WASHINGTON, DC–Fundamentals for the apartment asset class show little sign of weakening in the Washington DC area, according to projections by ARA Newmark's Mid-Atlantic Multifamily practice.

Indeed Executive Managing Directors Drew White and Al Cissel say that occupancy is expected to rise to 96% in 2018, from the current level of 95.5%.

This is not good for tenants, White tells GlobeSt.com — nor landlords.

The tight occupancy means even fewer concessions, he says. It also means that landlords' rents are too low. “That is what full occupancy means ultimately — that rents have been priced too low,” he says. “A 96% occupancy level is about as tight as you want to be.”

The hottest submarkets are in the 14th street and U street corridors where rents are commanding $4 per square feet and in some cases are pushing $5 per square foot, Cissel tells GlobeSt.com. Most of these properties are small infill buildings and the units are very small, ranging from 670 square feet to 750 square feet. The Mission on 14th Street is a case in point. Its units are small and rents are over $5 per square foot, Cissel says.

Now here's the kicker, according to the two brokers: A contrarian play is brewing in which some developers are testing the demand for larger units in those neighborhoods.

When you consider the mix of renters you can see the logic behind this move. Some are young people who want to be in the middle of urban life and are willing to pay the rent for a micro unit — but probably could not afford a larger unit. Then there are the Baby Boomers shedding their suburban lives in order to live in the District, as well as high-paid professionals who work in DC.

“When you look at the pool of people wanting to live in these neighborhoods it is clear not everyone wants to live in a shoebox and some of these people can afford higher rents,” Cissel says.

The only question, Drew adds, is how deep is this particular group of people. Is it enough to the support the cost of new development?

“There are one or two buildings either under construction or recently delivered on the U Street corridor that have larger units and it will be very interesting to see who fills it,” he says. One is a JBG Cos.' project at 13th and U streets that is coming online this Spring. The other is The Hepburn at 1901 Connecticut Ave., with units ranging from 900 square feet to 1500 square feet at rents averaging about $5 per square foot, Cissel says.

Two buildings do not equal a trend, but if they perform well they could lead to one, the brokers say — especially as the market continues to tighten.

Instant Insights /

A Contrarian Apartment Play Brews in The District

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