Possible Malinvestment In The DC Multifamily Sector?

By Oshrat Carmiel via Bloomberg

RE BubbleWashington is poised to be one of the only major U.S. cities with a decline in apartment rents this year after a surge in construction outpaced job growth, leaving the nation’s capital with a glut of properties.

The Washington metropolitan area, including the suburbs of Maryland and Virginia, will see average rents decrease as much as 2 percent, making it only market other than Detroit to have a drop among the top 20 U.S. cities, according to Delta Associates. Rents will fall further in 2014, data from the Alexandria, Virginia-based property-research firm show.

Washington is at the forefront of a nationwide surge in apartment construction, as home foreclosures, stricter lending standards and a growing number of young adults forming households create the highest demand for rentals in a generation. Work on U.S. multifamily homes jumped 31 percent in March to an annual rate of 417,000, the most since January 2006, the Commerce Department said last week.

“Everyone around the country is really watching D.C. because it’s on the front wave of all these markets — all the supply is coming back,” said Jay Denton, vice president of research at Axiometrics Inc., a Dallas-based multifamily research firm. Investors are looking “to see how it could play out if there isn’t enough demand for the new supply.”

Real estate investment trusts including Equity Residential (EQR), whose chairman is billionaire Sam Zell, and Home Properties Inc. (HME) are selling buildings in the region as more competition looms. About 30,211 apartment units are under construction in the Washington area, more than half of which will open this year, according to Delta Associates.

Budget Cuts

Job growth in the region, which is heavily focused on the government, has been too weak to support the construction, said Greg Leisch, chief executive officer of Delta Associates. Federal contracting has declined by $7 billion in the last two years and the spending cuts known as sequestration have limited employment and demand for rentals, he said.

“The supply would have been consistent with Washington’s job performance had the federal government not shrunk,” said Leisch, who expects the oversupply to be temporary. “In the new world with austerity and sequestration, it’s too much supply.”

Washington-area building began booming in 2010, after rents during the real estate crash fell half as much as in the rest of the country and began climbing toward a new peak sooner. That year, developers began work on 5,186 new apartments, and the region was among the top three U.S. markets for employment growth, according to Axiometrics.

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