The rapid addition of high-paying jobs, coupled with strong population growth and impressive tourist numbers, previously supported Washington’s economic expansion and maintained its advantage in the Mid-Atlantic region. Over the past six weeks, everything seems to have changed dramatically. According to local officials, from March 13 to April 21, almost 82,000 residents had filed for unemployment benefits, and preliminary data from the Bureau of Labor Statistics shows that the metro’s unemployment rate hit 6 percent in March.
With economic havoc brought on by the COVID-19 crisis, many investors “are now in a wait-and-see mode,” according to Foulger-Pratt Managing Partner & Chief Operating Officer Brigg Bunker. In the interview below, he talks about how the unprecedented situation is impacting his company and other real estate players in the D.C. area.
Please describe the current state of the D.C. multifamily market.
Bunker: The market has changed dramatically recently. There are many people going through challenging and uncertain times, resulting in changes in consumer habits, including the consistency of rent payments. As a result, there is significant uncertainty around existing projects and projects under construction, projects in lease-up and projects hoping to start in the near term. The uncertainty will continue until the COVID-19 restrictions are lifted and we start to see how the recovery will take place.
Are investors still pursuing multifamily deals in the D.C. area?
Bunker: There are certainly a lot of equity investors who are now in a wait-and-see mode to determine whether or not they want to continue investing in the current environment. We also see long-term equity sources working to move forward given the time frame needed prior to construction completion.
From a debt perspective, an unintended consequence of implementing the Paycheck Protection Program is that many of the resources used for new loan origination are now being utilized to implement the Small Business Administration’s program. This may result in a significant number of banks being on the sidelines in the near term. Projects that are teed up and ready to go in primary markets where specific submarkets are underhoused continue to attract equity investment during these uncertain times.
How is the new economic situation impacting D.C.’s hottest areas for multifamily development?
Bunker: Many of the hottest submarkets are synonymous with new luxury product. Consumer spending has changed, but the lasting effects of those changes remain to be seen. The amount and timing of rent growth is certainly unknown at this time. Depending on how quickly a recovery occurs and what happens to wages, people may choose to stay in shared households or look for less expensive housing options that could affect some of the more expensive but desirable submarkets.
Is the coronavirus outbreak affecting your development timelines?
Bunker: We currently have four projects under construction. Three are multifamily that include retail components in D.C. and one is an office building in Tysons Corner. Our Beckert’s Park project in Capitol Hill will deliver units this summer. Press House in Union Market and One501 in Eckington will deliver next spring. We are tracking the manpower and supply chain very closely on all three projects.
We are uncertain what the effects will be regarding the timing of delivery, but believe that we will see some effects of the COVID-19 shutdown affecting our schedule and budget. The pipeline for new starts anticipated in 2020 will likely be delayed due to jurisdictions’ inability to process permits and reviews as well as the aforementioned issues with debt and equity.
Bunker: Individual submarkets of new luxury product may experience temporary oversupply, but overall we continue to be underhoused in the region. The more pressing issue is whether we, as an industry, can deliver the type of housing to meet the needed demand in workforce and affordable housing. The private and public sectors continue to work to find resolutions to the workforce and affordable housing shortages.
Some experts say Amazon’s presence in Arlington has caused massive housing shortages. How are you taking advantage of this opportunity?
Bunker: Our data doesn’t suggest massive housing shortages at this time, but the Amazon effect has certainly changed the housing dynamics in nearby submarkets. With continued job growth in specific submarkets, we believe that more housing supply will be desired. We continue to explore multifamily opportunities in primary and secondary markets in the D.C. metro area.
Is Foulger-Pratt planning to take advantage of D.C.’s Opportunity Zones?
Bunker: For the right project, we would take advantage of Opportunity Zones, but we are not specifically targeting these types of opportunities or locations.
How do you expect this multifamily market to perform going forward?
Bunker: D.C. is a unique market, with many demand drivers. The federal government and ancillary services continue to be an important driver for jobs, and the addition of Amazon and other large companies will continue to create a diversified economy in the D.C. area. The current economic circumstances will create some short-term pain, but we are long-term investors and take a view that the D.C. metro is a wonderful area to live and work, and as such we view long-term opportunities.