D.C.-Area Apartments Had The Biggest Rent Drop This Century In Q2
Apartment landlords felt a sharp impact from the coronavirus pandemic last quarter, with D.C.-area rents experiencing their greatest decrease since the turn of the millennium.
Class-A rents in the D.C Metro area averaged $2,096 in the second quarter, a 3.2% year-over-year decrease, according to a report released Wednesday by Delta Associates.
The previous quarters with the highest rent drops this century were in Q3 2009 and Q4 2013, which each experienced roughly 3% declines, Delta Associates President Will Rich said.
The drop in rents was caused by a significant decline in apartment demand, especially in the District, where absorption was down 25%, according to the report. The apartment vacancy rate in the District was 6.8% at the end of Q2, up from 4.1% the same time last year.
"There has been an impact on absorption, on rents, on vacancy, basically all of the metrics were impacted in some fashion by the pandemic," Rich said.
Rich attributed the drop in demand to the inability of apartment owners to host in-person tours during the stay-at-home orders last quarter.
"It was very difficult to tour properties because they were closed to the public, so the only way people were able to look at apartments was to do online tours," Rich said. "That, more than anything, has impacted absorption in Q2."
Delta Associates expects demand to rebound in the second half of the year but remain below the long-term average. Rich said some parts of the region may experience continued rent declines through the rest of the year, but he doesn't expect the drops to be as sharp as they were last quarter.
"The level of rent decline was probably the most during Q2," Rich said. "Now that the economy is starting to open up again, I don't expect that rents will be declining as much."
While demand may return, the region's apartment market is still experiencing an influx of supply that could make conditions difficult for landlords. Delta Associates projects 15,150 units will deliver over the 12-month period ending June 2021, a 46% increase from the prior year.
Rich said this delivery increase is due in part to construction completions that were delayed from last quarter, but it also represents the bullish approach developers have taken on building new apartments.
The coronavirus did not stop many planned apartment projects from breaking ground in the D.C. region. Delta Associates found 12 projects totaling 3,388 units began construction in the second quarter.
Projects that began construction included a 323-unit Whole Foods-anchored building at the Parks at Walter Reed development, a 403-unit apartment tower in Silver Spring from Washington Property Co. and a 191-unit apartment building at CityInterests' Parkside development in Ward 7.
"In Q2 there was a large amount of units that started construction even though we were going through the pandemic," Rich said. "A lot of that was projects that either had financing and were about ready to start, or they were very close to the point of getting financing, so they were able to proceed."
Developers that were not close to obtaining financing may have a more difficult time securing a construction loan in today's economy, Rich said. He expects this to lead to a slowdown in new construction starts in the coming months.
"Moving forward, depending on the fallout from the recession we're now in, it will probably be more difficult for projects to receive financing to build, so it's possible that there may be a slight decline in the pipeline," Rich said.
Breaking down last quarter's apartment data by building size and geographic area shows renters favored properties in less dense environments as the pandemic forced people to stay home.
Rents in low-rise apartments across the region decreased by 1.9%, while rents in mid- and high-rise apartments fell by 4%.
Northern Virginia's close-in submarkets experienced a rent decline of 3.4%, while its outer submarkets experienced a drop of 1.9%. Rents in Maryland's close-in suburbs fell by 0.7%, while they stayed flat outside the Beltway.
Neighborhood performance within the District also showed an advantage for less-dense areas. Rents in Upper Northwest and Upper Georgia Avenue stayed roughly flat, while the NoMa/H Street, Central D.C. and Capitol Riverfront/Capitol Hill/Southwest submarkets experienced rent declines of more than 3%, the largest in the District.
"In those submarkets further from downtown, the housing stock is more mid-rise and less dense type of development compared to all the new high-rises being built either downtown or in areas like Capitol Riverfront and NoMa," Rich said. "The type of housing that is built in the outlying submarkets is probably a little more comfortable for people to live in currently."