ApartmentResearch

M A R K E T R E P O RT
Washington, D.C., Metro Area Fourth Quarter 2011

Investment Churns as Vacancy Falls, Construction Wanes

Solid rental housing demand and limited construction will remain the dominant story of the apartment sector in the Washington, D.C., metro through the end of this year. Local employers are no longer cutting jobs as they did during the recession and many have resumed hiring in sufficient numbers to ignite greater household creation. These new households have filled more than 16,000 rentals in the district, Maryland and Virginia since vacancy peaked two years ago, reducing the rate to less than 5 percent. Additional reductions in vacancy will not be as significant as those already recorded since the markets peak was reached because of a projected increase in construction next year. Rents, meanwhile, will grow at a steady pace in the final quarter of 2011, and a more robust pace of growth should materialize late next year as expanded employment opportunities result in greater tenant turnover within the market. Steady improvements in operations and expanded access to financing from several capital sources continue to nurture a climate where investor demand often exceeds the supply of assets listed for sale. Institutional-grade core properties and stabilized Class B assets remain at the top of the list of investors acquisition targets. Cap rates can vary widely across the market, but Class A assets in the district establish the price benchmark, with deals often executed at first-year returns in the high-4 or low-5-percent range. Intense competition for top-tier properties is pushing many investors into the Class B sector, where well-performing product sells at cap rates close to 6 percent. Investors remain highly selective regarding location, preferring properties near a Metro stop or in neighborhoods with a high proportion of owner-occupied housing. The market for Class C assets in the entire metro, meanwhile, has yet to gain significant traction. Properties in working-class areas of the district or Prince Georges County, especially, remain challenged by high vacancy and weak rent collections.

2011 Annual Apartment Forecast

0.6% increase in total employment

Employment: Employers will add 18,000 positions in the metro this year, expanding total employment 0.6 percent. In 2010, 33,100 jobs were added, partly offsetting the loss of nearly 59,000 positions in the previous two years.

2,430 units will be completed

Construction: Builders will deliver 2,430 units in 2011, a decrease from nearly 5,400 rentals last year. In 2011, more than 900 units will come online in both the Maryland and Virginia sections of the metro, while approximately 600 rentals will be placed in service in the district.

70 basis point decrease in vacancy

Vacancy: Vacancy will fall 70 basis points in 2011 to 4.4 percent, following a 120-basis-point decline last year. Net absorption will total approximately 4,600 units in 2011.

2.7% increase in asking rents

Rents: Marketwide asking rents will climb 2.7 percent in 2011 to $1,415 per month, while effective rents will rise 3.1 percent to $1,342 per month. New Class A rentals supported a 3.4 percent jump in asking rents last year and a 4.1 percent increase in effective rents.

Economy

Employment Trends
6%
Year-over-Year Change Metro Area United States

Employers in the metro added 8,100 positions in the first nine months of 2011, including nearly 15,000 positions in the third quarter. The private sector has led the Vacancy Rate Trends Metro Area way 10% this year, expanding 0.3 percent, or by 8,000 jobs.
United States

3% 0% -3% 6% -6% 3% 0%

Employment Trends
Metro Area United States

Vacancy Rate

8% The

4% 10%

government sector remains a drag on employment trends. Only 100 positions were created in the first three quarters this year, with all of the job growth occurring 6% the state and local level. So far this year, 2,000 positions in federal government at were eliminated. Rate Trends Vacancy
Metro Area United States

Number of Units (thousands) Median (Y-O-Y Year-over-Year Change Number of Units (thousands) Existing Units (thousands) Chg.) Number of Home Price Median Existing Home Price (Y-O-YExisting Home Price (Y-O-Y Chg.) Median Chg.) Year-over-Year Change

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

-3% 6% 10% -6% 3%0% 07 0% -10%

Employment Trends Home Price Trends

Metro Area Metro Area United States United States

Vacancy Rate Vacancy Change Year-over-YearRate

07

08

09

10

11*

Expanding medical practices and hiring by private educational institutions support2% the addition of 3,800 jobs in the education and health services sector during the 8% ed 07 08 09 10 11* first * Forecast three quarters. The professional and business services sector added 9,600 workSources: Marcus & Millichap Research Services, Reis 6% while trade, and leisure and hospitality employment declined by 3,100 positions. ers,

