DC Apartment Market Rebounds from Sequester
Transition's Impact Should be Minor
By Louis Rosenthal | Friday, December 9, 2016
Real estate magnate turned President-elect Donald Trump will ride into Washington, DC early next year to take up residence at, arguably, the hottest piece
of residential real estate in the world: the White House.
Many Trump administration bureaucrats and cabinet secretaries, along with the president-elect’s personal coterie of advisers, will soon be in the market for apartments in the DC area. Because the transfer of power involves little to no change in the quantity of positions to fill, the impact of a transition on the DC apartment market should be minor.
The DC apartment market is connected to politics (namely, budgetary decisions concerning federal employment), though the metro area’s fortunes rest primarily in larger supply and demand factors that operate separately from government.
Following a turbulent 2013 and 2014, which featured periods of negative rent growth, the Washington, DC metro area is finally showing signs of returning strength, even as rent growth (2.2% in October) remains well below the capital city’s long-term average (3.2%). On the optimistic side, job growth — a leading indicator for rent growth — has returned to above-average levels, averaging about 2.5% for 2016. The big question mark concerns the extent to which a batch of new supply (more than 11,000 new units) scheduled to deliver throughout 2017 will be absorbed.
Another major question concerns the operations of the federal government itself — primarily Congressional budgetary decisions — that impact Washington DC’s apartment market.
Consider, for example, the impact of across-the-board spending cuts enacted as part of the “sequester,” which went into effect in March 2013. Many federal agencies were forced to implement hiring freezes for the duration of the spending cuts. According to some estimates, 36% of all presently employed workers in DC work directly or indirectly for the federal government. This implies that any major changes in federal government employment levels could, in turn, impact the entire DC-area apartment market.
That is just what we saw. In early 2013, job growth among federal government employees turned negative, falling by as much as 4.5% in March 2014. Between 2013 and 2015, federal employment levels fell by 1.4%; however, non-federal government employment grew by 1.5%. The impact decreased federal employment had was severe enough to drag down total DC job growth. In short, while the DC job market was weak from 2012-2014, the decline in the later part of that period was almost entirely a product of job losses and slow job growth in reaction to the sequester.
That inevitably led to weakness in the apartment market. DC-area rents grew by 1.6% during the Great Recession, despite almost no job growth. From the start of the recovery until the sequester, rents grew by 3.9%, supported by a 1.6% increase in employment. Once the sequester began to take effect, however, rents fell on average by 0.2%, as job growth moderated to 0.6%. Since 2015, Washington, DC has seen significant improvement, with rents growing by 1.8% and employment by 2.2% as later budget agreements unfroze hiring in most federal agencies.
On the supply side, Axiometrics anticipates that more than 10,000 new units will have been delivered in the DC metro in 2016. This was slightly lower than the 11,000-plus new units delivered in 2015 and the 11,800-plus units expected for 2017 delivery — the largest single-year increase in metro DC since at least 1998.
Some 13% of the new supply in 2016 was concentrated within DC’s four urban-core submarkets, especially the Capitol Hill area. In contrast, the urban core accounted for 32% of 2014 deliveries and 15% of 2015 deliveries. The drop-off in urban core deliveries in 2015 and 2016, explains why rent growth is very similar among urban and suburban submarkets.
The similarity between suburban and urban-core rent growth in DC – 1.9% in the urban core and 2.0% in the suburbs since 2011 – goes against the national trend, which finds the suburbs outperforming the city center significantly. The gap between urban and suburban performance is unusually small in DC, which speaks to relatively low new supply levels in the urban core compared to the rest of the market.
Nevertheless, new supply is ramping up, generating concerns that DC might soon experience an apartment glut. However, the DC apartment market appears to be currently undersupplied relative to the number of new jobs being created within the metro area.
The run-up in rent growth that began in late 2014 occurred just as new supply levels were approaching their peak. Typically, we see rent growth moderate as new supply grows — but that’s not the case in DC, suggesting that, even with lots of new supply hitting the market, there exists enough demand to push rents (if at a below-average pace).
Looking forward, Axiometrics expects the DC metro to end the year with 2.2% rent growth, up from the 1.5% of 2015. In 2017, Axiometrics forecasts annual effective rent growth of 3.2%, driven in part by above-average 2.6% predicted job growth and higher absorption levels than new supply levels. Taking the longer view, Axiometrics projects strong average annual rent growth through 2021. In fact, among the top 120 metro areas in the country, Washington, DC is expected to rank in the top five for average annual rent growth in our forecast window (just behind the San Francisco Bay Area and Seattle).
In summary, the Washington, DC metro area’s apartment market saw a quick post-recession rebound, followed by a sharp slowdown in rent and job growth (partly because of the federal budget sequester). After more than two years of steady improvement, the nation’s capital appears to be on the brink of sustained rent growth levels above the metro area’s long-term average and the average of other major metro areas.