ApartmentResearch

M A R K E T
Washington, D.C., Metro Area

R E P O R T
Second Quarter 2012

Buyers Focus on District; New Neighborhoods Gain Favor
The vacancy rate remains on track to fall again this year, and the Washington, D.C., metro apartment market is reverting to its familiar pattern of previous recoveries. After a year of limited completions in 2011, market-rate rental construction will pick up notably in 2012, and again next year as well. The largest reductions in market-level vacancy were booked over the past 18 months and, since vacancy is already exceptionally tight, much smaller declines and occasional upticks will occur in the quarters ahead. As demand moderates, the construction pipeline will exert increasingly greater influence on property performance measures. Each area of the metro enters the middle of 2012 with sizable backlogs of planned projects; Virginia has 22,000 planned units, while the Maryland pipeline contains 16,000 rentals waiting to proceed. In the district, more than 14,000 units under consideration would expand market-rate stock 14 percent if all of the projects advance to completion. Tenant demand in the district is consistently strong, but some minor fluctuations in operations may ensue as new rentals come online. Despite moderating early in the first quarter, investment activity remains robust all across the metro. Strong investor demand generated an increase in transactions in each section of the market over the past 12 months, with deal flow in the district rising most significantly. Owners in the district who bring properties to market priced at levels reflecting recent improvements in performance can frequently field several offers. Assets in the best locations, usually defined as sites near Metro stops and in neighborhoods with good retail, can sell at cap rates of around 5 percent, regardless of the property’s size. Properties in secondary locations and not near public transportation still garner interest, but investors will likely demand cap rates starting at about 7 percent. Interest in fast-improving neighborhoods, such as Petworth and Columbia Heights, seems likely to gain steam in the months ahead. Purchases of properties for conversion to condominiums is also emerging as an investment objective, with recent condo sales in the district confirming evidence of strong buyer demand.

2012 Annual Apartment Forecast
1.5% increase in total employment

Employment: In 2012, total employment in the metro area will expand 1.5 percent, or by 44,000 workers. Last year, growth in private-sector payrolls offset a slight loss of government jobs, yielding a net gain of 28,100 positions.

4,700 units will be completed

Construction: Developers will add 4,700 market-rate rentals this year, an increase from 2,300 units in 2011. Projects totaling 1,472 units will be delivered in the district, while nearly 2,400 rentals will come online in Virginia.

30 basis point decrease in vacancy

Vacancy: One year after vacancy plummeted 90 basis points, the rate will decline an additional 30 basis points this year to 3.9 percent, the lowest year-end level in the past 10 years.

4.0% increase in asking rents

Rents: Marketwide asking rents will rise 4.0 percent in 2012 to $1,467 per month and effective rents will gain 4.7 percent to $1,401 per month as strong tenant demand persists. In 2011, asking rents rose 2.4 percent and effective rents advanced 2.8 percent.

Economy

Employment Trends
Metro United States

Improving business conditions supported the hiring of 14,800 workers in the first quarter this year. With the increase, 25,100 positions have been added across the metro in the past six months. Nearly 26,000 private-sector positions were added during the past six months, including 20,200 jobs from January to March. In the past half year, education and health services establishments created 8,100 jobs, while the opening of new hotels contributed to the hiring of 10,700 leisure and hospitality employees. A relatively strong job market helped lower the unemployment rate 10 basis points in the first quarter to 5.6 percent. The local work force and the number of employed residents each increased during the period. Outlook: Employment in the metro will expand 1.5 percent, or by 44,000 new hires, in 2012; local employers created 28,100 positions last year.

4%
Year-Over-Year Change

2% 0% -2% -4%

08

09

10

11

12*

Housing and Demographics

Home Price Trends
Metro Median Home Price (Y-O-Y Change) United States

The number of existing single-family homes sold in the metro increased 15 percent over the year ending in the first quarter. The median price rose slightly to $315,700 during the period. Developers will complete 16,000 units of single-family and multifamily housing during 2012, a 20 percent increase from one year ago. Completions rose 9 percent last year, the first annual increase in six years. Developers are building to meet demand expected to be generated by the creation of an estimated 27,000 households during this year. Including the projected increase in 2012, household growth has exceeded housing completions in each of the past five years. Outlook: The excess of projected household growth to the expected increases in housing supply will sustain favorable operating conditions for multifamily property owners in the near term.

