D.C. Housing Industry Awaits Swell Of Investment With TOPA Reform

Hundreds of new apartment buildings across D.C. — and any developed from now on — could soon have an easier path to sell after lawmakers changed a decades-old tenant protection law.

A key component of the Rental Act — legislation aimed at stabilizing the city's rental market and boosting supply — is an adjustment to D.C.’s Tenant Opportunity to Purchase Act, a law real estate leaders argue has stifled housing investment in the city.

The council passed the law this month, creating a 15-year exemption for new buildings from going through the TOPA process. That means that from the moment a building opens, developers are on a 15-year clock to sell before they have to abide by TOPA rules. 

The adjustment is expected to bring in a new flood of investors who have in recent years shied away from D.C., real estate brokers and investors told Bisnow. That could mean an increase in housing development and property sales, new capital infusions into properties and new tax revenue for the District.

“I don't think it's going to happen instantaneously, but — and I'm seeing it firsthand — it's massively going to increase the liquidity in the market because so many investors wrote off D.C. because they didn't want to deal with TOPA,” Foulger Pratt Chief Financial Officer Joe Clauser said.

The firm over the last decade has built hundreds of new apartments in Eckington, NoMa and Capitol Hill. 

“Since this passed and in the lead-up to it passing, we've had institutional investors representing hundreds of billions of dollars of assets under management reach out to us and show an interest in investing in D.C., and these are investors that weren't open to investing previously,” Clauser added.

The D.C. Policy Center completed an analysis showing that as of this year, the 15-year exemption would apply to 401 apartment buildings in the city. Those exempted buildings house 46,591 units, 33% of all the apartments in D.C.

This encompasses much of the multifamily development wave that spread over D.C. during the last two decades, particularly in hot neighborhoods like Navy Yard, NoMa and Mount Vernon Triangle. 

Mayor Muriel Bowser originally proposed the legislation, and the D.C. Council made amendments that real estate groups say watered it down. The mayor has yet to sign the Rental Act into law or comment on whether she plans to do so. A Bowser spokesperson said she hasn’t yet received the bill from the council.

TOPA, which has been in place since 1980, allows residents to join together to purchase or assign ownership rights to an apartment building when it is put up for sale or recapitalization. 

Supporters of the law argue that it’s an important tool to allow tenants to build equity in their own housing or at least give them leverage to advocate for their interests under the next ownership.

But critics say the law can delay the sale process up to 420 days, injecting uncertainty into owners’ exit timelines and causing multifamily investors, especially institutional players, to avoid the city. 

“We've had many calls with buyers that automatically crossed out D.C. because of the TOPA laws,” said Greysteel Senior Director Nigel Crayton, a multifamily sales broker. “If you can't control your exit, it really hurts your ability to underwrite and predict what your returns will be for your investors.” 

Multifamily construction starts across the nation have dropped in recent years due to a variety of macroeconomic factors like high interest rates and construction costs, but in D.C., TOPA was one more reason for investors to avoid funding projects.

Last year, the number of apartments that began construction in D.C. fell 79% — with just 932 units breaking ground after 4,474 started the prior year — according to the Washington DC Economic Partnership’s annual Development Report. 

Meanwhile, multifamily investment sales in the District lag behind its regional neighbors. 

In the first 11 months of last year, D.C. saw $936M in multifamily sales. That was below the $3.6B in Northern Virginia and $1.1B in suburban Maryland.

“There is a disparity between the number of transactions that occur in Washington, D.C., versus surrounding states,” CBRE Executive Vice President Martha Hastings, who brokers multifamily investment sales in the mid-Atlantic, told Bisnow. “And so if D.C. can increase volume more in line with surrounding areas, that's very meaningful.”

Foulger Pratt’s Clauser said that high interest rates and uncertainty about their direction have slowed investment sales everywhere, but combining that with the TOPA uncertainty in D.C. made it “really hard for people to transact in D.C.”

Last year, it took Foulger Pratt and its two partners nine months to go through the TOPA process to acquire the Belgard, a 346-unit apartment building in NoMa, Clauser said.

The uncertainty surrounding the timeline of a sale — and what a delay could mean for rising interest rates — created a shallow buyer pool for the asset, Clauser told Bisnow last August. 

Given the lack of competition, Foulger Pratt was able to acquire the asset for a “rock-bottom price” of $108M.

“It became so cheap on a price-per-pound basis that we were willing to take the interest rate risk,” Clauser said at the time.

Private equity group Capitol Rock Partners dealt with the TOPA process for a 107-unit building it acquired in Petworth for $20M, founder and CEO Felipe Ernst said in a LinkedIn post last week.

“This investment was a grind,” he wrote. “TOPA started well over a year ago, but with perseverance, we were able to get this one across the finish line.”

