Apartment Finance Today

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Mid-Atlantic

The Nations Finest

APARTMENT FINANCE TODAY • September/October 2009

The Washington, D.C., metro area continues to outperform its peers, as it looks to a bright future.

BY Al Cissel and Scott Melnick

Local Flavor: The 473-unit Jefferson at Inigo’s Crossing, which came online last year, will benefit from the BRAC-led expansion in suburban Maryland.
Photo: Daniel Mansfield

TURNS OUT THE SEAT OF government also houses one of the strongest apartment markets in the nation.

The Washington, D.C., metro area boasts robust fundamentals, sustained employment growth, and a transient workforce fueled by government spending. The District also touts the lowest unemployment rate among major metro areas at 6.2 percent, compared to the national rate of 9.5 percent, as of June 2009. Though the metro has experienced slowed economic growth during the past year, the area is projected to create approximately 13,500 new payroll jobs in 2009 with an additional 34,100 and 42,400 new jobs in 2010 and 2011, respectively.

This is due in large part to increased federal procurement, which is projected to rise 13.2 percent in 2009 to $75.3 billion. Another factor working in the area’s favor is the supply and demand balance. In fact, based on current pipeline and absorption trends, there will be a supply shortage by 2012 or 2013, creating higher rents and occupancy levels.

The Class A apartment pipeline in the metro’s three major markets—Northern Virginia, the District, and suburban Maryland— has shrunk considerably since ballooning to a total of 36,952 units in December 2007. As of June 2009, the total pipeline for the metro area totaled 20,772 units, with Northern Virginia, the District, and suburban Maryland decreasing by 43 percent, 40 percent, and 50 percent, respectively from their peaks, according to Alexandria, Va.-based research firm Delta Associates. The pipeline reduction has been mainly driven by the difficulty in obtaining construction financing, which has resulted in cancellations.

The Washington, D.C., metro did outperform every major metro in the nation in annualized net absorption, with 5,210 units for Class A and B apartments for the 12 months ending June 2009. Annual Class A absorption was an astounding 8,294 units. Currently, rents for Class A and B apartments metro-wide decreased 1.4 percent over the past 12 months, with a stabilized occupancy of 95.7 percent at the end of the second quarter of 2009.

Al Cissel and Scott Melnick are managing principals of Transwestern Institutional Multifamily Group, which provides transaction-related multifamily investment services throughout the Mid-Atlantic.
Photos: Daniel Mansfield

In the District itself, effective rents have experienced a contraction of 2.5 percent, the largest in the region. This negative rent growth is mainly attributable to the overdevelopment in the Capital Riverfront District. Heavy concessions and reductions in rent to spur lease-up have had a negative impact on the market statistics for D.C. as a whole.

But the softer metrics within the District’s limits belies a robust area economy, driven in large part by D.C.’s outer suburbs and a solid transactional environment.

In the Beltway and Beyond

The future looks particularly bright in Northern Virginia and suburban Maryland.

Many submarkets within both states will be affected by the military’s base realignment and closure (BRAC) program, which will relocate thousands of civilian and military personnel to selected bases throughout the nation. Between 9,000 and 14,000 new jobs in the D.C. metro area are anticipated as a result of BRAC. Additionally, the National Naval Medical Center in Bethesda, Md., is expected to grow by roughly 2,200 jobs by 2011 as a result of its merger with Walter Reed Medical Center in Silver Spring, Md.

Until those jobs come online, though, the markets are holding up fairly well. Effective rents for Class A apartments in Northern Virginia contracted by 1.6 percent in the 12 months ending June 2009. However, submarkets within Northern Virginia actually saw rents increase during that time, including the Vienna/Merrifield and Alexandria/Springfield submarkets, which saw 4.8 percent and 1.2 percent rent growth, respectively. Rent growth for Class A high-rise apartments was also positive at 3.5 percent. Stabilized vacancy for all investment-grade assets in Northern Virginia increased by 90 basis points (bps) to 4.3 percent over the year ending June 2009.

Over in Maryland, effective rent growth saw the smallest contraction in the metro area, decreasing by 0.7 percent. Class A high-rises in Silver Spring experienced the highest rent growth at 1.4 percent. Stabilized vacancy for suburban Maryland has increased by 40 bps to 4.4 percent in the past 12 months ending June 2009. But vacancy rates have actually decreased in selected close-in submarkets—including Bethesda, Rockville, Gaithersburg, and Germantown—by as much as 280 bps.

Slower but Safer

Apartment sales transactions have decreased considerably since the first half of 2008 when there were 38 sales transactions of Class A and B apartments throughout the Washington, D.C., metro area. Over the past 12 months, there have only been two Class A and B sales transactions here: Warwick House in Arlington, Va., and The Avondale in Laurel, Md.

However, market conditions have been steadily improving. The continued stability of the region, combined with increased investor confidence, available capital, and the alignment of buyer and seller pricing expectations, has created a significant increase in investor activity.

The most active sellers in today’s market are REITs seeking to reposition their portfolio. With interest rates at historical lows— and cap rates climbing—many private investors have come off the sidelines to invest at more attractive cap rates with cheaper debt. As such, the metro is one of the few markets in the nation that is currently seeing investment activity at sub-7 percent cap rates.

Overall, the Washington, D.C., metro area is well positioned to recover quicker than any other major metro area due to its continued employment growth in a down market, reduction in excess supply, and strong economic fundamentals.