Looking Back: The Good News
Despite tough economic times and record apartment vacancy rates nationwide, DC’s rental market “is holding up quite well,” says Montgomery. “Vacancy rates are not as elevated as we thought they would be at this time when we were looking out 12 months ago.” To see the full picture, he notes, you can’t just look at the overall numbers for DC; you have to pay attention to subm
arkets. In particular, if you pull out the Capital Riverfront sub-market (where 4 new properties were built within a 24-month period), rent growth for metro DC goes from negative to positive.In fact, the region is seeing record-high rates of existing and new rental units being occupied – or what Montgomery refers to as “absorption.” If you’re a landlord, this is exactly what you want to see given the current market. “To improve the market, you need to absorb more than you’re delivering. And the good news is, we will be delivering even less this coming year.” Montgomery identified two main factors that have boosted absorption and cushioned the blow of the economic downturn for the rental market:
1. More renters. In the early 2000s, the renter vs. owner ratio shifted significantly in favor of owners. Now we’re seeing a big shift back to the historical norm. “People who in 2005 would have bought a house are renting today … just like they would have in 2000.”
2. Job growth. While job growth has been weak in the economy overall, “the job sectors that populate [higher end] rentals are still gaining jobs … professional services, government jobs, health, and education jobs.”
Looking Ahead: The Better News
So as bad as conditions are for some landlords, these trends have saved them from becoming worse. The better news for landlords, argues Montgomery, is that “there’s light at the end of the tunnel.” And a key reason is that new construction, so prevalent in recent years, is grinding to a halt. At the start of 2009, there were over 50 rental properties in the market that had recently been built. Since then the number of new properties has been declining, and the pace of that decline is accelerating rapidly.
New properties are now down to around 35. And towards the end of this year, they “are going to fall of a cliff. … It’ll be like back in the middle of the condo boom when [apartment properties] weren’t being built because they were becoming condos, but this time there just won’t be any [buildings]. Or you’ll get 1 or 2 [new buildings] a quarter, rather than say 8.”
The result: “vacancy will start to decline in 2011, and really dive in 2012” and “the market will change from a renter’s market to a landlord’s market within the next 36 months … In submarkets where demand is strong, this may happen sooner.”
Montgomery’s advice in the meantime: “watch the bottom line”. “Rent growth will not really be found this year marketwise,” so the key for now is “how well you operate the property rather than rent growth. It’s about managing your costs and expenses. That’s what you can control.”
Key Numbers
And now for the key 2009 year-end numbers for the Washington Metro area from Delta Associates' new report:
Vacancy Rates
Overall: 4.3% (vs. 4.3% in 2008)
Class A: 3.6% (vs. 4.4% in 2008)
Class B: 5.2% (vs. 4.2% in 2008)
Absorption
Total: +6,061 units
Class A: +7,955 units (record)
Class B: -1,894 units
Concessions
Class A Existing: 7.2% (off monthly rent) (vs. 5.7% in 2008)
Class A New: 15.7% (vs. 11.5% in 2008)
Next month, we’ll continue our talk with Grant Montgomery, this time focusing on implications and tips for renters.
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