Ernst told Bisnow he thinks the Rental Act is a “step in the right direction to bring investment back into the District.”

At a meeting before the Rental Act vote, D.C. Councilmember Robert White, who chairs the Committee on Housing, said that Deputy Mayor Nina Albert had met with “all five major housing lenders” who had all “redlined” D.C.

The mayor’s office declined to comment on White’s statements. 

“Not all institutional investors had redlined the city for multifamily investment, but many have, and for a variety of reasons, one of which, of course, was the inability to have control of your exit timing,” said Solitude Cove Capital Managing Principal John Kevill, a longtime D.C. broker who previously led Avison Young's national capital markets team before launching his own advisory firm in 2022.

Emilia Calma, director of The Wilkes Initiative for Housing Policy, told Bisnow that her team spoke with local and national developers about this issue in D.C. 

“A lot of the developers have talked about having trouble attracting investment in their project, and a lot of the investors we talked to mentioned pivoting towards development in states that have less regulatory hurdles,” she said.

Though there will be a lag, the real estate industry expects new multifamily development and sales activity to pick up once the legislation goes into effect. 

CBRE has already started highlighting the fact that the council passed the bill in order to draw interest to properties the brokerage is marketing. 

Two days after the bill passed, CBRE sent out an email marketing The Rowan, a 353-unit apartment building in Brookland, with a subject line that began: “The RENTAL Act has Passed Council.”

The Rowan delivered in 2021, meaning that once the bill is signed, it would be exempt from TOPA through around 2036. Hastings declined to comment on the marketing materials.

The 15-year exemption represents a middle ground the council struck between Bowser’s initial proposal for a 25-year TOPA exemption and an alternative proposal from Councilmember Brianne Nadeau for a three-year exemption. Bowser argued against the change, saying most examples of TOPA being used have been for buildings constructed before 1978. 

Brokers say that 15 years should still help turn the tide. Because many institutional investors are looking for five-to-10-year hold times, the 15-year exemption allows them to be confident that they can execute their exit plan on new construction. 

“I think the vast majority of investors will feel like 15 years is well inside what I call their trading window,” Kevill said. 

In some cases, it could allow for a second investment cycle to take place within the exempted window. If a building is sold five years after it delivers, for example, the next owner has 10 years to sell the building while it's still exempt from TOPA. 

But not every owner wants to sell within the first five years, and for owners that want to hold for longer, the 15-year exemption won’t make much of a difference. 

MRP Managing Principal Bob Murphy, onstage at Bisnow’s Developing Southeast D.C. event Tuesday, spoke about the bill’s potential impact on The Elevation at Washington Gateway, a 400-unit building the firm delivered in 2014 on Florida Avenue Northeast in NoMa. 

“It’s one of those normally after 10 years you’re going to sell, but if we sell it now we’re within the 15-year period, but the next buyer is not going to sell it in three years, so he’s outside of it — he’s underwriting TOPA,” Murphy said. 

He added that the 15-year exemption is “better than not” having it, but it doesn’t fully solve the problem. 

The TOPA exemption is expected to have the most impact on fueling new development, as investors of new construction will have a full 15 years to sell the building after it is delivered. 

“The front end of the curve is really what the impact is going to be,” Crayton said. “The top 50 developers — that are not in D.C. right now — in the country, may look at D.C. now and say, ‘Hey, the numbers look just as good as they do in North Carolina.’”

New development has to contend with other hurdles slowing starts nationwide, but there are signs the macroeconomic climate is shifting, such as the Federal Reserve cutting rates this month by 25 basis points. 

But many investors would still rather buy existing assets than deal with development costs, and brokers do expect the TOPA exemption to accelerate that market. 

“It's impossible to predict what will actually happen, but we would anticipate an increase in volume as soon as this becomes law,” Hastings said. 

Once the law goes into effect, a portion of the eligible buildings nearing the 15-year exemption threshold will be on an especially tight clock. 

“The merchant builders that built a property in 2011, 2012, 2013 — that burnoff period is coming soon,” Crayton said. “You may start seeing an increase in listings in that capacity.”

Industry players also said the exemption could affect the pricing of assets as it creates more competition.

“While TOPA was in place, I used to joke with investors and brokers in the market that we'd see a 25-basis-point decline in cap rates if TOPA was repealed,” Clauser said. 

In addition to shortening the exemption period, the council also removed the mayor’s proposed exemption for buyers that committed to institute an affordable housing covenant at the purchased property. 

The real estate community says that change represented a big blow to affordable housing development and preservation. 

“It would have been a benefit to affordable housing and incentivize more affordable housing developers to come to D.C. and build,” Ernst said.