Capitol Hill Multi-Family Submarket Overview
The identity of this iconic Washington, D.C. neighborhood is slowly changing. Developers added a significant number of high-end, luxury units to the streets of Capitol Hill this cycle, expanding the apartment inventory by 25%. Developers like Foulger-Pratt and Donatelli Development are transforming entire blocks with the additional supply underway.
Demand for apartments is untested because this type of inventory has never historically been available. Most renters opt for an English basement, which helps explain why developers never built here. With the popularity of H Street to the north and Navy Yard to the south, Capitol Hill is becoming a viable option for development. But it is taking time for these recently delivered projects to stabilize. Last year’s vacancy expansion was notable, and the two properties that delivered averaged just seven to eight units leased per month.
Competing for renters is difficult. The submarket is sandwiched between H Street and Navy Yard, enticing renters away from Capitol Hill to these trendier neighborhoods. Apartment owners must also compete with residents who come to the area to buy a home. Capitol Hill homes are among the most desirable in D.C., and the wealthy residents pay the premium for living here.
Strong fundamentals led to significant rent gains in the early years of the cycle, but recent weakness slowed that growth. The high-end market was particularly soft, as 4 & 5 Star properties underperformed relative to 3 Star properties. But that could likely be explained by the significant gap between 3 Star rents and 4 & 5 Star rents. Owners in older properties have more room to push rents, while the influx of competition in 4 & 5 Star rents hamstrings owners.
Sales volume is typically low because of the limited inventory. When properties do trade, like the handful of deals this year, pricing is reflective of the smaller apartment complexes. Institutional players being priced out of H Street, Downtown, and Southwest/Navy Yard were able to find a few opportunities earlier this cycle. And with even more projects delivering in the coming years, Capitol Hill might remain in their focus.
H Street/NoMa Multi-Family Submarket Overview
The H Street/NoMa Submarket is a darling among real estate developers chasing the increasing number of young, high-earning renters moving to the area. This attracted an influx of new supply that kept this cycle’s vacancy rates well above the metro average, which peaked at over 30% in 2013. The submarkets transformation was extraordinary. More than 6,000 units delivered this cycle, the most to any single submarket. The inventory quadrupled and rents are now among the metros highest. Millennials continue to drive the strong demand needed to help vacancy recover as construction continues unabated. Occupancy volatility hampered both rent growth and sales volume performance recently. Years of 1,000-plus unit deliveries prevented landlords from pushing rents as competition at the top of the market was tight. Investors are wary of these slow rent increases, as well as high vacancy rates in many new deliveries. More units were underway at the start of the 18Q4 and it may take time before vacancy reaches equilibrium.
Southwest/Navy Yard Multi-Family Submarket Overview
Fundamentals are outperforming, remarkable for a submarket that added more than 6,000 high-end units in the last 10 years. Occupancies are above the three-year average thanks to record net absorption. Landlords benefit from a growing base of young, wealthy renters willing to pay higher rents for better access to neighborhood amenities. Another substantial wave of projects should deliver in the coming years, again raising questions of over-supply. The sale of the Onyx earlier this year is the first trade in more than two years, signifying optimism not just for developers, but also for other investors.