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Apartment Development 'Starting To Ramp Up' In D.C.-Area Opportunity Zones

The opportunity zone program took some time to begin spurring new development, as the federal government spent months finalizing the regulations, but it finally appears to be impacting apartment construction in the D.C. area. 

A rendering of MRP's Bryant Street project, currently under construction in an opportunity zone

Projects totaling 5,759 apartment units are currently under construction in the D.C. area's opportunity zones, comprising 20% of the region's active development, according to Delta Associates. That total is up from 4,324 units under construction in those same areas in Q3 2018. 

"In the Washington Metro area, there are over 90 opportunity zone tracts, and apartment development is starting to ramp up in these areas," Delta Associates President Will Rich said Wednesday on the firm's Q3 Market Overview & Awards for Excellence webinar. 

A Delta Associates chart showing the level of apartment construction in D.C.-area opportunity zones

The most opportunity zone units are under construction in the District, Delta Associates said, followed by Prince George's County, Montgomery County and Prince William County.

Prince George's County has the largest share of its total projects located in the designated census tracts, with over 70% of its under-construction apartments sitting in opportunity zones. Prince William County has over 40% of its total apartment pipeline in opportunity zones. 

Delta Associates' research did not show exactly how many of the apartment projects utilized the federal program's tax benefits. But a series of projects in D.C., Maryland and Virginia have broken ground this year after the developers announced they received opportunity zone investment. 

The developer behind one of Prince George's County's largest opportunity zone projects, Urban Atlantic, received a $21M opportunity zone investment from Bridge Investment Group and broke ground in June on a 282-unit New Carrollton building.  

"We were able to raise opportunity zone funds, and people were fighting each other to invest in this development," Urban Atlantic's Vicki Davis said at a Bisnow event last month. "It does change the game a lot."

A rendering of Urban Atlantic's New Carrollton Metro development

A new Price William County project hit the boards in an opportunity zone this week. Grace Street Properties acquired the 13-acre Station Plaza shopping center in Woodbridge and plans to move forward with a 2M SF mixed-use development. 

Multiple under-construction D.C. projects have utilized opportunity zone financing this year. Douglas Development in May received an opportunity investment from PTM Partners for its 453-unit Buzzard Point project. MRP Realty and FRP Development Corp. secured opportunity zone equity for the first phase of the team's 1,500-unit Rhode Island Avenue project and broke ground in July. EJF Capital invested opportunity zone equity in Donatelli Development and Blue Skye's 262-unit Hill East project in May

"In the District specifically, the zones that were selected primarily are in the areas that have development in the pipeline already," Rich told Bisnow after the webinar. "They may not have necessarily started construction, so the opportunity zone program would allow these projects to move forward quicker than they would have otherwise."

Rich expects investment in opportunity zone areas will continue to increase in the coming years. Delta Associates works with developers to provide market analyses, and he said he has noticed an increased interest in developing in opportunity zones and taking advantage of the tax benefits. 

The firm also released its quarterly apartment market data Wednesday, showing continued strong absorption and modest rent growth.

A Delta Associates graph showing annual rent growth in the D.C. area since 2006

Delta Associates found that 9,714 Class-A units were absorbed in the D.C. area during the 12 months ending Sept. 30. Delta Associates projects region-wide absorption will hover around 9,000 units/year for the next three years, above the long-term average but trending down from recent years. 

The D.C. area experienced 2.8% rent growth during the last 12 months, according to Delta Associates. This is more than some recent years during which it remained stagnant or fell slightly, but it is still below the average annual rent growth of 3.9% between 1996 and this year. 

"Two-point-eight percent is stronger rent growth than we've seen in the past several years, but it is still below the long-term average," Rich said. 

Annual rent growth is expected to remain below the long-term average, Rich said, because the elevated development pipeline makes it harder for landlords to raise rates. Delta Associates projects over 11,000 units will deliver in 2020, roughly the same as this year.