Washington, D.C.
, Metro Area
Third Quarter 2015
Overbuilding Strains Operations; Investors Persistent
The pace of economic growth in the Washington, D.C., metro is accelerating as organizations expand their hiring practices.
The key employment sectors government and professional and business services experienced dramatic improvement
during the year, reversing the trend of prior job losses and restoring headcounts to new heights. These new workers are
seeking multifamily rentals due to the extreme cost of single-family housing, particularly in areas inside the Beltway near
employment hubs. The relative strength of the apartment market led developers to finish more than 18,800 units last year,
the highest in more than 15 years. Construction activity will contract from last years heady level but will remain elevated
by historical measures as builders stay active in a renter-dominated market. The escalation of supply has begun to affect
vacancy, which continues to rise as net absorption fails to keep pace with completions. The inventory glut has led to years
of underperformance in effective rent growth relative to the broader nation, and that trend will remain in place this year as
improvement in pricing will be less than inflation.
Undeterred by deteriorating operations, investors have been using historically low interest rates and easy access to commercial credit to bid aggressively on listed assets inside the Beltway. Deals have been extremely focused on properties inside the
District, which accounted for more than half of the years trades. Current owners are evaluating their holdings in anticipation of a rising interest rate environment for the first time in a decade and are considering refinancing before choosing to list
for personal or business reasons. Institutional and individual investors have been eagerly scooping up available assets, with
first-year yields falling broadly to the mid-5 percent range. Well-located complexes will garner a 50-basis-point premium to
the average, while value-add buildings will price closer to 6 percent. Overall, activity will remain elevated as market participants align themselves with the changing monetary policy environment, encouraging yield compression.
2015 Annual Apartment Forecast
1.5%
increase in
total
employment
12,800
units
will be
completed
50 basis
point
increase in
vacancy
1.8%
increase in
effective
rents
Employment: In 2015, job creators will add 48,500 people to the workforce, a 1.5 percent increase. Last year, payrolls expanded 1.4 percent, led by gains in the education and health services,
and trade, transportation and utility sectors.
Construction: Builders will finish 12,800 units this year, a 2.3 percent addition in stock year
over year. In 2014, inventory expanded 3.4 percent with the completion of 18,800 units.
Vacancy: Strong investment in new units combined with relatively steep rent hikes will put upward pressure on vacancy. Vacancy will climb to 5.8 percent this year, up 50 basis points. Last
year, average vacancy swelled 20 basis points.
Rents: Average effective rent will grow 1.8 percent this year to $1,615 per month. In 2014,
monthly rates expanded 3.4 percent year over year, the biggest jump since mid-2012.
Economy
Washington, D.C., organizations hired 63,900 workers over the last four
Vacancy Rate Trends
Employment Trends
4%
quarters ending
in June,
a 2.1 percent expansion. This pace of improvement
Metro
United States
more than doubled job growth over the previous year and marks the fastest
pace
8% of the current cycle.
3%
The
6% education and health sector posted the biggest relative gain, increas-
Employment Trends
2%
Metro
1%
4%
0%
3% 11
15*
Metro
11
13
14
15*
10
Metro
12
12
13
13
14
14
15**
15*
Construction Trends
Construction Trends
Completions
Multifamily Permits
4%
Monthly
Rent
Y-O-Y Rent
Metro
2%percent
1.5
[Link]
Last States
year,Change
payrolls expanded 1.4 percent with the addi4%
43,000 positions.
$1,800
tion
of more than
8%
0%
11
12
$1,550
6%
13
14
15*
3%
2%
0%
$800
0% prices in the metro are among
$1,550
Home
11
12
13
14
15* 3% the highest in the nation. The median
11
11
11
12
12
13
13
14
14
15*
15**
Multifamily Permits
12
13
14
13
14
15*
$1050Monthly Rent
1%
Y-O-Y Rent Change
$260
The estimated mortgage payment after accounting for a 20 percent down
4%
insurance and taxes is $1,960
per month. Average rent for a D.C.
0%
13 per14month,
15* translating to an annual savings of more
apartment is12$1,600
3%
$1,550
than $4,300. The relative affordability of renting and the prohibitive cost of
$190
Salespush
Trends
homeownership
many residents
toward rental options.
