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D.C.-Area Apartment Pipeline Up 66%, May Slow Rent Growth

The pipeline of multifamily projects in the D.C. region has come roaring back, with 66% more units expected to deliver over the next 12 months than what came to the market in the last year.

Those new deliveries will likely moderate rent growth once they hit the market, providing relief to renters after a year of record-high increases.

Construction on Greystar's 756-unit Illume project in Navy Yard, as seen in May 2022.

This past quarter, rents metro-wide surpassed pre-pandemic levels, according to a new report from Delta Associates. The growing supply of new, Class-A multifamily units may put downward pressure on the high rent growth the region has seen over the past year, said Will Rich, president of Transwestern-affiliated Delta.

"The moderation [in rent growth] that we're starting to see in the market, that's something that we expected to see," Rich said. "One of the things that we were a little bit surprised about was the growth in the pipeline."

The number of new starts may soon surpass pre-pandemic levels. There are 41,443 units likely to deliver marketwide over the next three years, Delta found in its quarterly study. If the number of all planned and under-construction market-rate apartment units holds, 2022 would have the largest pipeline in over a decade.

Rich said a combination of factors, including the rapid growth in office-to-residential conversions and groundbreakings on large-scale projects, have led to that huge pipeline, which is largest in D.C. proper. 

"With the elevated office vacancy rate that we have in downtown, we expect that there'll be more conversions to come for multifamily," Rich said. "That trend seems to be accelerating."

Looking further out, the District's 36-month pipeline contains more than 18,000 units, higher than both Northern Virginia and suburban Maryland and 4,000 units above the District's own pipeline two years ago.

Recent deliveries include projects like Greystar's Illume, which has begun lease-up and is slated to deliver 756 units in the Capitol Hill-Riverfront-Southwest submarket once completed. But increasingly, that pipeline will be dominated by large-scale projects in the NoMa-H Street submarket.

Rents continued to rise quickly this past quarter: 12.8% year-over-year across all investment-grade multifamily properties in the region.

But the new units will have consequences for the broader market, softening rent growth most in those two submarkets where the majority of deliveries occur, Rich said.

"While there are projects that are going to be moving forward [elsewhere], it's not a significant amount of new product compared to the two areas that are adjacent to downtown that have the bulk of the supply,” Rich said. “Those areas are likely where you're going to see more softening of rents and a rise in vacancy, but not necessarily universally across all submarkets in D.C.”

One factor fueling the jump in scheduled deliveries is a lagging consequence of the pandemic. Many projects paused when the pandemic first shut everything down and are only just now getting back online.

The influence of those projects means that the explosive growth of the region's pipeline will likely moderate soon, much like rent growth is slowing after recovering from its pandemic slump, Rich said.

Even so, the contours of the market will be permanently changed. The Capitol Hill-Riverfront-Southwest submarket absorbed the most units over the past year, with over 2,000 units absorbed. But the NoMa-H Street submarket has the most deliveries, and with the Capitol Riverfront area slowly becoming built out, the District's still-growing appetite for rental units may shift into the Northeast quadrant.

The Washington Gateway development in NoMa, photographed in April 2020. Construction on the project's final phase is expected to begin in August.

Along with Upper Georgia Avenue, those submarkets are the only ones where average rents have not exceeded March 2020 levels, thanks in large part to a growing supply moderating rent increases, Rich said. 

"There are a significant amount of new projects coming online in those areas," Rich said. "That rapid rent growth ... is likely not to continue moving forward."

Looking ahead, market forces may begin to affect the long-term pipeline. Rich pointed out that the U.S. Bureau of Economic Analysis is scheduled to release its Q2 GDP numbers on Thursday, and should provide a clearer picture of whether the country is in a recession.

The mere idea of that economic environment, coupled with rising interest rates, has been enough for developers in Northern Virginia to warn that investment in the multifamily sector may slow, Bisnow reported on Thursday.

For now, those fears haven’t translated into meaningful changes in the industry, and may still prove unfounded. But Rich said he anticipates it’ll be an important issue to watch over the next quarter.

“It’s a bit early to tell, but in the next few months it may be more of a factor in decision-making for developers,” Rich said. “Being in an environment with rapidly rising interest rates would in some cases give developers pause when deciding whether to proceed with a project.”