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As Renters Leave Downtown, Suburban Maryland Apartments Emerging As Top Local Alternative

The shift away from downtowns has become a growing trend across the country during the coronavirus pandemic, and new data shows how this played out last quarter in the D.C. region's apartment market. 

Suburban Maryland's Pike & Rose mixed-use development, with the Henri apartment building on the right, photographed Sept. 23.

Rents for Class-A apartments in the D.C. area last quarter fell by 7%, according to Delta Associates, the most severe rent decline the firm has ever recorded.

The rent drop was most pronounced in the District and other high-rise areas throughout the region, while suburban areas remained relatively stable. Suburban Maryland experienced a 2.4% rent drop, while Northern Virginia rents fell 7.2% and D.C. rents fell 10.7%. 

Digging further into the performance of the suburban areas shows that the region's low-density neighborhoods were the best performers. Suburban Maryland's high-rise submarkets experienced a 6.4% rent drop, while rents increased in its low-rise submarkets by 0.7%. Northern Virginia's high-rise rents fell by 10.9%, while its low-rise rents fell by 3.5%.

"Projects that are further away from the core are performing better than projects closer-in," Delta Associates President Will Rich said Wednesday on the firm's 24th annual Market Overview and Awards for Excellence webinar. 

Rich attributed the relative strength of low-rise suburban markets to the trend of companies keeping their offices closed during the pandemic and allowing their employees to work remotely. 

"The exodus we're hearing about from cities is not limited to D.C.; it's happening in other cities like New York and San Francisco," Rich said. "If you don't need to commute into the city to work and if you're in economic stress, then it's best for you to find a place that's more affordable."

D.C. area rent decreases this year have been the sharpest Delta Associates has ever recorded, and it projects rents will be flat next year before rising in 2022.

The region's vacancy rates also show the relative strength of the suburbs. Vacancy in the District rose from 4.4% in Q3 2019 to 7.8% last quarter. Northern Virginia's vacancy rose from 4.4% to 5.2%, while suburban Maryland's was essentially unchanged, from 4.1% to 4.2%.

In addition to the shift away from downtown areas, Rich attributed suburban Maryland's strong performance to the relative lack of new supply hitting the market. Delta Associates' report found 833 apartment units delivered in suburban Maryland last quarter, compared to 5,080 in Northern Virginia and 5,698 in the District.

"One thing going for suburban Maryland is there are not as many projects that are delivering right now in Maryland compared to what you're finding in the District and Northern Virginia, so there's not as much competition," Rich said. "There aren't as many new projects leasing in Maryland, so the need for concessions is not as great as it is elsewhere."

Suburban Maryland does have a surge of around 2,220 units expected to deliver in Q4, according to Delta Associates, outpacing the other two parts of the region. Rich said these deliveries are concentrated in high-rise submarkets like Downtown Bethesda and could hurt vacancy and rents in those areas. 

But the District and Northern Virginia are still expected to outpace suburban Maryland in deliveries in the coming years. Of the region's 36-month development pipeline, 43% of the units are in the District, 35% are in Northern Virginia and 22% are in suburban Maryland. 

Looking at vacancy and rent trends for Class-A apartments within the District shows which neighborhoods are suffering the most from the shift to suburban areas. 

The submarket including Capitol Hill, Capitol Riverfront and Southwest D.C. had the highest stabilized vacancy rate of 9.8% as of Sept. 30, up from 5% at the same time last year. This submarket also experienced a 12% rent decline.

The upper Georgia Avenue submarket had the second-highest vacancy rate of 9.6%, up from 3% at the same time last year. Its rents fell by 11.7%. 

The Central D.C., Columbia Heights/Shaw and NoMa/H Street submarkets also experienced double-digit rent decreases of 12.7%, 10.6% and 10.1%, respectively. 

Developers looking to lease up apartments in these submarkets in the coming months will likely have a difficult time, Rich said, but he expects projects that are breaking ground now will not face as challenging of a market. Developers have continued to break ground on new apartment projects throughout the region during the pandemic. 

"For the currently leasing projects, it's going to be a tough slog going forward getting units filled over the next several months," Rich told Bisnow after the webinar. "But beyond that period, if projects are about to start construction or have just started, depending on where they're located, they will likely not experience what's currently happening in the market when they deliver."

Delta Associates projects the region's apartment rents at the end of this year will be down 5% from last year, but then it will begin to stabilize next year. It projects flat rents in 2021 and then increasing rents starting in 2022. 

Rich also predicted that the shift away from urban areas will not be a long-lasting trend. He said he expects a vaccine to be available by the end of next year, and he thinks the shock of the pandemic will then wear off and cities will regain their appeal.

"I think the consumer will realize that there are benefits to being in an urban environment, and that trend we were seeing prior to COVID of cities being desirable places to live, it will revert back to that," Rich said during the webinar. "It might not be as strong as it once was, but I don't think the migration away from cities is going to be permanent."