2%
$1,300
$1,800
payment,
$800
$225
11
$155
Outlook:
Although household income is generally high, the cost of a down
$260
$120
$225
$800
11
and high home prices in 1%
sought-after markets lead many to rent.
12
11
12
13
Construction
13
14
14
15*
15**
0%
$190
In the last 12
months,
builders completed more than 13,300 units, a 2.4 perSales
Trends
Construction Trends
11
12
price of a single-family residence reached $385,000, up 3.4 percent year over
year. The median
household income
2% is $93,300 per year, well above the na$1,300
Sales Trends
tional average.
Rent Trends
$1050
payment
15*
10
cent
$155 uptick. During the same span a year earlier, 15,000 units were brought
online
as developers ramped up construction efforts to meet heavy demand.
$260
$120
$225
Although
the metro, investors focused on
11 construction
12
13 is spread
14 throughout
15**
high-rent areas inside the Beltway. A quarter of all units finished this year
were
in the Central D.C. and North Arlington submarkets. Northwest D.C.
$190
also received a lot of attention; 1,500 units were delivered this year.
$155 pipeline is healthy with more than 20,000 apartments currently under The
11
12
* Forecast
** Trailing 12-month period through 1Q
page 2
15*
Monthlythat
Rent the planning
Y-O-Y Rent
Change for single-family housing may be weakindicating
pipeline
1%
$1050
2%
ening.
Construction starts are also4%
bleak, down 5.7 percent year over year.
$1,800
15
14
Rent
Trends
4%
Single-family
permit
issuance is down 14 percent during the last 12 months,
United States
5 Completions
200
13
$1,300
Home Price Trends
Home Price
TrendsPermits
Completions
Multifamily
-10%
Metro
United States
20
20%
-20%
11
12
13
14
15**
15
10%
5
-10%
20
0
-20%
15
12
Housing and Demographics
-10%
1%
20%
-20%
0%
10% 11
11
10
0%
11
6% building on the 40-basis-point drop in the prior year. The unemploycent,
ment rate is now 70 basis points below the U.S. metro average.
Trends
Vacancy
Rate
Outlook:
InRent
2015,
jobTrends
creators will add 48,500 people to the workforce, a
United States
States
United
12
Vacancy Rate
14
Home Price Trends
Employment
Trends
0%
2%
0%
13
0%
During
the last year, the unemployment rate fell 40 basis points to 4.6 per-
Monthly Effective Rent Monthly Effective RentMonthly Effective Rent
Price per Unit (thousands)
Average Price per Unit (thousands)
Vacancy Rate
Average Price per UnitAverage
(thousands)
12
1%
10%
3%
United States
ing 4.6 percent with the addition of 18,300 jobs. The metros two biggest
4% Vacancy
employment
sectors,
Rategovernment
Trends and professional and business services, rebounded Metro
this year asUnited
moreStates
than 31,000 positions were created combined. In
2%previous year, these sectors laid off more than 4,300 people.
the
8%
2%
20%
4%
0%
Vacancy Rate
United States
Year-over-Year Change Year-over-Year Change
Year-over-Year Change
Number
of Price
Units(Y-O-Y
(thousands)
Median
Home Price
(Y-O-YYear-over-Year
Change)
Year-over-Year Change
Number of Units (thousands)
Median
Home
Change)
Year-over-Year
Change
Number of Units (thousands)
Median
Home Price (Y-O-Y
Change)
Change
Metro
13
14
15*
way, 7,800 of which are slated for completion later this year. The bulk of con$120
struction
place
Yard and Northeast D.C., and comple11 is taking
12
13 in the
14 Navy
15**
tion dates are set through 2017.
Outlook: Builders will finish 12,800 units this year, a 2.3 percent gain in
stock year over year. In 2014, inventory expanded 3.4 percent with the completion of 18,800 rentals.
Marcus & Millichap
Apartment Research Report
Vacancy
Despite the robust pace of development over the last 12 months, average vacancy dipped 20 basis points to 4.6 [Link]
In the previousTrends
year, an influx of
Vacancy Rate Trends
Average vacancy showed little variability. Rates fluctuated 10 basis points
6%
1%
Takoma Park/Adelphi submarket where4%rent is more affordable, about $300
less than the metro average. Apartments
0%on the outer edge of Alexandria have
11
12
13
14
15*
the highest vacancy, 7.2 percent.
