McLEAN, VA—The trend line is clear. Over the past few years, multifamily investors have become increasingly bullish. In 2014, when Capital One first surveyed attendees at the annual RealShare Apartments Conference in Los Angeles, 43% of those industry professionals said they planned to be net buyers in 2015. In each succeeding year, interest in buying has grown steadily, from 47% for 2016, to 51 percent for 2017 and now 57% for 2018.
Will Washington, DC, follow this trend in 2018? Last year, Greater Washington had 14,700 completions, mostly class A properties concentrated inside the beltway and in nearby suburbs like Rockville and McLean. The metro area is projected to have even more deliveries in 2018—16,700 according to Marcus & Millichap. As 2017 progressed, rent growth slowed and vacancy rates moved upward, but the effects were not dramatic—and they are expected to remain muted through 2018.
This performance in unlikely to dampen enthusiasm for multifamily for a simple reason: the growing Washington economy strongly favors renting. The Washington area continues to add jobs, an estimated 50,000 in 2017. These are not just in government, but also in well-paying sectors like engineering and education. But even for these professionals, especially young ones who prefer living in Washington or nearby suburbs, home ownership is out of reach. The website howmuch.net recently estimated that the cost of ownership in the region is nearly $900 more per month than the cost of renting. As a result, the rental market remains resilient.
Private equity and institutional investment is a good measure of the sustainable enthusiasm for the Washington market. This group accounts for slightly under 25% of all deal activity, and has a significant advantage over individual investors: it possesses the deep pockets increasingly required for development. Two years ago, developers could secure bank loans with 75% loan to cost, in 2017 banks were very conservatively structuring loans at 55% LTC and guarantees in the 25% to 35% range. 2018 has seen a change in the bank lending environment with LTC's edging up to the 65% and 70% range and guarantees in the 15 to 25% range.
In 2017, local private equity firms acted conclusively on their belief in the sustainability of the Washington multifamily market. Perhaps the most high-profile project is The Boro, Meridian Group's grand plan to create a 15-acre, 3.5-million-square-foot live/work/play community in Tysons, Virginia—transforming an office and mall destination into a mixed-use urban landscape. The $850-million first phase will have 677 multifamily units as well as office, retail, entertainment, and three parks.
Private equity has also been active on a smaller scale. Federal Capital Partners (FCP) participated in a number of transactions in 2017. It broke ground at the Highline, a 318-unit apartment in the Union Market neighborhood, an area that is seeing an abundance of multifamily construction. The property will include affordable housing in addition to luxury apartments. FCP has also been involved in other modest transactions, selling a 405-unit garden apartment community in Leesburg, VA in January and purchasing two apartment communities, totaling 449-units, in Maryland's Prince George's County in September 2017. These deals illustrate the potential of class B properties. Smaller assets in prime neighborhoods have become a major target for investors pursuing a value-added strategy.
In addition to building a new office for Fannie Mae, Carr Properties plans to build a mixed-use 937,000-square-foot building on the site of Bethesda's Apex Building. The new development, which will rise above the planned western terminus of Metro's Purple Line, will have 480 units in connected residential towers as well as an office tower and retail space.
As this sampling of transactions illustrates, private equity is as deeply attracted to Washington multifamily as ever. It also underscores another trend revealed by the Capital One survey—some will both buy and sell. The number of respondents who said they would be net sellers, although much smaller, has grown from just 14% to27%. The increase in both buyers and sellers bodes well for an active real estate market both nationally and in Washington.
Sadhvi Subramanian is SVP and Mid-Atlantic market manager at Capital One Commercial Real Estate. The views expressed here are the author's own.
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