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'The Bottom Fell Out' Of D.C.'s Apartment Market, But Developers Aren't Backing Away

Apartment rents in the D.C. area experienced the sharpest drop in decades last year, with the District feeling the most pain, but developers continued to break ground on new projects and say they remain confident the market will recover. 

The Wren development in Shaw, photographed April 25, 2020.

Developers and investors, speaking Thursday on the Bisnow Multifamily Annual Conference East digital summit, said they experienced weak leasing demand in the District last quarter.

"In the fourth quarter, it does seem like the bottom fell out a little bit," JPMorgan Asset Management Managing Director Allina Boohoff said. "There were a lot of deliveries in D.C. proper that were counting on new college graduates, new people coming in, that were just frankly not there."

The market's weakness was detailed in new Q4 data released by Delta Associates last week. Class-A apartment absorption in the District fell by 75% for the 12 months ending Dec. 31, Delta's Q4 report found, and rents for Class-A, high-rise apartments declined by 17.9%. The District's Class-A vacancy rate increased from 4.9% in Q4 2019 to 10.3% last quarter. 

While the District's performance was the worst, the pain was felt throughout the region. Class-A rents across the D.C. Metro area declined by 10.2% last year, the steepest decline Delta Associates has recorded since it began tracking the market in the 1980s. 

"Since March, when the pandemic first started to impact the economy, apartment market conditions have gradually worsened in the Washington Metro area," Delta Associates President Will Rich told Bisnow Monday. "Rents have declined more rapidly, vacancy has increased at a faster rate, and absorption has dropped off significantly."

Delta Associates' research shows D.C.-area apartment absorption last year was well below its historical average.

Rich said the apartment market in the D.C. suburbs has still weakened during the coronavirus pandemic, but it has outperformed the city. Apartment absorption in Northern Virginia fell by 33% last year, and it dropped by 35% in suburban Maryland.  

The vacancy rate in Northern Virginia rose from 4.4% in Q4 2019 to 5% last quarter. High-rise apartment rents in Northern Virginia fell by 15.3%, while low-rise rents fell by 2.9%.

Low-rise rents in suburban Maryland increased by 2.2% last year, while high-rise rents fell by 8.6%. Suburban Maryland experienced declining vacancy from 4.8% in Q4 2019 to 4.5% last quarter. 

"We've seen a shift in demand from being in more urban, high-rise environments to more suburban or exurban areas," Rich said. 

WashREIT Managing Director of Multifamily Ed Murn said suburban assets comprise about one-third of the REIT's portfolio.

"The suburban portfolio has definitely outperformed the urban," Murn said. "The suburban portfolio has had some pain here in Q4, but we see it recovering quicker than our urban assets."

The REIT's urban assets experienced even more pain, Murn said. He said some new leases signed in its urban portfolio last quarter had rents 10% to 20% below the previous year, a lease trade-out performance he called "the worst I've seen."

"We've got a lot of rent growth we need to recapture, but by no means are we giving up on the urban core," Murn said. 

Clockwise from top left: JPMorgan's Alina Boohoff, CBRE's David Webb, WashREIT's Ed Murn, EYA's Aakash Thakkar, Mill Creek's Sean Caldwell and Neighborhood Development Co.'s Adrian Washington.

Boohoff said JPMorgan Asset Management has seen its suburban apartments outperform those in the District, but it also isn't giving up on the urban core. She said the investment firm is looking to keep a balance between its urban and suburban assets.

"In the last 10 to 12 months, our suburban portfolio has done phenomenally well, particularly because of the trends you're hearing: People are fleeing the city for now, they are definitely choosing to live in the suburbs," Boohoff said. "That said, we do believe there will be a snapback of some sort, and so you can't necessarily forgo urban investment altogether."

EYA Executive Vice President Aakash Thakkar said he has seen a shift away from downtown in the for-sale housing market. He said this shift has benefited projects in the suburbs and in the outer submarkets of the District. 

"We've got projects we're selling in the Fort Totten, Michigan Park and Brookland areas, so we saw folks coming from downtown to those locations," Thakkar said. "And then we've got projects selling in Northern Virginia and Montgomery County, and we saw folks moving out of the District."

Thakkar also said he remains bullish on the D.C. multifamily market over the long term. 

"Our thought big picture is that the District is a resilient place," Thakkar said. "Job growth is solid. The tech sector is moving in with federal government employment as a backstop. All of those things lead us to believe there is long-term opportunity for those of us who do what we do in the District."

The confidence developers have for the D.C. apartment market's future isn't just talk; it has been shown in their willingness to keep breaking ground on new projects during the pandemic. 

Projects totaling 11,393 units started construction across the D.C. Metro area last year, Delta Associates found, including 1,651 units in the fourth quarter. 

"Developers are looking to the future and they see the fundamentals of the market are still strong," Rich said. "There is going to be a temporary shock to the market that's currently occurring. Their thought is by the time their projects deliver, many impacts of the COVID pandemic will subside."

Rich said he thinks the region's apartment absorption will be higher this year than it was last year, and he predicts rents will remain roughly flat in 2021. He then predicts the market will experience rent growth in 2022. 

"Demand will return to the market," Rich said. "It's not necessarily going to bounce back to pre-pandemic levels immediately. It's going to take some time."