3%
Outlook: Strong investment in new units
combined with relatively steep rent
2%
Trends
Home
Price
hikes will put upward pressure on [Link]
In 2015,
ratesTrends
will climb to 5.8
Rents
United
States
Unitedvacancy
States
average
13
swelled
14
15*
0%
2% in Home
Average effective rent increased 2.5 percent
the pastPrice
four quarters
Trendsto $1,605
per month, barely outpacing inflation.
In the Metro
previous four-quarter
United States period,
-10%
rents rose 1.0 percent year over year. 1%
20%
-20%
0% of the age spectrum with buildings
Rent growth was strongest on either end
11
10%11
12
13
14
14
15*
15**
built before 1970 and buildings built after 2000 posting the strongest numbers. Those finished in the 1990s expanded
0% rates just 0.7 percent.
Construction Trends
Home
Price
Trends
Completions
Multifamily
Permits rent
Apartments in Central D.C. commanded
the
highest
average
monthly
-10%
Metro
United States
at $2,375 per month. Farther from the metro center, monthly rates began
20
20%
dropping, with Fredericksburg/Safford,
Frederick and South Prince Georges
-20%
County among the lowest in the metro.
12
13
14
15**
15 11
10%
Outlook: Average effective rent will grow 1.8 percent this year to $1,615 per
10
0%
Trends
month. In 2014, monthly rates expanded
3.4Construction
percent year over
year, the big-
gest jump since mid-2012.
Sales Trends
Completions
5
-10%
20
0
-20%
11
15 11
12
12
Multifamily Permits
13
13
14
14
15*
15**
Buyers were active in the last 12 months with deal flow accelerating 14 per-
10
cent as participants evaluated their portfolios
ahead of an expected
Construction
Trends rise in the
benchmark interest rate. Last year, transaction
velocity
dropped
5 percent.
Completions
Multifamily Permits
5
More Class A properties were traded this
cycle, putting upward pressure on
20
per unit prices.
0
11
12
13
14
15*
The median price jumped over 10 percent
with buyers paying on average
15
$250,000 per unit. Although sales were spread throughout the metro, the
10
Anacostia/Southeast and Adams Morgan/Columbia
heights submarkets had
the most activity.
5
Cap rates compressed 30 basis points from the high-5 percent range into the
0 assets that traditionally yield lower
mid-5s as investors focused on upper-tier
11
12
13
14
15*
first-year returns. Rates for Class A properties reach the low-5 percent range
whereas lower-tier assets hit the low-6 percent area.
Outlook: Deal flow will remain steady this year as low interest rates encour-
age investment. Investors will look for properties in prime locations and
along transit routes.
Marcus & Millichap
Apartment Research Report
United States
12
13
$1,550
6%
15*
Vacancy
Trends
RentRate
Trends
Metro
Monthly
Rent
2%
$1,800
8%
0%
14
United
Y-O-Y States
Rent Change
4%
11
$1,300
4%
12
13
14
2%
Rent Trends
Monthly Rent
2%
$1050
$1,800
0%
$800
$1,5501111
$1,300
12
14
1415*
0%
15*
3%
2%
Sales Trends
Rent Trends
$190
$1,300
Y-O-Y Rent Change
1%
13
4%
0%
15*
3%
14
Sales Trends
2%
$155
$260
$1050
1%
$120
$225 11
$800
11
$190
12
12
15*
Y-O-Y Rent Change
1%
4%
13 13
Monthly Rent
$1050
$260
$1,800
$800
$225
11
12
$1,550
3%
Year-over-Year Change
Year-over-Year Change
Year-over-Year Change
percent, up 50 basis points year
20 basis points.
Metro
over year.
year,
1% Last
20%
4%
0%
11
12
10%
3%
Metro
8%
0%
11
6%
4%
United States
Vacancy Rate Trends
2%
Vacancy Rate
Metroin theUnited
At about 2.2 percent, average vacancy is tightest
East States
Silver Spring/
4%
Monthly Effective Rent
Monthly Effective Rent
Monthly Effective Rent
Average Price per Unit (thousands)
Vacancy Rate
Average Price per Unit (thousands)
Average Price per Unit (thousands)
3%
above or below 4.3 percent across different age tranches. Apartments built in
the 21st century, however, stand alone2%
with 5.5
percent of space
unoccupied.