10% 0% -10% -20% -30%

08

09

10

11

12*

Construction

Construction Trends
Completions Multifamily Permits

A relatively mild winter enabled developers to complete all four projects and 519 market-rate rentals scheduled for delivery during the period. Over the past 12 months, 2,800 units were brought online, down from about 5,100 apartments in the preceding year. A new construction cycle is ramping up. Nearly 8,000 units with scheduled completion dates are under way in the metro, including 4,200 rentals slated for delivery over the final three quarters of 2012 and the balance due for completion next year. By market section, about 2,600 units are being built in the district; 2,500 units are under way in Maryland; and Virginia has 2,900 rentals on the way. Approximately 53,000 rentals were planned during the first quarter, an amount equal to 13 percent of existing market-rate stock. Roughly the same number of rentals were listed as planned at the end of last year, but many of those projects are now under construction. Outlook: Barring any delays, developers are on course to add 4,700 market-rate rentals this year, representing a 1.2 expansion of stock and an increase from 2,300 units in 2011.
Marcus & Millichap

18
Number of Units (thousands)

14 10 6

2

08

09

10

11

12*

* Forecast

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Apartment Research Report

Vacancy

The metrowide vacancy rate decreased 20 basis points in the first quarter to 4.0 percent. More than 1,300 rentals were absorbed during the period, a sufficient number to offset additions to inventory. Over the past year, the vacancy rate has declined 90 basis points.
Vacancy Rate

Vacancy Rate Trends
Metro United States

10% 8% 6% 4% 2%

Despite an addition to stock in the district, a larger increase in occupied units lowered the vacancy rate 30 basis points to 4.4 percent in the first quarter. The vacancy rate was 5.3 percent one year ago. The vacancy rate in Maryland fell 20 basis points in the January-to-March period to 4.1 percent. In Virginia, demand growth moderated in the first three months of 2012, leaving the vacancy rate unchanged at a still-low 3.8 percent. Outlook: Vacancy in the metro will decline 30 basis points this year to 3.9 percent, following a 90-basis-point plunge in 2011.

08

09

10

11

12*

Rents

Asking rents across the metro advanced for the ninth straight quarter during the January-to-March period, recording a 0.6 percent increase to $1,419 per month. Over the past year, asking rents have gained 2.6 percent. Also during the first quarter, effective rents gained 0.7 percent to $1,347 per month. Effective rents have climbed for nine consecutive quarters and have increased 3.0 percent year over year. Average asking rents in the district rose 0.6 percent in the first quarter, accompanied by a 0.7 percent bump in effective rents. Year over year, asking and effective rents there have risen 2.8 percent and 3.2 percent, respectively. In Virginia, asking rents rose 0.5 percent and effective rents climbed 0.6 percent during the quarter, while asking rents rose 0.6 percent and effective rents added 0.8 percent during the period in Maryland. Outlook: Marketwide asking rents will rise 4.0 percent in 2012 to $1,467 per month. Effective rents will gain 4.7 percent to $1,401 per month.
6%
Year-Over-Year Change

Rent Trends
Asking Rent Effective Rent

3% 0% -3% -6%

08

09

10

11

12*

Sales Trends**

Transaction velocity surged 40 percent over the past year. The number of deals in the district jumped 50 percent during the period, while smaller gains were posted in Maryland and Virginia. Deals executed over the past year carried a median price of $107,600 per unit, compared with a median price of $117,300 per unit in the preceding 12 months. The mix of properties changed from one period to another. In Maryland, for example, sales of several older assets in secondary locations over the past year carried a median price of $69,900 per unit. During the preceding year, sales of higher-quality properties underpinned a median price of $117,300 per unit. Overall, average cap rates in the metro sat in the low-6 percent range over the past year, reflecting the influence of sales of large institutional assets and properties in high density, high demand locations such as the district. Outlook: A strong rental housing market will sustain the metro’s stature as one of the country’s more liquid and active investment markets.
◆ Median Price Per Unit (thousands)

