The Washington metropolitan area, colloquially known as the “DMV” region, has been a perennial favorite for multifamily capital, particularly pension funds, life companies, family offices, and other institutional investors and is often regarded as ‘recession-proof’. “There’s no shortage of capital pursuing multifamily assets in D.C. Whether it’s the Metro expansion, Opportunity Zones or Amazon’s HQ2, the job and population growth make D.C. and the surrounding areas not only a strong market for local investors, but large pension funds, institutional money and overseas investors,” REBusinessOnline wrote at the end of 2019. As we all know, 2020 has been a year like no other. What impact has COVID-19 and recent economic turmoil had on this market’s luster, and what do the prospects look like for investors, owners, and operators in the long term?
From the initial shutdowns in March to the continued uncertainty of today, cities with heavy representation in retail, tourism, and service sectors have experienced significant economic repercussions from COVID-19. In Washington, D.C., by contrast, having the federal government as the city’s largest employer has served as a major buffer. D.C. experienced a particularly acute government-mandated economic shutdown from March – May. To illustrate, while payroll performance in the District of Columbia’s leisure and hospitality sector declined nearly 60 percent from May 2019 to May 2020, jobs in this sector account for less than 5 percent of the city’s workforce. Jobs in government, which actually increased slightly from May to May, account for roughly one-third of the District’s workforce. Stabilized vacancy rates have approached 7 percent and asking rents have dropped in that same time period. However, the D.C. Metro’s response to the crisis has been one of the most robust, with local economy currently 90 percent + open for business and no signs of a dip back into lockdown.
In addition to dozens of federal agencies and departments, the greater metropolitan area is home to private sector employers like Fortune 500-ranked Capital One Financial and Freddie Mac, defense contracting giants like Lockheed Martin, global consulting firms like Booz Allen Hamilton and Deloitte, and, of course, the four million square feet of Amazon’s much-coveted, energy efficient HQ2, expected to employ over 25,000 people.
Workers in the metropolitan area also tend to be well compensated. In 2019, Loudoun, Fairfax, Howard, and Arlington counties and the Virginia city of Falls Church reported the nation’s highest median household incomes, with Loudoun topping the list with a median household income of $129,588. As unemployed workers struggle to make ends meet, the metropolitan region’s well-compensated, white-collar professionals—many of whom were able to continue business as usual from remote offices—keep paying their bills.
Vacancy rates for properties that have been open for leasing at least a year remain low, peaking at just over 6 percent earlier in the year. That being said, bolstered by diversified job growth, the market has a substantial supply pipeline with 12,000 units already delivered in the past 12-months and another 31,000 under construction, which will increase inventory by another 6 percent. That’s the third largest pipeline in the country.
However, the luxury apartments in the area have been influenced by the pandemic-induced slowdown, with the average rent of a luxury, Class A, D.C. apartment falling from $2,649 a month in June 2019 to $2,561 a month in June 2020.
As the pandemic turns the corner into its eighth month, D.C. residents put a significant amount of value into where they live. Pet friendly, light, bright, airy open spaces have become the preferred living situation and renters and homeowners are putting more stock into ‘the home’ itself rather than the location. As the world continues to shelter in place, residences that can support a ‘work from home strategy’ while offering an improved quality of life are in favor. The median home price of D.C. rowhomes exceeded $800,000 in July, and the value of homes in the region are 13 percent above July of 2019. Meanwhile, D.C. still retains its status as the forefront of the national apartment market. Renters by choice are opting to spend more time at home than ever before. Where Metro-served locations were once the favored assets, properties that prioritize open spaces, outdoor areas, a keen focus on indoor air quality, and expanded living spaces with a sense of place are now strongly in favor. Washington, D.C. is a consistent ‘safe-haven market’ and historically thrives during downturns relative to the rest of the country.
This is due to the strength of the federal government employers and contractors and the expansion of the federal budget shows no signs of slowing down. Manageable risk, with low volatility and a focus on the long game, is a hallmark of the Washington, D.C. market. Cap rates have remained at 5.7 percent–5.8 percent over the past five years. “At the beginning of the year, secondary and tertiary markets were picking up yield with their shorter commutes, lower taxes, and costs of living. Steadiness wasn’t as big of a selling point,” said Walker & Dunlop Director Nicole Brickhouse. “Now investors are rediscovering its appeal.” While investors took a break in the second quarter to ascertain the impact of the pandemic, sales began increasing early in the third quarter, albeit some with income guarantees.
According to an analysis by the Metropolitan Washington Council of Governments, the metro area needs 320,000 housing units by 2030—and these units need to be in price ranges residents can afford. “Even at higher income levels, many renters are paying more than 30 percent of their income on housing, and some find homeownership out of reach,” according to the Urban Institute. “Lower-income residents, meanwhile, are getting further priced out of the market.”
Fortunately, affordable housing remains active in Washington, D.C. Much of this is due to Mayor Muriel Bowser, who has a six-pronged strategy for affordable housing in the District of Columbia and set a goal of 36,000 new units by 2025, with 75 percent for middle and low-income families. Also providing vital support are the many programs of Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA). “These agencies were designed to provide liquidity in a crisis like this, and they’re delivering on their promise,” said Walker & Dunlop Director Colin Coleman. On April 30, Walker & Dunlop closed on a $2.4 billion Fannie Mae Credit Facility to refinance 67 multifamily properties in the Washington, D.C. area, the largest facility in Fannie Mae’s history. The portfolio of the borrower, Southern Management Corporation, includes 22,439 units total, over 60 percent which qualify as mission-driven affordable housing under FHFA guidelines. Affordable housing is being financed in a variety of neighborhoods, including those making headlines for mixed use/Class A development. One example is 1550 First Street. Future residents will live close to the new soccer and baseball stadiums, the Waterfront and Navy Yard Metro stations, and new luxury developments like the RiverPoint.
The region’s biggest story for new development, of course, has been National Landing neighborhood, home to Amazon HQ2, the Virginia Tech Innovation Campus, over 50,000 jobs, and over 15,000 residential units with another 6,800 in the development pipeline.
As COVID-19 lockdowns spur renters to crave more living space and outdoor space, keep an eye on suburban submarkets with access to public transportation, such as Dunn Loring-Merrifield in Virginia and Largo in Maryland. Meanwhile, big marquee projects remain a Washington, D.C. staple. The Wharf at the Navy Yard/Waterfront, for example, is entering Phase 2 of development, with 255 apartments, 95,000 square foot retail, 549,000 square feet of office space underway.
“Suburban value-add and infill core plus opportunities continue to generate the most interest from buyers,” said Walker & Dunlop Director, Will Harvey. “Activity remains strong given the current rate environment and as soon as rent growth increases, owners will recapture their pricing power.”