Employment
Trends
Metro
Vacancy Rate
8%
Number of Units (thousands)
Median
Home
Price (thousands)
(Y-O-Y Change)
Year-over-Year
Number
of Units
Median
Home PriceChange
(Y-O-Y Change)
Year-over-Year Change
Number of Units (thousands)
Median Home Price (Y-O-Y Change)
Year-over-Year Change
Metro
States
supply temporarily raised vacancy 20 basis points
whileUnited
the market
adjusted
to absorb the new units.
4%
13
13
14
14
15*
0%
15**
Sales Trends
$155
$260
$120
$225
11
12
13
14
15**
$190
$155
$120
11
12
13
14
15**
* Forecast
** Trailing 12 months through 2Q
Sources: CoStar Group, Inc.; Real Capital Analytics
page 3
Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation
Despite volatility surrounding economic growth in China and Greeces status
Visit [Link] or call:
John Sebree
Vice President, National Director
National Multi Housing Group
Tel: (317) 327-5417
[Link]@[Link]
in the eurozone, the yield on the 10-year U.S. Treasury is trading near 2.25
percent. Economic data is showing improvement following weak first quarter
GDP, with market participants now positioning for the December meeting as
the most likely starting point for an interest rate hike. The latest comments
from Federal Reserve Chairwoman Janet Yellen, however, indicate that the
exact moment is still data-dependent.
The Federal Open Market Committee has committed to a policy of lower
for longer as it assuages fears that the first interest rate increase will disrupt
the recovery. The first policy rate change is expected to be just 25 basis points,
and measures will remain accommodative for some time.
Agency lenders are underwriting 10-year multifamily loans ranging between
4.3 and 4.7 percent with average LTVs from 55 to 75 percent. Portfolio lenders are offering similar loan-to-value ratios with interest rates between 3.85
and 4.50 percent as underwriters have become more competitive in an effort
to do business. Floating bridge loans for stabilized assets will require LTVs
of 70 percent and price with a spread between 250 and 425 basis points over
LIBOR, while value-add transactions will be underwritten at 80 percent LTV
(60 to 65 percent of cost) with a 300- to 475-basis-point spread.
Total CMBS issuance is expected to top 2014 levels this year as $100 billion to
$125 billion is underwritten. A wave of pre-crisis loans will start to come due
over the next few years, prompting refinancing as current owners renegotiate
the capital structure of their assets. Through April, $35.8 billion in CMBS
had been originated, underscoring the availability of credit as credit unions,
insurance companies and alternative asset managers expanded their offerings.
Prepared and edited by
Aaron Martens
Research Associate, Research Services
For information on national
apartment trends, contact
John Chang
First Vice President, Research Services
Tel: (602) 687-6700
[Link]@[Link]
Washington, D.C., Office:
Bryn Merrey
First Vice President, District Manager
[Link]@[Link]
7200 Wisconsin Avenue
Suite 1101
Bethesda, Maryland 20814
Tel: (202) 536-3700
Fax: (202) 536-3710
Price: $150
Marcus & Millichap 2015
[Link]
Local Highlights
The most significant project completed this year is 628-unit Avenir Place. The
seven-story apartment complex is located in Vienna and finished construction
in late 2014.
The biggest development currently under construction is Art Place. The mas-
sive mixed-use development will deliver 929 units of residential, more than
300,000 square-feet of retail space and 170,000 square feet of cultural and
art spaces. Scheduled for completion in the summer of 2017, the project will
encompass 16.5 acres when finished.
One of the largest bioscience firms in the Greater Washington area is taking
steps to expand its Silver Spring campus. United Therapeutics Corp. is planning to hire about 100 employees and build a new 120,000-square-foot office
tower in the next few years.
Johnson, Mirmiran & Thompson, one of the nations largest engineering firms,
is planning to move its corporate headquarters to a 130,000-square-foot builtto-suit office building in northern Baltimore County. The move will bring 600
business professionals to the area, which could strengthen fundamentals for
complexes in the area.
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to
the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; CoreLogic, Inc.; [Link]; National Association of Realtors; Real Capital Analytics; MPF Research; TWR/Dodge Pipeline; U.S. Census Bureau.
