Cissel

WASHINGTON, DC-A healthy economy and strong job growth are helping to fuel the multifamily market in the nation’s Capitol. Though the expansion in employment--by 28,400 jobs between April 2007 and April 2008, ranking sixth in the nation--is nearly half the levels recorded during the boom period of the past few years, it remains healthy enough to sustain the local real estate market, as long as developers keep their activity in check, maintain researchers at Delta Associates in a midyear report on the market.

The 1% job growth the DC area saw over the past 12 months was up from the 0.2% rate of national growth, placing the metro region sixth in terms of employment gains. While it’s no longer the leader in this category, the DC area is the only large metro region that gained more jobs this year than last. The local unemployment rate stood at 3.1% in April, compared to 5% nationally.

While the financial and construction sectors could cut more jobs due to the credit crunch, the firm anticipates the market to recovery slowly through 2010, with many positions added in the professional and business services sector. Metro DC payrolls should grow by about 23,900 new positions this year, 29,000 in 2009 and 42,500 in 2010. Further, the firm notes that the shift in the single-family housing sector has caused many would-be condo buyers into renters. And many other households in the region that are renting, researchers add, do so by choice.

The stabilized vacancy rate for investment-grade properties in the area rose to 3.6% at midyear versus 2.9% a year ago. When compared to the national rate of 5.6%, it’s still one of the lowest vacancies in the country, but it’s high by local historic standards. Rent increases, too, were off from the long-term average of 4.5% annually, coming in at 3.1% between June 2007 and June 2008. Class A rents grew by just 1.8% during the same period, but that’s still better than midyear of last year, when rents for prime space fell by 30 basis points.

Much of that was due to the net absorption of 6,296 class A and B units since midyear 2007. Most of those apartments were class A--5,676 units, the second highest total in the US and the highest ever recorded in Metro DC. Given that the number of projects being marketed has doubled in the past year, Delta says those absorption numbers are "remarkable." Some of that as likely spurred by concessions, which rose to represent 4.1% of face rent at class A projects in the second quarter, compared to 3.6% last year. Concessions have been steadily rising since the beginning of 2007.

Melnick

However, Scott Melnick, a partner and co-director of Transwestern’s multifamily group, maintains the concessions are in pockets of the market, and many of them involve reverted condominiums, properties located near reverted condos that have to compete or new communities that are in the lease-up stage. He notes that the major multifamily companies such as Archstone-Smith, Equity Residential and Aimco don’t have concessions, though they may alter their rents slightly when they do their daily pricing. Al Cissel, also a partner and co-director of the multifamily group, concurs that the prevalence of concessions depends on the submarket and the location of the properties. However, the concession issue won’t be long-lived, he says, because the pipeline is declining.

After peaking at 36,951 units--mainly due to condominium reversions--at the end of last year, the number of units in the pipeline continues to decline, coming in at 33,802 units at midyear 2008. The shadow market, Delta reports, "seems to have run its course, with absorption and rents showing real strength for both class A and B product." The downward trend will probably continue through the balance of the year.

Al Cissel tells GlobeSt.com, "the shadow market is definitely still there, but it’s being managed." Those units, which tend to be in reverted condo projects, are being absorbed as the owners of those properties are offering reduced rents or concessions. The inventory overhang of these units, says the executive, will take just a year or two to fully tighten up.

"The overall market isn’t dramatically affected by the shadow market," states Melnick. "Plus, most of the condominium projects under way have now been reverted to rental units, so won’t add to inventory. The pipeline is already down from 2007, and no one’s starting new condo projects now, so there won’t be new ones that switch to rentals."

The strong multifamily fundamentals and healthy local economy have investors of all stripes flocking to the quality of the mid-Atlantic region. Melnick and Cissel note that when all the numbers are tallied up, the sales volume for the first half will likely be on par with the $816 million recorded in the first half of 2007. In the past month alone, reports Melnick, the two have handled more than $800 million in investment deals for apartment properties of various types and sizes. Further, the executives say three-quarters of the transactions they’ve closed, in the past two years, have involved buyers from outside the mid-Atlantic.

"The most active and greatest number of buyers are those looking for value-add properties that were built in the 1980s and 1990s, where they can buy and reposition these assets," says Melnick, reporting that there continue to be opportunities to grow rents and occupancies for local properties. "Institutional players and REITs are also seeking new deals, but there aren’t that many available in the market."

As for the price gap between seller expectation and what buyers want to pay, Melnick says it isn’t as wide as it would seem. "It’s not that sellers are sitting back and not accepting prices offered for their properties, because no one’s holding out for condo buyers anymore. Sellers have become more realistic and have realized they’re dealing with rental buyers and the prices they are willing to pay," he says. "And just like there’s a flight to quality properties, there’s also a flight to quality buyers by sellers. So the eventual winner of a bid may not necessarily be the highest bid but rather, the one that has the best certainty of execution."