now many living opportunities have blossomed into creating very strong submarkets with millennials.

In Northern Virginia, vacancy is up, and rents are down for low-rise product. Melnick says as a record-setting level of deliveries occurs over the coming year, absorption will have to pick up from near-average levels to bolster performance levels.

Meanwhile in Suburban Maryland, JLL reports that this sub-state region was the only one where record-setting absorption outpaced deliveries of Class A product. According to its report, the trend of strong demand, coupled with more restrained construction starts, will sustain more positive market performance.

Baltimore, Philly and Richmond

Transwestern’s Sigmon says rental housing fundamentals in the Baltimore area are healthy, although increased supply may affect performance in the coming year.

According to JLL, stabilized Class A vacancy for the Baltimore metro area is down 80 basis points from last year to 3 percent. Baltimore’s southern submarkets are down from 3.1 percent last year to 2.9 percent; and vacancy in Baltimore’s northern submarkets are down to 3.0 percent from 4.1 percent last year.

Some areas of Baltimore and Philadelphia have seen a resurgence of some older buildings as well as renovations of some office buildings being converted into residential.

When it comes to Philly, the area is experiencing a significant reduction in household formations.

“Plus the Philadelphia MSA employment picture is mixed with moderate growth in the northern area coupled with dramatic downturns in the southern areas of the MSA,” Ressler says. “The South Jersey casino and construction trade declines are [having] and will have a dramatic impact.”

Richmond submarkets such as Glen Allen and Short Pump are showing steady rent growth, Williams says, supported by the rise in banking and manufacturing jobs. There’s also been limited construction in the market.

By the numbers

When it comes to rents, Ressler says the areas doing the best include suburban Philadelphia (with an average rent increase of 2.6 percent year over year), urban Philadelphia (1.8 percent) and Baltimore (1.4 percent). The Northern Virginia, Baltimore, Philadelphia and Washington D.C. Lifestyle markets are experiencing the lowest and sometimes negative rent growth numbers compared to all other national markets. The renters-by-necessity have experienced the smallest percentage gains in the nation for the last year.

“Lifestyle renters are benefiting from an increase in concessions,” he says. “U.S. single-family housing formation is flat, helping the multi-family segment.”

For D.C.’s lifestyle renters, East Cleveland Park/Woodley Park has seen an increase of 36 percent year-over-year, while Bladensburg/Riverdale Park has risen by 14 percent.

For renters by necessity, East Foggy Bottom has increased by 8.1 percent; Capitol Hill has risen to 7.3 percent; and Georgetown/Wesley Heights/South Glover Park is up 6.3 percent.

In Northern Virginia, the largest lifestyle increase was in Old Town Alexandria/Potomac Yard at 8.3 percent; while renters-by-necessity saw the Bull Run/Centreville/Chantilly area increase by 6.2 percent.

Baltimore’s biggest increase for lifestyle renters was in Dundalk with a 13.8 increase, while Frederick was up 14.7 percent for renters-by-necessity.

Finally, the Richmond-Tidewater area’s lifestyle renters flocked to Hopewell, with an increase of 22.5 percent, while Hallwood led the renters by necessity with a 14.6 percent rise.

Investment trends

Although year to date the investment market has been a little down on overall sales volume, Williams says it’s mainly because there has been some polarization of what buyers are focused on.

“There’s been a focus on real core urban high-end product in downtowns,” he says. “The District, Arlington (Va.), Bethesda (Md)…they have all seen a greater growth in purchasers looking at value-add and core-plus opportunities,” he says.

D.C. saw a total of 37 investment sales, Northern Virginia 13, Baltimore 38, Richmond-Tidewater 20 and Philadelphia 37.

Melnick says that where once investors would skip over Philadelphia, they are now clamoring for opportunities in the downtown area.

Additionally, where once Newport News was where people wanted to invest, Richmond is now finding a lot of interest—something Melnick says was unfathomable just three years ago.

Up and coming  

While the success of many of these Mid-Atlantic cities isn’t a surprise, Ressler says some of the places to keep an eye on aren’t the usual suspects.

“Fredericksburg is the fastest growing city in Virginia,” he says. “Other places like Annapolis, Coatesville (in suburban Philadelphia) and Prince George’s County are all expected to be strong in the years ahead.”

Williams says to keep an eye on Fairfax County in Virginia, where the silver line just opened up in the blossoming Tysons Corner.

“There are major plans for urbanizing the area and a few residential buildings have opened in the last 24-36 months and many more are planned to open around the metro station,” he says. “It’s becoming a much more walkable area.”

Columbia, Md., is also seeing a resurgence with the redevelopment of its downtown over the last 24 months. Bethesda is having a similar resurgence, with new developments planned near its red line metro stations.

The last word

Business Week ran a big story in August on the Washington rental market, saying how it’s a tenants’ market, but Melnick thinks when you look at the data, it’s really old news.

“Maybe if it ran two years ago when deliveries were escalating, but that’s not the case anymore,” he says. “Rents are going up and there are certainly good opportunities. In general, when you look at the Mid-Atlantic market, you see stability and people focusing on developing elsewhere will help the long-term market.”

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