D.C. Apartment Rents Rise 2.5% Despite Slowing Absorption
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D.C.'s apartment market experienced unexpectedly strong rent growth in the first quarter, but a surge of new deliveries this year could put downward pressure on rents.
Rents for Class-A apartments in the District averaged $2,596/month last quarter, a 2.5% year-over-year increase, according to Delta Associates' Q1 Mid-Atlantic Class-A Apartment Market Report.
The rent growth came despite the continued onslaught of new apartment deliveries and a significant drop in absorption. D.C. delivered 4,180 new Class-A units over the 12 months ending March 31. During that same period, the market absorbed 3,584 units, a 16% decrease from the prior year.
Delta Associates President Will Rich said he had expected supply outpacing demand would make it difficult for landlords to raise rents, and he was surprised by the strong rent growth.
"We were under the impression there would be weaker rent growth in the District due to all of the deliveries that have been coming," Rich said. "However, many of the submarkets have outperformed their long-term average in D.C. proper."
The ability to raise rents in the face of supply-heavy market dynamics shows the appeal of new apartments in D.C., Rich said. Many of the new deliveries are occurring in neighborhoods like Capitol Riverfront and NoMa, areas that are also welcoming a host of new retail amenities.
"It shows that the District remains an area where people want to live," Rich said. "Its evolving amenities that have been added to many submarkets in the city have attracted residents who want to be in an urban environment."
The supply surge is set to increase dramatically over the next 12 months, and Rich expects rents will not be able to maintain the upward momentum. An estimated 6,346 units are expected to deliver in the District over the next 12 months, a 52% increase over the last year.
"We expect the District will experience weaker rent growth than the long-term average over the next 12 months due to the sheer number of units that will be coming into the marketplace," Rich said.
The surge in deliveries comes in part because a significant number of units that were delayed in prior years were allowed to move forward. Opponents to projects filed appeals that have forced over a dozen projects with thousands of units to go through lengthy court processes. But the court has decided several cases and allowed projects to move forward over the last year.
"Now that some of those cases have been settled, construction has commenced on some of these larger-scale projects that, if those lawsuits didn't occur, they would have already been underway or close to delivered," Rich said.
The suburbs are experiencing similar market dynamics as the District. Northern Virginia achieved 2.8% rent growth despite absorption falling by 41% year over year. Suburban Maryland rents rose 1.5%, despite a 14% drop in absorption.
The weak absorption in Northern Virginia occurred largely because there weren't enough new units to absorb, but that will soon change.
Northern Virginia delivered 1,436 units in the 12 months ending March 31, but it is projected to deliver 7,646 units over the next year, an increase of over 400%.
"A good chunk of those deliveries will be in Arlington and Alexandria, which traditionally have been areas you've seen higher absorption of apartments," Rich said. "Those areas are in higher demand so with more deliveries we expect absorption."
Amazon has promised to gradually create 25,000 jobs by 2030, and could potentially reach 37,850 by 2034. With Amazon employees making an average annual salary of $150K, Delta Associates projects a majority will become homeowners or rent townhouses. It estimates HQ2 employees will generate 3,700 units of Class-A apartment demand by 2030 and potentially 5,500 units by 2034.
Arlington is projected to capture nearly 50% of that apartment demand, or an estimated 2,600 units by 2034. Fairfax County is projected to receive nearly 900 units of HQ2 demand by 2034, with Alexandria getting over 600 units of demand and the District receiving just under 700 units of demand.
"A large share of Class-A renters who work at HQ2 who choose to rent will be living in Arlington and Alexandria in our estimate," Rich said. "We think there would be a bigger impact there than the Metro area as a whole.