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Arlington Multifamily Leaders Brace For 'White-Knuckle Ride' Amid Inflation, Interest Rate Hikes

Arlington County leaders are preparing for a difficult economic environment for multifamily development, even as they say they're optimistic about the region's future.

Bean Kinney & Koman's Jonathan Kinney, Mill Creek Residential's Joe Muffler, Bozzuto's Jo Gavigan, Cooper Carry's Steve Smith and Shooshan Co.'s John Shooshan speak during a panel at Bisnow's Future of Arlington County event.

The steady rise of interest rates in the U.S. hasn't appeared to stop new construction yet, but if the Federal Reserve pushes the federal funds rate to 3.5% by year-end as it has targeted, that could have serious repercussions, said Shooshan Co. Chairman John Shooshan, speaking at Bisnow's Future of Arlington County event on Thursday.

"The industry is going to have to tap its brakes here," Shooshan said. "There'll be a course correction."

The Fed reportedly plans to stick to a 75 basis point increase when it meets next week, a sharper increase than economists expected would be the norm at the start of 2022, but lower than some feared in response to high inflation.

Anxiety has risen nationwide among multifamily owners and developers in response to the interest rate hikes. More than half believe rising rates — coupled with geopolitics and recession risks ⁠— have negatively impacted investment in the sector, according to the National Multifamily Housing Council's quarterly survey, released Thursday.

"Continued interest rate hikes from the Fed have translated into higher longer-term rates and a higher cost of both debt and equity," NMHC Chief Economist Mark Obrinsky said in a statement coupled with the survey. "While these higher rates have cut into investor proceeds, many sellers are reluctant to lower prices, causing a sharp drop in sales volume."

Despite the pessimism associated with the economy, Arlington County's multifamily market has been performing relatively well. Its monthly rent growth has repeatedly surpassed D.C. proper this year, in a region that's already the eighth-most-expensive for rents nationwide, according to data from and Zumper.

That gives firms like Mill Creek Residential confidence in its 18-month pipeline of projects throughout the county, Managing Director Joe Muffler said at the Bisnow event, which was hosted at Rosslyn City Center, which was recently redeveloped by American Real Estate Partners. But Muffler doesn't think the area is immune to the seismic market forces being felt today.

"We feel fantastic about the long-term residential in the corridor, we feel great about the long-term retail that’s here as well, but it's going to be a white-knuckle ride over the next eight months to next year," he said.

Pillsbury Winthrop Shaw Pittman's Jamie Bobotek, Columbia Pike Partnership's Kim Klingler, Insight Property Group's Sarah Davidson and BM Smith's David Peele speak during a panel at Bisnow's Future of Arlington County event.

Navigating an inflationary environment and pursuing development means securing long-term capital, Muffler said. Mill Creek's pipeline includes the PNC Bank-backed Modera Kirkwood in Clarendon, which broke ground in December 2020.

Seeking longer-term equity partners has also been part of Bozzuto's strategy, said Jo Gavigan, senior vice president of operations at Bozzuto. She said the construction and management sides of the business meet often to discuss what inflation is doing to rent, costs and mortgages in order to ensure deals can still pencil out.

Gavigan has also seen strong demand, with low vacancies and stable occupancy, in Bozzuto's Arlington County portfolio. But she's being careful to ensure Bozzuto's multifamily buildings can be attractive to renters as inflation reaches its highest point in decades.  

"I think Arlington and the corridor is one of the top markets where we can [raise rents], but it's really going to be critical that we're at the table when we’re looking at these deals," Gavigan said.

The breaking point for rent growth may be coming soon. From May to June, the county had the sixth-highest rent increase among the top 100 U.S. urban areas, according to Apartment List data reported by the Sun Gazette.

The market has so far been able to absorb that growth in part because of corporate relocations bringing high-paid workers to the region, Muffler said. He pointed to Nestlé and Microsoft, both of which have made major commitments to Rosslyn in recent years, as prominent tenants investing in the labor pool Northern Virginia provides.

Meanwhile, the relocation of the headquarters of defense contractors Raytheon and Boeing, while more symbolic than meaningful from a leasing perspective, signal the long-term confidence Fortune 500 companies have in the region. 

These companies have a deep pool of knowledge workers to draw from. A WalletHub study released Monday found that the D.C. metropolitan statistical area had the third-highest level of educational attainment in the country, behind Ann Arbor, Michigan, and the San Jose, California, area.

Walsh, Colucci, Lubeley & Walsh's Andrew Painter, AREP's Jason Alexander, Jefferson Apartment Group's Greg Van Wie, Stream Realty's Anthony Chang and Rosslyn BID's Mary-Claire Burick speak during a panel at Bisnow's Future of Arlington County event.

“If you don't have a master's or a Ph.D., you're gonna live somewhere else,” said Anthony Chang, managing director of Stream Realty. “I think all the companies that are coming into Arlington County and the Rosslyn-Ballston Corridor are chasing that talent.”

But anxieties about housing, especially for workers who aren’t drawing high salaries from major corporate employers, have begun to creep into the rental market. Shooshan believes that the need for housing that is affordable for those workers will become a bigger part of the conversation as rents, responding to the market, continue to push higher. 

"Double-digit rent growth, it's fine if you're working for Raytheon or Accenture, but we have so many people in our society that can't afford that," Shooshan said. "These people need places to live."