The Newsroom - Washington DC

How Rental Markets are Changing the face of DC

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Last week sitting in the nosebleeds at Nationals Park I was staring out towards the Washington Monument and couldn’t help but to notice how many heavy construction cranes I could see in plain view. Without much effort I counted 11, which has to be at least double the amount I usually see from way up there.

So if you live in Washington, DC you may have also noticed how much construction is going on around the city. The reality remains that after climbing out of the worst recession since the Great Depression – largely fueled by a collapse in the housing markets – home ownership rates remain lower than we’ve seen since the end of World War II, especially with younger people. Yet here in DC we’ve experienced tremendous growth in populations and a decrease in unemployment, meaning more people are living and working in the District then even before the recession hit (according to the census bureau in 2007, 574,404 people lived in DC and 2014, 658,893). So that means we need housing; lots of housing. But the influx of new construction has not led to a great rise in the home ownership rate in Washington, DC, so what gives?

With the median home price in Washington, DC sitting around $460,000 before factoring potential condo fees and utilities, many younger professionals working in the city are forced to turn to the rental markets for their housing needs, which has local developers and real estate investment trusts (apartment companies) paying close attention. Earlier this year I attended a closed door meeting with executives from Equity Residential, a REIT with over 30 properties (and counting) in our market, who all agreed that the current conditions nationwide were perfect for growth in the rental apartment industry. I was told point blank “there has never been a better time in our country’s history to be in the rental business”, and after pondering that statement for a few days, I would have to agree, especially here in the nation’s capital.

So here’s a look at why…

According to RentJungle.com the average apartment within 10 miles of Washington, DC rents for just over $2,000 per month, before factoring utilities or parking costs. That alone supplies the necessary return for developers looking for emerging investment opportunities in our local real estate markets. For neighborhoods close to job hubs, mass transit, and nightlife you can expect that figure to multiply 2 or 3 times for the same apartment, making those opportunities for developers even better (Adams Morgan, U St, Georgetown, Dupont + Logan Circle, parts of Arlington+ Alexandria, etc). Being ranked consistently in the top 10 most expensive rental markets in the U.S. is a logical explanation for REITS and developers to continually invest in D.C., but it is not the only reason.

According to the Brookings Institute, the average 24 year old with a college degree working in Washington, DC earns $42,000 per year, which equals roughly $3,500 per month before taxes. Using that math, a young professional living within 10 miles of the city would need to spend roughly 58% of their total income to simply afford the average rental apartment. Even if that same 24 year old increased their income by 10% year over year, it would take them nearly 10 years to reach an income level (roughly $90,000) where living alone they could spend less than the industry recommended 33% of their total income on rent, allowing them to regularly contribute to savings. Using DC’s median home price, a first time buyer would have to save $23,000 just to get a minimal 5% down payment, not including their closing costs which will run them an additional 13k-16k. So with lower savings opportunities due to the high cost of living, many people are forced to rent longer, and spend more of their money on rent to live in a trendy neighborhoods which adds time to the process of saving up for a down payment.

So financially the reasons for people renting longer are easy to understand and backed by hard data, though alone leaves out a major piece of the rental puzzle.

Younger people under the age of 40 experienced devastating consequences from the recent recession, which left a lot of them unemployed and sometimes stuck with a house that was no longer worth the purchase price, and are subsequently not in a hurry to jump right back in the home ownership saddle. Also, according to a study conducted by Future Workplace, ninety-one percent of Millennials (1977-1997) plan to stay at their current job for less than 3 years. Younger people are looking for flexibility with their living arrangements and view home ownership as a potential costly barrier to their next professional endeavor, which makes the ease of renting look more appealing. Along with this I’ve encountered a growing sentiment in many people living in the city, who believe in “doing more with less”; that living longer in smaller energy-efficient space is not the hardship it once was for previous generations, desperate to trade crammed city living for larger suburban houses. Many Millennials see apartment life as a simpler and more economical way to serve their housing needs.

So the results are very understandable. We are watching developers pour in to the city, desperate to find new opportunities to take advantage of our growing population combined with a larger appetite for renting among younger professionals. As this trend grows, we will continue see large amounts of construction and development, destined to change the look and feel of DC one block at a time. If you want proof, just take a long walk up 14th street from Logan Circle to Columbia Heights and count the amount of brand new apartment communities and businesses.

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WASHINGTON, DC- SEPTEMBER, 3: Street scene on Columbia Rd. and 14th Sts. in the Columbia Hts. section of Washington, D.C. Many new stores have opened in recent years, changing the look of the neighborhood. (Michael S. Williamson/The Washington Post)

Amateur investors and hopeful developers alike always ask real estate professionals like myself the million dollar question. Where’s the trend moving, so I can get ahead of it and be the beneficiary of a rising market? If you ask me that today, I would say something that may sound odd, but is 100% data driven in Washington, DC. My answer would be anywhere in the city in the not-so-distant future will be a winner so be prepared to see a lot more changes soon. With the population only projected to go up over the next 10 years, we can expect a lot more growth in our housing markets fueled largely by new luxury rental projects and businesses eager to take part in the emerging opportunities they bring.

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Jonathan Fox
Washington, D.C.
202.322.9379

jonathan.fox@compass.com

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