Newly-Traded Shaw Apartment Hovers at 6 Cap Rate. For Now.

WASHINGTON, DC—An apartment building in Shaw has just traded at a trailing 12-month 6.01 cap rate, but the way cap rates fluctuate in this submarket it is unlikely to stay there for long, says one of the brokers of the transaction, Marcus & Millichap's Marty Zupancic.

Zupancic and colleague Grant Fitzgerald had the listing for the 10-unit apartment building in the LeDroit Park neighborhood of Shaw. Some 25 tours were conducted for the property, located at 500 U St., NW, with the final price coming in at $1.7 million, or $170,000 per unit. It was one of the highest per-per-unit sales comps in the submarket, the brokers say.

The new owner will make some improvements to the property, Zupancic tells GlobeSt.com, bringing the cap rate to below 6 cap. "It will then grow into a 6 then beyond a 6," he says.

Dynamics, including pricing, in this submarket are rapidly changing thanks to the influx of Class A properties in the pipeline, the growing number of millennials that want to live in the city, and the increased demand for Class B and B+ properties on the part of investors and renters, Fitzgerald says. "A gap has opened up, with these people looking for Class B properties that are more affordable but still in a great location."

Cap rates are swinging wildly as a result, from 4% to 6% depending on whether they are rent controlled and stabilized. A six cap is the ceiling, though, Zupancic says. "I don't see them going any higher."

The building was constructed in 1940 and is just under 7,000 gross square feet. It is located just south of Howard University and is three and a half blocks from the Shaw/Howard University Metro Station on the Green and Yellow lines.