‘Everybody Wants to be in Washington, D.C.’

Washington, D.C.--The strength of the economy in the nation's capital continues to lead to a tight apartment market.

Washington, D.C.—The strength of the economy in the nation’s capital continues to lead to a tight apartment market.

“The reason for the strength of our economy is the private sector that caters to the government,” says Dean Sigmon, senior vice president and director, Transwestern. “Delta [Associates] reported somewhere in the close proximity of 40,000 jobs created in the Washington region year-over-year after the first quarter, which is unprecedented compared to other areas of the country.”

As of April, the unemployment rate for Washington-Arlington-Alexandria was 5.4 percent, according to the Bureau of Labor Statistics.

Multifamily specifically has remained strong, particularly with a lack of new construction since 2007. Last summer, over 17,000 units were absorbed across the region, according to Delta, which, adds Sigmon, has had a trickle-down effect. (Annualized net absorption of A and B apartments was 8,619 units, 160 percent of the region’s long-term average, according to Transwestern’s Q1 2011 Multifamily Outlook.)

“The Class B market has been stronger than Class A with regard to rent growth,”Sigmon tells MHN. “There’s so little Class A available that has to be absorbed that owners of Class B apartments that do value-add … are seeing significant return on their investments.”

During the first quarter of 2011, Class B rents increased an average of 8.9 percent from one year ago, and rents are projected to increase approximately 7 percent over the next year. Vacancy, meanwhile, decreased 70 bps, to 2.3 percent. (Every single sub-state vacancy was down year-over-year in the first quarter,” notes Sigmon.)

Class A assets, meanwhile, saw a 7.8 increase over the same period, notes Robin Williams, senior vice president and director, Transwestern.

“We are seeing in the C Class segment a similar growth that we’re suggesting in the B Class segment in terms of compression of concessions, if there were any, and rent growth,” Williams tells MHN. “That is a submarket where you’re seeing a vibrant interest in renovation and repositioning of assets.”

“Our last two sales here [were] both C+/B assets that the buyer is coming in and implementing renovations to cater toward that slightly higher submarket renter,” adds Williams. In one case, the investor is adding about $12,000 per unit, while another investor is adding close to $20,000 per unit, he reports. “It’s come firmly back in vogue in the marketplace to renovate older, existing product and bring it up to a higher standard and compete not really directly with the A Class assets but get that middle-market group that [is] looking for quality living conditions at relatively affordable rates.”

The transaction market in D.C. is quite competitive, with Class A assets trading in the mid-4 percent cap rate range. Class B product in the suburban Washington D.C. area is trading in the low- to mid-5 cap range, while Class B product that’s not in the best locations is in the 6 cap range. Class C product, meanwhile, is trading in the mid- to high-6s, reports Sigmon.

“We have seen a variety of buyers, private equity as well as private equity that has discretionary funds that have already been raised, including local operators who have partnered up with institutional equity,” he adds. Those have been some of the most active buyers in our marketplace, not to say we have not seen significant REIT interest in our marketplace, specifically for core assets. REITs have been extremely aggressive; their cost to capital is extremely low. We’ve seen REITs take down some of the more trophy, higher-priced assets.”

The buyer pool for the B-/C Class assets, meanwhile, is more of “a combination of out-of-town operators that are looking for a foothold in our submarket, as well as local management companies and operators utilizing institutional equity partners that are acquiring and renovating communities,” adds Williams.

“Everybody wants to be in Washington, D.C.,” says Sigmon. In fact, he reports over $1.5 billion in apartment sales transaction already in 2011.

One potential concern for the near term, however, is the development pipeline, says Sigmon. “We have a sweet spot right now on the development pipeline because there aren’t a whole lot of deliveries, but where it does become a little bit of a concern is by mid-year 2013.”

Another concern is, of course, the potential for cuts to defense spending and the impact that could have on the region as a whole, since, as Sigmon points out, “a lot of the private sector caters to the government.”

On the bright side, however, are some of the infrastructure improvements in the region. For example, Tysons Corner’s silver line metro, which is currently under construction, could have an impact on some of the suburban Virginia markets and the ease of access to downtown D.C.