Sales Trends
$130

$105

$80

$55

$30

07

08

09

10

11

* Forecast ** Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics page 3

Marcus & Millichap

Apartment Research Report

Capital Markets
By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation

Visit www.NationalMultiHousingGroup.com or call:

John Sebree Director, National Multi Housing Group Tel: (317) 218-5300 john.sebree@marcusmillichap.com

The national apartment market’s strong performance continued in the first three months of 2012 as the vacancy rate slipped 30 basis points to 4.9 percent, marking the eighth consecutive quarterly decline. As conditions continue to improve, refinancing and disposition options for owners will expand to some owners that were underwater two years ago. Despite a brief increase to approximately 2.3 percent during the period, the interest rate on the 10-year Treasury ended the first quarter at about 2 percent. Capital continues to flow into safe-haven investments such as U.S. government debt amid lingering uncertainty over the eurozone. Fannie Mae and Freddie Mac will have unlimited financial support from the federal government through the end of this year. However, Congress will weigh a number of proposals to sunset the GSEs over the next decade and privatize the secondary mortgage market. The entities accounted for 65 percent of apartment mortgage originations last year. Access to acquisition financing continues to improve. Loans from portfolio lenders are issued at LTVs ranging from 70 percent to 80 percent, while the government agencies will work at the high end of the range on the highest-quality properties. All-in rates on mortgages of $3 million and more start in the mid-3 percent range for terms of five years, while 10-year debt varies from the low- to mid-4 percent region. Rates for smaller assets can rise up to 30 basis points to 75 basis points higher.

Submarket Vacancy Ranking
Rank
1 2 3 4
Prepared and edited by

Submarket
Dupont Circle/Adams Morgan Takoma Park Kensington/Wheaton Western Fairfax County Woodley Pk./Cleveland Pk./Van Ness Seminary Road/Landmark Hyattsville Downtown/Logan Circle Gaithersburg/Germantown NE Alexandria/Glebe Road SE Fairfax County Bethesda/Chevy Chase Northwest D.C./Georgetown Falls Church/Annandale Pentagon City/Chrystal City Northeast Montgomery Stafford County Frederick County Howard U./Mt. Pleasant/Brightwood Rosslyn/Ballston Prince William County Foggy Bottom Brookland/Ft. Totten Anacostia/Northeast D.C.

Vacancy Rate
2.1% 2.3% 2.5% 2.6% 2.6% 2.7% 3.1% 3.2% 3.3% 3.4% 3.4% 3.4% 3.4% 3.6% 3.8% 3.8% 3.9% 4.1% 4.2% 4.6% 4.7% 5.4% 5.7% 7.9%

Y-O-Y Basis Point Change
-10 -70 -30 -50 -20 -70 -40 -80 -10 -130 -100 -60 -100 -60 -110 -60 -30 -60 -160 -60 -80 -60 -120 -20

Effective Rents
$1,565 $1,136 $1,336 $1,377 $1,853 $1,343 $1,094 $1,575 $1,269 $1,138 $1,371 $1,831 $1,640 $1,413 $2,027 $1,206 $957 $932 $1,217 $1,785 $1,100 $1,787 $996 $889

Y-O-Y % Change
3.5% 3.3% 3.2% 2.6% 3.7% 1.5% 1.2% 2.1% 1.2% 3.3% 2.2% 0.9% 3.3% 4.9% 2.4% 1.2% 4.6% 1.3% 2.6% 3.7% 3.5% -0.1% 2.4% 4.0%

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Art Gering
Senior Analyst Research Services For information on national apartment trends, contact

John Chang
Vice President, Research Services Tel: (602) 687-6700 john.chang@marcusmillichap.com Washington, D.C, Office:

David Feldman
Regional Manager dfeldman@marcusmillichap.com 7200 Wisconsin Avenue Suite 1101 Bethesda, Maryland 20814 Tel: (202) 536-3700 Fax: (202) 536-3710

Price: $150

© Marcus & Millichap 2012 www.MarcusMillichap.com

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, National Association of Realtors, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.