Multifamily Research

Market Report Third Quarter 2018

Washington, D.C., Metro Area

Investors Broaden Their Approach As

Development Stays in Familiar Areas Multifamily 2018 Outlook

Healthy rental demand reflected in falling concessions. Job 11,900 units Construction:
opportunities continue to draw recent college graduates and young will be completed Deliveries slow from the 14,500
professionals to Washington, D.C., a trend that is aiding demand units completed in 2017.
for apartments. The 20- to 34-year-old cohort, a prominent renting Multiple neighborhoods in D.C.
demographic, is growing at more than double the national rate. and Northern Virginia will each
At the same time, concessions are falling, improving effective rent receive over 1,000 units.
growth. At the start of 2017, over 25 percent of properties in the
market were offering some form of concession on rent. Six months 20 basis point Vacancy:
later, that ratio is down to 15 percent, the lowest that measure has Continued development is placing
increase in vacancy
been at in five years. Vacancy would also be declining if not for the a strain on vacancy rates in certain
impact from completions. areas, pushing the metrowide level
up to 5 percent. In 2017, vacancy
Construction set to moderate, vacancy strained in near- rose 10 basis points.
term. Fewer openings are expected overall in 2018 compared
with 2017, but numerous arrivals in several already well-supplied 3.6% increase Rents:
submarkets will place short-term pressure on vacancy. This is the The average effective rent climbs
in effective rents
case for Navy Yard and Tysons Corner, where vacancy has risen 3.6 percent in 2018 to $1,740
80 basis points year over year in each location. Development per month, aided by falling con-
elsewhere is faring better. In East Alexandria, a record 1,400 units cessions. Last year, rates rose
are in the pipeline, yet vacancy has fallen 60 basis points in the 1.9 percent.
past 12 months. As development shifts to less unitized areas over
the next two years, vacancy pressures will abate.

Investment Trends
• Trading activity picked up a modest amount in Northern Virginia
Local Apartment Yield Trends and suburban Maryland during the 12-month period ending
Apartment Cap Rate 10-Year Treasury Rate in June. Investors interested in Class A assets looked toward
Virginia, especially in the Greater Alexandria area. The average
12% sale price for such assets is $40,000 to $150,000 less per
unit than the District’s average of $409,000 per rental, with
9% comparatively favorable measures of vacancy and rent growth.
Rate

6% • Demand for high returns and competition over available listings

has driven some investors into the secondary and tertiary
3% markets of suburban Maryland, raising sales velocity in the
region. Several deals were made for Class B properties in
0%
00 02 04 06 08 10 12 14 16 18* Frederick and Montgomery counties, with average first-year
yields of 6 percent, 100 basis points above the market average.
• Foreign investment in the market surged from 6 percent to
Sales Trends 15 percent of dollar volume in 2017, and that ratio is holding
Sales Price Growth constant so far this year, with prominent transactions involving
* Cap rate trailing 12-month average through 2Q; Treasury rate as of June 28.
buyers from Sweden, Mexico and Germany.
ce per Unit (000s)

Sources: CoStar$240Group, Inc.; Real Capital Analytics 16%

Year-over-Year

$180 12%

$120 8%
Washington, D.C.
2Q18 – 12-MONTH PERIOD
Employment Trends EMPLOYMENT:
Local Apartment Yield Trends

4%
Metro United States
1.4%
Apartment Cap Rate 10-Year Treasury Rate
increase in total employment Y-O-Y
Year-over-Year Change

12%
• Roughly26,200 positions were added during the first half
3% of the year, contributing to the 47,200 jobs created during
9%
the past 12 months. Hiring cut the unemployment rate 20
2%

Rate
basis points to 3.5 percent during this time.
6%
1% • The professional and business services sector expanded
3%
by 13,500 personnel. About 15,500 employees joined the
0%
0%education and health services sector as well.
14 15 16 17 18* 00 02 04 06 08 10 12 14 16 18*

Completions and Absorption CONSTRUCTION:

Sales Trends
Completions Absorption 12,900
Sales Price Growth
units completed Y-O-Y

Average Price per Unit (000s)

$240 16%
20 • Construction slowed from the 15,400 apartments

Year-over-Year Growth
completed in the 12-month period ended
$180 12% in June 2017.
Units (000s)

15
Navy Yard, Tysons Corner and Reston received the most
$120
new units over this time period. 8%
10

5
• $60
More than 19,300 completions are scheduled
4% through
2020. The largest project is the 677-unit Boro in Tysons
0 $0 0% in 2019.
Corner, which is expected to be delivered
14 15 16 17 18* 14 15 16 17 18*

Vacancy Rate Trends VACANCY:

Metro United States 10 basis point decrease in vacancy Y-O-Y
6%
• The removal of 2,000 units over the past year ended in
5% June allowed the absorption of roughly 11,000 units to
Vacancy Rate

offset supply additions, dropping vacancy to 4.4 percent.

