Overview – Apartment fundamentals in Downtown D.C. continue to strengthen after inventory increased by about 25% since 2010. Vacancies, which reached the double digits in 2013 and 2014, regained their footing in 2018 and were again below the historical average. Recently delivered projects have been leasing well. In fact, almost all of the absorption came from 4 & 5 Star buildings over the past three years. As developers provide new living alternatives in Shaw, Mount Vernon Triangle, and Chinatown, it appears many residents are trading up for these apartments.

Rents suffered from a slowdown in demand from 2016- 17 but made considerable gains last year. Concessions are still relevant in apartments built in 2018 but are hard to find in older properties. It appears Downtown D.C.’s supply-side concerns are in the rear-view mirror as only a handful of small apartments were under construction at year-end. This could further improve occupancies and rent growth, with the potential to lead to further sales.

Sales activity has been muted after the record level of volume from 2010-15. Only a few properties traded last year and after the flurry of activity earlier this cycle, the disparity between what’s available and at what price point has left many companies targeting other submarkets. Looking forward, Downtown D.C.’s reputation as one of the most sought-after residential submarkets in the metro should keep developers and investors coming back over the long term.

Vacancy – Downtown is frequently considered one of the trendiest places for young professionals to live. Its central location provides proximity to many Metro stops and puts it within walking distance of major job nodes in the CBD, East End and West End. Retail amenities are abundant, too, with Whole Foods Markets near Logan Circle and Foggy Bottom and a Trader Joe’s on 14th Street. The more than 30 fitness centers or gyms here cater to the fitness-focused residents, and the submarket also offers culture and nightlife, with a wide range of fine dining and fast-casual restaurants.

Demographics in the Downtown Submarket are an apartment owner’s dream. Foggy Bottom, Dupont Circle, and Logan Circle were among the first areas of popularity in D.C., but it appears there has been a demographic shift in recent years. Many of the young renters that made this area popular have continued moving east to neighborhoods like H Street, NoMa and the Capitol Riverfront. Filling that backspace is an older, educated renter base. These professionals typically work Downtown, as the average household income is almost $130,000/year, making the $2,500/month average rents affordable.

These favorable demographics led to a significant supply wave, which hit earlier than in most submarkets. More than 3,000 units delivered from 2014–18, and it took almost two full years for vacancies to return to pre-supply levels.

New construction is generally met with strong demand because of residents’ high incomes and propensity to rent. These tailwinds boosted leasing at the submarket’s newest properties. The 5 Star, 197-unit Legacy West End delivered in March 2018 and was about 87% occupied as of Q4 2018. More recent deliveries, like the Lydian and the Lurgan have also leased quickly.

Rents – Rent growth rebounded late last year, after going sharply negative in 2017. Rents fell in response to vacancy increases because of negative absorption and new supply. Year-over-year rent growth of about 2% as of Q4 2018 was still below the historical average, but significantly outperformed the three-year average of about 0.5%. Leasing is likely to pick up over the next few months, and with a pipeline that has largely emptied, that positive momentum could give way to further rent gains.

The submarket remains one of the most expensive in the metro. Average asking rents for newly constructed apartments were roughly $4/SF as of 18Q4, a 20% premium over the overall submarket average. But Downtown is facing more competition from neighborhoods like H Street and Navy Yard, both of which have experienced abundant construction and can provide renters with similar amenities and Metro access in desirable neighborhoods. As a result, both of these submarkets are priced similarly.

Downtown D.C. has one of the largest disparities between 3 Star and 4 & 5 Star rents. On average, the premium is about 40%. This has led to significant rent increases in 3 Star properties. From 2010-18, 3 Star rent growth totaled about 200 basis points more than 4 & 5 Star rent growth.

Properties built in 2018 are still offering concessions. The Lydian and the Lurgan, both built this year, were offering one month of free rent on a 12-month lease at year-end. The Legacy West End and Apartments at Westlight were offering concessions on two-bedroom floor plans.

Downtown DC Multi-Family Report Q1 2019