Georgetown-Uptown Multi-Family Submarkets Q4 2018

Adams Morgan/Columbia Heights Submarket Overview

There are many neighborhoods that can claim to be among D.C.’s most popular, but the Adams Morgan/Columbia Heights submarket boasts a few. Adams Morgan, U Street, Columbia Heights, Mount Pleasant, and Petworth comprise the submarket. While these are older, established submarkets, U Street and Columbia Heights prove that transformation is underway.

The submarket’s inventory expanded by 14% since 2010. U Street is the main beneficiary, delivering more than 1,000 units since 2010. That, combined with retail development, has U Street emerging as a renter’s favorite. But they’ll have to pay the price, as rents in these properties average $3.90/SF.

Rents average $2,000/month, but new supply commands a significant premium. The handful of projects that delivered in Adams Morgan since 2010 average more than $4.10/SF, on par with new deliveries in DuPont, Shaw, H Street, and the Navy Yard. The Hepburn is one of the most recent examples. The project delivered in August 2016, with asking rents averaging $4.80/SF. The project reached full occupancy in five quarters while offering minimal concessions. This premium goes for the other neighborhoods as well.

Columbia Heights and Mount Pleasant average $3.60/SF for new deliveries. Petworth, the most recent emerging neighborhood in the northern part of the submarket, has new deliveries averaging $2.70/SF, about 10% above the neighborhood average.

The submarket has one of the tightest vacancy rates, impressive when considering the amount of new supply. Brief periods of vacancy expansion did occur when new projects delivered, but they were quick to stabilize. It appears the submarket is reaching a new normal. The historical vacancy is about 6.5%. With new demographics and consistent demand trends, it appears the new average could be closer to 5%. The pipeline should remain full in the coming years as developers take advantage of this growing demographic shift, but it could come at the cost of elevated rent growth.

The submarket’s cyclical rent growth is its one blemish. Cumulative growth since 2010 reached 20%, or about 2.5% per year. The majority of that growth was frontloaded in the earlier years of the cycle, when a substantial wave of demand led to occupancy increases. The recent vacancy volatility led to just an average of 2.2% annual gains over the past three years. Most of the positive rent growth was from 1 & 2 Star and 3 Star properties. They make up the bulk of the inventory, and as rents get more expensive at the top-end, many renters look to more affordable options. The spread between a 3 Star and 4 & 5 Star property is large, so owners in these properties still have room to grow. But this slow growth did little to deter investors.

Cyclical volume ranked the submarket in the top 10 at more than $1.5 billion. The majority of those sales came from 4 & 5 Star properties in the early years of the cycle. Sales have been trending down since the peak in 2014, but this year demonstrated that there is still interest when opportunities arise. The Ellington sold for $118 million, and The  Elysium Fourteen sold for $43 million this year, both located near U Street.

Connecticut Ave Northwest Submarket Overview

Historically, the Connecticut Avenue/Northwest Submarket has some of the steadiest apartment fundamentals in the D.C. metro, and despite several jumps in vacancy over the past few years, levels have recovered and are below the metro average. Rent growth has been weak for several years but has shown signs of life so far this year. A rebound in growth could continue since new projects continue to be held up by local neighborhood commissions and lengthy approval processes.

Population growth here lags behind the metro average, and the demographic story is weak compared with those of neighborhoods like Petworth, Shaw, Columbia Heights, or H Street/NoMa. But the submarket could appeal to investors seeking supply-constrained areas skewed to 3 Star inventory that offer value-add opportunities. Plus, the submarket’s ease of access to D.C.’s largest job centers, paired with strong job growth in the region over the past year, bodes well for long-term demand and makes this one of the steadier submarkets in the region.

Georgetown/Wisconsin Ave Submarket Overview

The submarket’s status as one of D.C.’s most desirable submarkets persists, but more from a homeowner’s perception, not a young renter’s. Renters searching for brand new apartments in a vibrant neighborhood that provides nightlife and entertainment typically go to other submarkets, rather than Georgetown/Wisconsin. Demand over the past couple years has been lacking as renters migrate east to hot neighborhoods like H Street/NoMa and Southwest/Navy Yard.

Several projects delivered in recent years, but not anywhere near as much as other areas of the District, largely because the Historic Preservation Review Board (HPRB) and local Advisory Neighborhood Commissions (ANCs) make building in Georgetown/Wisconsin Avenue difficult. Also contributing to the lack of development is the historically low rent growth. Rents in a good year have grown at about inflationary levels, keeping wouldbe developers in other areas of the metro as a means to achieve better yields. This has kept the submarket’s inventory predominately older with few units. The purchase of the Adams-Mason House demonstrates just that: The property was built in 1812 and has just 8 units but sold for more than $530,000/unit.

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