Washington, D.C. Metro Gears Up for Development
- Oct 28, 2010
Washington, D.C.—Multifamily developers in the D.C. metro area are starting to plan new developments and are ramping up to break ground on new projects.
“Two years ago, everyone laid off development teams, but smart companies started planning to put shovels in the ground for a 2011 or 2012 delivery because the pipeline went from 16,000 units to 3,000,” recalls K. David Meit, CPM, principal of Oculus Realty LLC, a newly established firm formed to provide alternative multifamily investment, management, and consulting services to owners of investment property in the Washington, D.C. metropolitan area. The firm also specializes in managing rent-regulated apartment buildings in Washington, D.C.
According to Meit. rents in Class A and B apartments are up approximately 7.5 percent over the last year, while vacancy in these communities is less than 1.5 percent.
“Absorption rates are driving rents,” Meit points out. “Everyone is gearing up for putting shovels in the ground and in the first quarter of 2012, this stuff will deliver and the market will be tight enough that you’ll probably be able to lease up in nine months to a year. It’s 2004 to 2006 all over again.”
Meit has observed a tightening of the markets, particularly in Class A apartments, over the last year. “Part of that is lot of these reversions have worked themselves out,” he notes. “The shadow market has not been as much a factor as it was 18 months ago.”
From a macroeconomic point of view, he tells MHN, Washington, D.C. has had the benefit of the federal government, and as the government’s involvement in the financial sector has increased over the last 18 to 24 months, the MSA has seen an influx of “smart, young professionals into the area, which bolstered class A and B apartment communities.”
The Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va. MSA continues to have the lowest unemployment rate in the nation, at 6.2 percent as of September 2010, according to the U.S. Bureau of Labor Statistics. (The District itself, however, reported a 9.8 percent unemployment rate, demonstrating a dichotomy between the city and the surrounding areas, which tends to drive the average down.)
And because the fundamentals are strong, the D.C. metro area has seen an increase in the number of transactions taking place. “The cost of money for the REITs is very low, so a lot of local players [aren’t] able to compete. … In the metro D.C. market, you have big players buying ultra-luxury in Arlington, and regional players are nibbling around the edges at more Class B and C,” notes Meit.
“A lot of players are chasing the same deals,” he adds, “so we see cap rate compression.” Deals are trading in the sub-5 to 6 percent range, he reports, estimating that cap rates were around 7.5 percent in the worst of the storm (though, he adds, nothing traded).