As we close 2020, the effect COVID-19 is having on the Washington Class A apartment market is quite staggering. Absorption of Class A product in 2020 fell 50% from last year and was at its lowest level since 2012. Meanwhile, construction activity has not slowed much as starts were down only 4% and deliveries decreased 10% from last year. The lack of demand and increase in supply resulted in a rise in stabilized vacancy above 6.0%. Competition intensified for the smaller pool of renters with plenty of concessions so effective rents declined over the year by double-digits for the first time since Delta started tracking the multifamily market in the 1980s. As noted over the past couple of quarters, these severe departures from market norms were more concentrated in the District and other high-rise submarkets in the suburbs. Low-rise product is holding up much better than the overall market, with Suburban Maryland continuing to outperform the other substate areas in both product types.
FOURTH QUARTER 2020 HIGHLIGHTS
The stabilized vacancy rate for all classes of investment grade apartments increased by 110 basis points over the past year and now stands at 4.7%; Class A vacancy experienced a 150 basis-point increase to 6.1%.
Metro area Class A rents decreased by 10.2% over the year – now the steepest decline recorded by Delta. For Class A and Class B combined, metro area rents decreased by 10.1%.
Class A absorption below the 10-year average, with 5,528 Class A units absorbed in the 12-month period ending December 2020. Absorption including Class B product totaled 3,692 units.
Per project lease-up pace for projects currently in lease-up was 12 units per month, down from a year ago and the lowest it’s been this decade. However, there are 86 projects in active lease-up today compared to 61 projects a year ago.
The pipeline of likely deliveries over the next 36 months currently stands at 40,004 units, an increase of nearly 1,600 units from a year ago. This is the 10th year in a row the development pipeline has been above 30,000 units and the third quarter in a row it has crested 40,000 units. Condo conversion will not help much with reducing the development pipeline, as only 4.5% of the 26,486 units currently under construction (but not yet leasing) metro-wide are of a scale of suitable for switching to condominiums before delivery. So far in the cycle, a handful of apartment projects, ranging in size from 60 to 200 units, have switched to condominiums and a few have subsequently switched back to apartments). (and a few have subsequently switched back to apartments).
Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals which has been providing consulting and subscription data services to the commercial real estate industry for over 40years.
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