Yet it was that slowdown in the sales market--specifically, condominiums--that put significant pressure on the region last year as shadow rentals pushed supply up, while a weaker economy and moderating job growth impacted demand. The good news this year is that the supply pipeline, which peaked in the fourth quarter of 2007, is declining and landlords are increasingly able to bump up rents, despite vacancies. For the fourth quarter in a row, annualized absorption of class A units tops 5,000, and, importantly, the presence of the shadow market is being felt less as absorption and rent figures are showing strength or both class A and B product.
As of the third quarter, the stabilized vacancy rate for the DC metro area came in at 3%, up a mere 10 basis points from the prior year, and half the national rate of 6%. Overall rent growth remained modest--2.9% since September 2007, below the long-term annual average of 4.5%--but class A rents saw 1.1% growth over the past year, compared to an 80-basis-point decline in the third quarter of 2007.
Absorption figures showed improvement as well, with 7,583 class A and B units leased in the third quarter. For the first time ever, DC-area class A absorption--6,872 units--came in first in the US. And while the take-up rate at new projects declined to 15% a month, that's a considerable figure given the fact that the number of projects with units on the market has grown by more than half over the past year. Those absorption figures could be up due to an uptick in landlord concessions, which now account for 4.3% of face rent, from 3.6% of face rent in Q3 2007. Concessions have been rising since the beginning of 2007, point out Delta researchers.
On the plus side, the pipeline is beginning to shrink at last, though it remains relatively full. At its lowest point, there were 18,000 units in the works in 2005. Due to condo reversions, supply grew to 36,951 units at year-end 2007. That number began to decline quarter over quarter this year, landing at 29,322 units at the end of September.
Meanwhile, a tighter financing climate has resulted in a slower pace of investment sales. So far this year, $850.7 million worth of class A multifamily buildings closed. That's significantly less than the $1.26 billion in volume for the prior year. Also telling is the number of land sales; only $126 million in land traded this year, significantly less than the $486 million in land sales recorded through the third quarter of 2007. This, according to Delta, is a potential indicator of a slowdown in the pipeline of oncoming supply in future years.
No doubt the credit crunch has helped to considerably curtail new starts, with only three new projects kicking off between June and September. The tighter financing conditions will continue to hamper new projects. "While frustrating in the near term," say analysts, "this tightening of the development spigot will improve supply/demand balance and the health of the Washington market over the intermediate term."
For the near term, supply will likely continue to outpace demand for the next 24 months, according to the firm, but the reduced inventory will probably lead to a lower vacancy than originally anticipated--slightly over 4% in 2011 as opposed to the 5% that was previously projected. Key to any of the results, says Delta, lies in job growth.
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