The Washington DC metropolitan area (DC Metro) multifamily market cooled slightly during the fourth quarter of 2014 but still closed out the year with near-record demand levels. Annual net absorption registered 6,849 units, the highest demand level since 2010. However, with a record 13,867 units delivered in 2014- nearly double the previous record set in 2009- absorption in the fourth quarter registered a negative 672 units. Consequently, the region’s vacancy rate rose 0.8 percentage points over the fourth quarter to end the year at 5.9%.
The majority of the new units delivered in the District of Columbia which saw 5,918 units come online in 2014. After decades of outmigration, the District of Columbia has experienced a clear turnaround in population growth during the past five years. Over 10,000 people moved into Washington, DC in 2013 and even more are projected for 2014. It is not surprising then that DC saw the highest demand levels among the three jurisdictions comprising the DC Metro with 3,528 units absorbed. In fact, the District of Columbia was also the only jurisdiction to post positive absorption during the fourth quarter with 161 units absorbed. Due to the large number of new units delivered, the District’s vacancy rate rose 1.3 percentage points over the fourth quarter to 7.1%. The average effective rent per unit fell by approximately $4 over the quarter to $1,698 per unit but this still represents a 1.4% increase from year-end 2013.
In Northern Virginia, demand fell behind supply during the fourth quarter; 923 units delivered and absorption registered a negative 515 units with only two out of eight submarkets posting positive absorption. Still, annual demand in Northern Virginia was positive with 1,554 units absorbed over the year- this despite a record 4,079 units delivering during 2014. Mostly due to the new deliveries, Northern Virginia’s vacancy rate rose 1.2 percentage points over the fourth quarter to 6.2%. Average effective rents remained steady, rising less than $1 to $1,749 per unit.
The story in Suburban Maryland was much the same as that in Northern Virginia. Demand during the fourth quarter was a negative 318 units but 2014 annual absorption was still positive at 1,767 units. The area saw 3,870 units deliver in 2014- all during the first three quarters of the year. The uptick in Suburban Maryland’s vacancy was more subtle than in the other DC Metro jurisdictions, rising only 0.2 percentage points over the fourth quarter to 5.0%. As in the District of Columbia, average effective rents fell about $4 over the fourth quarter to $1,424 per unit, but were still up 2.0% from year-end 2013.
Multifamily investment sales volume registered $3.3 billion during 2014 as 61 properties traded. While that is well below the record set in 2013 (when the Archstone Portfolio sale contributed to a staggering $8.0 billion in sales volume), overall multifamily investment has steadily trended upward and is now double what it was only four years ago. The average sales price in the DC Metro was $202,348 per unit in 2014 and cap rates averaged 5.91%.
- With over 18,000 units under construction across the DC Metro, the region will likely continue to see vacancy increase in the short-term, but long-term population and job growth forecasts suggest there will be a pronounced shift in the amount of multifamily product that will be needed on an annual basis. Consequently, the short-term uptick in annual supply that we witnessed in 2014 and are expecting in 2015 should be viewed as the “new normal” in terms of what is needed to accommodate the expected increase in annual demand for the foreseeable future.
- Traditionally the region has supplied between 6,000 and 8,000 multifamily units per year. However, George Mason University’s Center for Regional Analysis suggests that in light of a sharp drop in the supply of single-family units delivering to the market and the growing percentage of renters to total occupancy in the region, upwards of 12,000 multifamily units will be required annually moving forward.
- Both asking and effective rents have continued to increase at an average rate of between 1% and 2% per year. While the influx of supply may slow this increase temporarily, rental growth is expected to remain strong in the region’s transit-oriented, mixed-use developments.
Sources: DTZ Research, CoStar
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By: Nathan Edwards
Director of Research, DTZ- Washington, D.C.
Email Nathan: Nathan.Edwards@dtz.com
Contributor: Urmi Joshi, Senior Research Analyst, DTZ
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