4%
• Fewer completions and improved demand for Class A
3% rentals helped push the vacancy rate in Northeast D.C.
down 180 basis points year over year to 4.3 percent, the
2% largest decline for any submarket in the metro.
14 15 16 17 18*

Rent Trends RENTS:

Monthly Rent Y-O-Y Rent Change 2.2% increase in effective rents Y-O-Y
$1,800 4% • The average effective rent in the market improved to
Year-over-Year Change
Monthly Effective Rent

$1,730 per month over the past annual period after

$1,600 3%
appreciating 2.3 percent during the prior year.
$1,400 2% • Rent growth was most pronounced among Class C
properties as the average amount advanced 3.8 percent
$1,200 1% to $1,341 per month in the year ended in June. Rates
rose the most for such units in East Alexandria.
$1,000 0%
14 15 16 17 18*

* Forecast
 Multifamily Research | Market Report

DEMOGRAPHIC HIGHLIGHTS

FIVE-YEAR POPULATION GROWTH* 2Q18 POPULATION AGE 20-34 2Q18 MEDIAN HOUSEHOLD INCOME
(Percent of total population)
291,900 Metro 22% Metro $100,683
U.S. Median $61,179
U.S. 21%

1Q18 TOTAL HOUSEHOLDS

FIVE-YEAR HOUSEHOLD GROWTH* POPULATION OF AGE 25+

PERCENT WITH BACHELOR’S DEGREE+**
35% Rent

157,000
Metro 48% 65% Own
U.S. Average 29%
* 2017-2022 **2016

Lowest Vacancy Rates 2Q18 Investment Landscape Still Growing; Buyers

Spread Outward to Chase Returns
Y-O-Y
Vacancy
Employment Effective Y-O-Y %
Submarket Basis PointTrends Local
• Transaction Apartment
velocity improvedYield Trends
roughly 9 percent during
Rate Rents Change
Change
Metro United States the previous four
Apartment Capquarters
Rate as10-Year
intensified competition
Treasury Rate
4% raised the average sale price for the ninth consecutive
annual
12%period to $216,300 per unit.
Year-over-Year Change

Southeast D.C. 3% 2.9% -80 $1,176 3.4%

SUBMARKET TRENDS

• Over 9%
the same span, the average initial yield fell 10
Hyattsville/Riverdale2% 3.2% 0 $1,364 2.9% basis points into the high-4 percent band.
Rate
SALES TRENDS

6%
Outlook: Rising prices and falling cap rates inside
1%
Manassas/Far Southwest
Suburbs
3.5% 10 $1,409 3.8% the District
3% will motivate more investors to consider
opportunities in secondary and tertiary markets outside
0%
East Silver Spring/Takoma of the primary
0% Virginia and Maryland suburbs where cap
14 3.7% 15 40 16 $1,359 17 1.6% 18* 00 02 04 06 08 10 12 14 16 18*
Park/Adelphi rates can still exceed 6 percent.

Downtown Silver Spring 3.8% -10 $1,815 1.3%

Completions and Absorption Sales Trends
Reston/Herndon 3.9% -30 $1,833 1.2% Sales Price Growth
Completions Absorption
Average Price per Unit (000s)

West Fairfax County 3.9% -40 $1,773 2.7% $240 16%

20
Year-over-Year Growth

$180 12%
Units (000s)

Fredericksburg/Stafford 4.0% 20 $1,259 2.5%

15

Seven Corners/Bailey’s10 $120 8%

4.0% 30 $1,619 2.1%
Crossroads/Annandale
$60 4%
5
Overall Metro 4.4% -10 $1,740 3.6%
0 $0 0%
14 15 16 17 18* 14 15 16 17 18*

* Trailing 12 months through 2Q18

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States
6%
Multifamily Research | Market Report

By WILLIAM E. HUGHES, Senior Vice President,

2Q18 Apartment Acquisitions
By Buyer Type Marcus & Millichap Capital Corporation
• Healthy economy and inflationary pressure drive rate in-
Other, 1% Cross-Border, 9%
creases. The Federal Reserve appears committed to normal-
izing the fed funds rate, but further action could be restrained
Equity Fund this year as headwinds could weigh on the economy. Economic
& Institutions, 23%
growth and inflation have had a dramatic effect on the 10-year

CAPITAL MARKETS
Treasury rate, which has more than doubled over the past two
Private, 63% years to 2.85 percent. However, capital inflows as investors
Listed/REITs, 4%
seek alternative investment options are holding the rate below
3 percent.
• Borrowing costs rise, cap rates remain compressed. Debt
Apartment Mortgage Originations providers are facing a rising cost of capital, leading to higher
By Lender lending rates for investors. To compete for loan demand, some
100% lenders may choose to absorb a portion of the cost increas-
es while others will require higher equity stakes up front. More
Percent of Dollar Volume

75% Gov't Agency complex and creative approaches to financing properties may
Financial/Insurance begin to emerge as investors seek to reach return objectives.
Reg'l/Local Bank
50%
Nat'l Bank/Int'l Bank • Lending market remains competitive as interest rates
CMBS rise. Government agencies continue to consume the largest
25% Pvt/Other
share, just slightly over 50 percent, of the apartment lending
market. National and regional banks control approximately a
0%
12 13 14 15 16 17
quarter of the market. Multifamily interest rates currently reside
in the mid-4 percent to mid-5 percent realm with maximum
Include sales $2.5 million and greater
leverage of 75 percent. Portfolio lenders will typically require
Sources: CoStar Group, Inc.; Real Capital Analytics loan-to-value ratios closer to 70 percent with interest rates in
the low-4 percent to low-5 percent span.

National Multi Housing Group Washington, D.C., Office:

Visit www.MarcusMillichap.com/Multifamily
Matthew Drane Regional Manager
Tel: (202) 536-3700
John Sebree matthew.drane@marcusmillichap.com
First Vice President, National Director | National Multi Housing Group
Tel: (312) 327-5417 7200 Wisconsin Avenue
john.sebree@marcusmillichap.com Suite 1101
Bethesda, MD 20814
Prepared and edited by
Cody Young
Research Associate | Research Services

For information on national apartment trends, contact:

John Chang
Senior Vice President, National Director | Research Services
Tel: (602) 707-9700
john.chang@marcusmillichap.com

Price: $250

© Marcus & Millichap 2018 | www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment
growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intend-
ed to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered
as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; National Association of Realtors; Moody’s Analytics; Real Capital
Analytics; RealPage, Inc.; TWR/Dodge Pipeline; U.S. Census Bureau