Brokers See Unprecedented Investor Appetite For D.C.-Area Apartments, But Not Enough Properties For Sale
Investors are pouring money into D.C.-area apartments at a rate some veteran brokers haven't seen in their lifetimes, in part because buyers see it as a safe asset class during a recession. The only problem: There are not enough properties to buy.
"In my 20 years in the business, there is more capital on the sidelines trying to deploy in multifamily than I've seen in my entire career," said Transwestern Executive Vice President Dean Sigmon, who will speak Nov. 7 at the Bisnow Multifamily Annual Conference East in D.C.
The flow of capital into multifamily is occurring in many markets throughout the country, but Sigmon said investors are especially interested in the D.C. market. Sigmon said his team has closed about $500M in Mid-Atlantic multifamily sales this year, including two Prince George's County properties that sold last month.
"Everyone wants multifamily, everyone wants workforce housing and everyone wants D.C.," Sigmon said. "We're a very resilient economy. In the last downturn we fared extremely well. It is the investment space in commercial real estate where everyone wants to be. There are a lot of new players trying to come into D.C."
The D.C. metro area has had the fourth-highest multifamily investment sales volume of any U.S. market through Q3 this year, according to CBRE, behind New York, Los Angeles and Dallas. D.C.'s year-to-date investment volume of $4.7B represents a 16.5% increase over the same period last year. CBRE's David Webb said he expects this trend to continue.
"We do not see volume going down," Webb said. "The appetite is still there, and all the conditions are ripe for continued strength."
The increased sales volume comes as the D.C. area is experiencing rent growth of around 3%, a higher rate than it recorded in recent years. Melnick Real Estate Advisors founder Scott Melnick said this rent growth is helping push investors to the D.C. market.
"Especially now with rent growth there are still more people entering Washington," Melnick said. "There were times that various investors were skipping here because they could go to Nashville or Atlanta and get higher rent growth when rents were flat."
Investor demand for D.C.-area apartments is also strong because people see it as a stable asset class if the economy enters a recession, Melnick said. The economy is now in its longest-ever expansion period, and some indicators this year have pointed to a looming recession.
"Investors have looked at multifamily as more stable, but over the various cycles they’ve also looked at Washington as more recession-resistant because the government keeps on going," Melnick said.
Another factor pushing multifamily investors to D.C. is that other markets such as New York and California are implementing rent control measures that make their apartments less attractive for investors, Webb said.
"There are some rent control issues in markets like New York, driving investors away from those areas," Webb said. "We definitely see some people looking down here that hadn’t been looking down here."
The hottest class of D.C.-area apartments are suburban, Class-B communities that investors see as value-add opportunities, brokers agreed.
"It is by far the lowest-risk apartment investment opportunity in our region," Sigmon said of the Class-B market. "Never has a workforce housing or value-add property wavered with regard to performance."
Melnick, who launched his own firm last year and has already brokered over $500M in deals, said he has focused largely on the suburban workforce housing space.
"Right now, there is more money for value-add, workforce housing than there has ever been," Melnick said. "There has been a lot of money raised for it, there’s good debt for it, and also it’s safer in that new construction isn’t directly competing against older workforce housing and there’s more need for it."
JPMorgan Managing Director Allina Boohoff, who oversees the firm's investments from Baltimore to Florida, said it has recently shifted its focus from downtown high-rise apartments to suburban, garden-style apartment developments.
"We feel that given the affordability crisis in the cities, that high-rise apartments — which we have been long on for quite some time — we feel that the spreads there don’t make as much sense," Boohoff said. "The idea is really for us to venture into the suburbs and really build apartments for a wider swath of people."
Boohoff also said she sees multifamily as a stable investment class for a potential economic downturn.
"Multifamily is considered a defensive play," she said. "People have to live somewhere, so it's just a matter of adjusting rents relative to demand."
While investor demand for suburban multifamily assets is as strong as ever, brokers say buyers have had a hard time finding enough properties to satisfy their appetite.
"There is just not enough product to meet the demand," Sigmon said. "D.C. is starved for opportunities. Our investment sales volume in the D.C. region is up from where it was last year, but there don't seem to be as many opportunities going into year-end that we would typically see in our market."
Melnick said he has also heard concerns from investors that they can't find enough apartments to buy.
"Most buyers will reference how hard it is to buy here both because the pricing keeps getting stronger and there are more buyers than there are deals to buy," Melnick said.
Many of the deals Melnick has closed have been 1031 exchange transactions, allowing the seller of a property to defer taxes if they flip the money into a new acquisition. He said 1031 buyers have helped create even more demand for D.C.-area apartments, but it can be challenging for them to find a property to buy within the required window after selling an asset.
“It’s so hard to buy because there’s such strong demand, and people can’t just easily go contract to sell their property and hope within 45 days they’ll find a trade property," Melnick said.