SOUTHEAST SNAPSHOT, MAY 2005

Washington, D.C. Multifamily Market

Drew White, Director Cushman & Wakefield Capital Markets Group

The strength of the apartment market is evident from the various market indicators. Rental rates grew by more than 4 percent in 2004, with gains being particularly strong in Northern Virginia and the District of Columbia. Average rents for Class A and B apartment properties are $1,284 for Northern Virginia, $1,161 for Suburban Maryland and $1,685 for the District. Vacancy rates are phenomenally low, with the D.C. metro area having 2.1 percent vacancy rate in third quarter 2004, the lowest in the nation. Vacancy rates are expected to remain low through 2007 as home prices continue to increase and people shift from buying to renting.

Several different types of condominium projects are being developed throughout the area, supporting the explosion of success in the D.C. multifamily sector. Mixed-use projects are very popular, as developers are catering to the live/work/play lifestyle and many larger-unit condo projects are being constructed to target empty nesters. Some examples of these types of developments are Beauregard in the U Street Corridor, with an average condo size of 1,150 square feet; Monroe at Virginia Square, averaging 1,480 square feet per unit; and Byron in Falls Church, which has condos averaging 1,600 square feet. Typical condo tenants in the area include first-time homebuyers unable to afford single-family homes, workers seeking closer proximity to their places of employment, and empty nesters seeking to downsize or simplify their lives.

Apartment development trends are leaning in the same direction as condominium construction. Developers of urban projects are seeking in-fill locations, especially in high-density areas and mixed-use projects located near mass transit. Tenants choosing apartment rentals in more suburban locations are those who are looking to rent instead of buy because of higher interest rates and general housing affordability. The in-town renters choose to pay a premium for the urban locations’ accessibility to jobs and entertainment.

As the market continues to thrive, the D.C. area is seeing an abundance of significant projects under development across all submarkets. In Suburban Maryland, Adagio in Bethesda sold out in 1 month, with sales averaging $566 per square foot. Also in Bethesda, Crescent Plaza sold 93 percent of its units in 2 months. In Columbia Heights, Kenyon Square is demonstrating how far the growth has reached, as it features a blend of market-rate and affordable units in an area that generally is considered on the fringe of the metro region. Furthermore, the Wax Museum, containing 441 units, and Square 516, containing 372 units, are being developed in the Penn Quarter. The latter project is bringing ground-floor retail with an anchor grocery store to an area that previously lacked retail development. Finally, Summerfield at Brambleton has been very successful. In only 3 months, this suburban Loudon County large market and affordable unit project already has sold 50 percent of its stock.

The District and Northern Virginia have reaped the most benefits from the Federal Government fueling job growth. Developers are seeing Northern Virginia more positively than Maryland because the area is more pro-business and the Defense Department is located there.

Looking toward the future, the urban sector is primed for ancillary development. As larger project sites already have been purchased, developers are seeking out new areas such as southeast and southwest D.C. With a large supply of office space being delivered in the next 18 months, residential units will be in even higher demand. In the suburbs, Loudoun and Howard counties are set for the most development.

The outlook for the Washington, D.C., multifamily market remains increasingly positive. Job creation, rising prices for single-family homes and favorable demographics bode well for the market, and these factors will continue to fuel strong demand for multifamily units. Strong absorption and moderating new supply has translated to positive market trends, and with moderate construction continuing, rental units should be absorbed without significant competition.

— Drew White, director, Cushman & Wakefield Capital Markets Group

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