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D.C. Apartment Rents Continue To Decline, But Not Where Experts Predicted

With developers in D.C. planning and delivering multifamily projects faster than ever, its apartment rents continued to drop during the third quarter, although not in the neighborhoods experts predicted. 

The apartment balconies at Capitol Hill's Hine School Residences, one of D.C.'s most recent multifamily deliveries

After D.C. experienced a rare drop in rents during the second quarter — the first quarterly decline in two years and just the third since 2010 — that trend continued in Q3. District-wide rents for Class-A apartment buildings decreased by 1.3% year-over-year to an average monthly rate of $2,585, according to research firm Delta Associates, and Class-B rents experienced a drop of 0.6%. 

Researchers saw this rent drop coming, given the record-high number of units delivering this year. But what caught some experts by surprise was the submarkets where that rent drop was concentrated. 

The Columbia Heights/Shaw submarket, an established multifamily area, experienced a 4.1% decline in Class-A rents. Its vacancy rate now sits at 6%, the highest of any submarket in the District. The second-largest rent drop occurred in Central D.C., a submarket that includes Dupont Circle, Logan Circle and Mount Vernon Triangle, with prices falling by 2.4%. These submarkets still had the city's highest average Class-A rents at $2,700 and $2,852, respectively, but the drop in rents comes as a surprise given their relatively slow pace of new deliveries. 

Meanwhile, the submarket with the most apartments coming online experienced an unexpected increase in rents. In the Capitol Hill/Capitol Riverfront/Southwest D.C. submarket, Class-A rents grew by 3.2% to an average of $2,410. That submarket absorbed 1,655 units during the 12 months ending Sept. 30, comprising nearly half of D.C.'s total absorption over that period. 

The NoMa/H Street submarket had the second-highest absorption over that span, with its 935 units more than doubling the absorption of the third-highest area. Rents did drop in that submarket to an average of $2,413, though its 1.2% decline was slightly below the District average. 

The vast majority of apartments delivering this year are opening in those two emerging submarkets, and they also have by far the largest pipeline of projects expected to deliver over the next three years. Experts had predicted this supply surge would lead these areas to experience falling rents, but that decline was instead concentrated in the more established Northwest D.C. neighborhoods.

Delta Associates President Will Rich at an event in 2016

Delta Associates President Will Rich attributes this unexpected dynamic to changing preferences among renters, with these emerging areas generating more excitement than older neighborhoods. 

"There has been a shift in development activity, as well as buzz, to some of the areas in the eastern part of the city, the NoMa/H Street area and Capitol Riverfront/Southwest," Rich said. 

Southwest D.C. has benefited from the fanfare around the opening of The Wharf, Rich said, while the Capitol Riverfront and H Street neighborhoods have both been the beneficiary of new Whole Foods stores and a number of restaurant openings. 

The District's apartment supply outpaces its demand by a significant amount, while its suburban neighbors remain more stable

Over the next three years, the NoMa-H Street and Capitol Riverfront/Southwest areas are poised to become the two largest multifamily submarkets in the District, Rich said, surpassing the number of total units in central D.C.

The number of projects under construction and planned will keep D.C.'s pace of apartment deliveries at roughly the same level for the next three years, and Rich predicts this will cause a continued rent decline in the short term. But he sees developers beginning to slow down their activity beyond that three-year window, likely leading rents to grow at a modest pace over the long term.