Apartments rents in Washington, D.C. are growing at a faster rate than they have in years.
The city’s current rent growth performance has hit the highest level since mid-2012, according to Greg Willett, chief economist for RealPage Inc., a provider for property management software and services.
But apartment rents are still not growing quite as quickly in Washington, D.C. as they are in the rest country. Even though D.C. has benefited from strong job growth in recent years, the city saw an influx of new construction start earlier in the cycle than the rest of the United States.
“Developers in our area were the first to re-start construction after the Great Recession,” says Mike Muldowney, executive vice president with real estate services firm CBRE. “The onslaught of new construction worried many… But we are coming out of the softness.”
Strongest rent growth in years
Apartment rents in the D.C., metro area grew an average of 2.7 percent over the 12 months that ended in the first quarter of 2019, according to RealPage. That’s the strongest growth figure in years.
“Job growth continues to create apartment demand,” says Muldowney. The number of jobs in the D.C. metro area grew by 60,700 in 2018, compared to 48,900 in 2017.
However, apartment rents are not growing as quickly in D.C. as in the rest of the U.S. markets studied by RealPage, where rents grew an average of 3.2 percent over the 12 months that ended in the first quarter of 2019.
“A big run-up in construction wiped out the area’s past performance premium over results for the nation as a whole,” says Willett.
Developers had 19,573 new market-rate apartments under construction as of April 2019. “That’s in line with the high seen over the course of the current economic cycle,” says Willett. Building activity is especially active in the Navy Yard-Capitol South submarket and the Northeast District of Columbia area.
However, developers are having to work harder to find new construction sites. “The pipeline is narrowing across the region, meaning that the stage is set for continued high occupancy and the anticipation of decent year-over-year rent growth,” says Muldowney.
Occupancy in D.D. is still strong overall. In the first quarter of the year, 95.5 percent of the apartments in the metro area were occupied. That’s slightly above the U.S. average of 95.2 percent, according to Willett. “Local occupancy has been hovering around the level seen now throughout recent years,” he notes.
Demand for apartments in the market is still strong, though it has softened compared to recent years. The number of occupied apartments grew by 11,438 over the 12 months that ended in the first quarter of 2019. Since early 2014, the demand for apartments has grown by 11,000 to 15,000 apartments a year, according to Real Page.
“The area’s performance as of the first quarter 2019 falls at the lower end of that recently-typical range,” says Willett.
Top neighborhoods lure investors
The rents in D.C. metro area are growing the most in a handful of neighborhoods, including Northern Virginia submarkets like Crystal City, North Arlington and parts of the city of Alexandria, according to Willett. The Navy Yard-Capitol South area, where lots of deliveries have held back rent growth in recent years, is also starting to see some rent growth momentum.
“Amazon’s decision to come to National Landing and Virginia Tech’s decision to open in Innovation Campus in Alexandria are both really exciting drivers for job growth that translate into rent apartment demand,” says Muldowney.
Investors spent $3.3 billion to buy apartment properties in the D.C. metro area, marking the second year in a row that more than $3 billion in apartment properties sold here, according to CBRE.
The Arlington/Alexandria market accounted for 40 percent of all sales activity, as investors continue to target the submarket, CBRE reports. Cap rates in the area ranged in the mid-to-high 4 percent for top transactions, including the one involving Avalon Ballston Place, which sold in August 2018 for $170 million, or a cap rate of 4.3 percent, according to CBRE.
“With Amazon announcing its plans and the metro area receiving some nice recognition for the organic growth of intellectual capital, pockets are experiencing some nice rent growth and an uptick in occupancy, leading investors to pursue opportunities her instead of in the Sunshine States,” says Muldowney.