STRONG RENT GROWTH WHILE VACANCY CONTINUES TO RISE
Suburban Maryland once again outperformed Northern Virginia and the District in terms of rent growth. Still, Northern Virginia was only slightly behind, recording year-over-year gains similar to Suburban Maryland for the first time in 2018. District year-over-year rent growth progressed at a modest pace of 0.7%. Vacancy increased 160 basis points in Suburban Maryland, while District vacancy increased a less significant 20 basis points. Northern Virginia’s vacancy decreased a notable 70 basis points from a year prior. Metro-wide class B rents increased 3.3% since December 2017, outpacing the Class A market’s 2.6% growth. All sub state areas experienced positive year-over-year gains.
- Suburban Maryland up 3.7%
- Northern Virginia up 3.5%
- District up 0.7%
- Metro-wide low-rise up 3.1%
- Metro-wide high-rise up 3.6%
Class B apartment rent growth continues to outpace Class A, rising 3.3% in the Washington metro area since this time last year. While rents continue to increase, vacancy fluctuations may start to stabilize in 2019. Several contributing factors will continue to impact vacancy and rents in the coming year:
1.Washington metro area Class B apartment market supported by job growth. We believe that job growth will continue to support a sturdy Class B apartment market in the coming years. Strong job growth has been occurring in the Leisure/Hospitality and Retail Trade sectors, with 10.1% of the metro population now employed in Leisure/Hospitality alone. Both industries have lower-wage jobs compared to other sectors, in turn generating greater demand for more affordable Class B apartments. Moreover, the highest job growth throughout the region remains in professional/business services. Entry level positions in this industry do not pay enough to support Class A apartment rents, making newly employed professionals in the sector search for Class B options with rents within their budgets.
2.Interest rates continue to rise. The Federal Reserve raised rates four times in 2018, after increasing the Federal Funds Rate three times in 2017. Two rate hikes are projected in 2019, with an additional hike expected in 2020. These rate increases have resulted in higher mortgage interest rates. As the Federal Funds Rate continues to rise, would-be homeowners may opt to rent instead, generating further demand in the metro area’s rental market.
3.New apartment deliveries put pressure on rents and vacancy. Delivery of new Class A units was historically high in 2018, although annual rent growth was the strongest it’s been since 2010. However, concessions for newly-leasing properties will suppress rent growth in selected Class A submarkets as property managers struggle to maintain occupancy. We expect to see declines in Class A rents in some submarkets, which places a limit on Class B rents to keep a reasonable spread between the two asset classes. Properties offering concessions will likely see lower vacancy rates as they attract new residents.
4.Renovation activity is building and will continue to have an impact on rents. Over 18,000 Class B units are under renovation in the metro area. As these improvements are completed, properties with revamped apartments will achieve premium rent prices.
Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals which has been providing consulting and subscription data services to the commercial real estate industry for over 35years.
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