4% Outlook: 10% 6% 2% 8% 07 3%

Vacancy Rate Trends Rent Trends This AskingArea employment in the metro will expand 0.6 percent as emyear, Rent Metro total United Rent Effectivejobs. ployers create 18,000States More than 33,000 jobs were added in 2010.
08 09 10 11*

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

* Forecast Sources: Marcus & Millichap Research Services, Reis

Housing and Demographics

4% -3% clined 6% 2% -6% 3% 07 07

6% The 0% for-sale housing market continues to gradually find its footing. In the 12 months

-3% -20% 10% -6% -30% 0% 07 07 -10%

Home Price Trends

Metro Area United States

* Forecast * Trailing 12-Month Period Sources: Marcus & Millichap Research Services, BLS, Economy.com Sources: Marcus & Millichap Research Services, Economy.com, NAR

08 08

09 09

10 10

11* 11*

Median Price per Unit (thousands) Price per Unit (thousands)Price per Unit (thousands) Year-over-Year Change Median Median Year-over-Year Change

ending in the thirdTrends the median price of an existing single-family home deRent quarter, Asking Rent about 2 percent to $317,600, while the number of residences sold decreased Effective Rent approximately 6 percent.
08 08 09 09 10 10 11* 11*

* *Forecast Forecast Sources: Marcus &&Millichap Research Services, Reis Sources: Marcus Millichap Research Services, Reis

-20% 10% 12 -30% 0%9 07

Home Price Trends Construction Trends

Metro Area Apartment Completions United Permits MultifamilyStates

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, Economy.com, NAR

to Effective Rent for rental housing, multifamily builders requested persolid demand -6% mits for the construction of 5,800 units over the past 12 months, an increase of 44 3% 07 08 09 10 11* $100 percent from the previous one-year period. * Forecast

6% $120 In response

Developers of single-family homes remain hesitant. Permits for 9,200 units of singlefamily housing were issued over the past 12 months, representing a fall of 7 percent 0% from the preceding year and below the long-term annual average of 24,000 units. Rent Trends Sales Trends -3%
Asking Rent

Sources: Marcus & Millichap Research Services, Reis

-10%6 -20%3 12 -30%0 9 07 6

Construction Trends
Apartment Completions Multifamily Permits

Outlook: Strong household creation will continue as a result of the metros vigorous Sales Trends economy, fueling demand for housing and, in turn, encouraging developers to plan -3% $60 $120 build additional housing. and
-6% $40 $100 07 08 0909 10 10 11* 11*

0% $80

* * Forecast Trailing 12-Month Period Sources: Marcus && Millichap Research Services, U.S. Census Bureau Sources: Marcus Millichap Research Services, Economy.com, NAR

07

08 08

0909

10 10

11* 11*

* * Trailing 12-Month Period Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA Sources: Marcus & Millichap Research Services, Reis

07 08 Construction

3 12 0 9 6 3 0

Construction Trends
Apartment Completions Multifamily Permits

Two market-rate projects containing 326 units were brought online in the metro $80 during the third quarter. Including those projects, 3,200 units were delivered in the Sales Trends $60 past 12 months, a decline from the approximately 5,800 rentals completed in the $120 prior year.
$40 $100

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

* Trailing 12-Month Period

Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

More than 500 units remain under way and slated for delivery in the fourth quarter this year. Key projects coming online include the 170-unit Foundry Lofts in the dis$80 trict and the second phase of the Camden Summerfield in Landover, MD, totaling 187 rentals. $60

07

08

09

10

11*

07

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

The pipeline of projects coming online next year continues to fill. Approximately $40 07 08 11* 4,000 units are under09 and10 way scheduled for completion in 2012. Nearly 2,300 rent* Trailing 12-Month Period Sources: Marcus & Millichaponline Services, CoStar Group, Inc., RCA of the metro, while market-rate inventory als will come Research in the Virginia section in the district will expand by 1,200 units.

Outlook: Following the delivery of 4,600 units in 2010, production will ease to only 1,800 rentals this year, one of the lowest totals on record. An average 5,700 rentals were completed annually in the past five years.
Marcus & Millichap
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Apartment Research Report

Vacancy

Year-over-Year Change

Tenant demand remains strong across the metro. Through the first three quarters of the year, new rental households absorbed approximately 3,800 units of rental housEmployment Trends Metro Area ing, pushing down vacancy 50 basis points6% 4.6 percent. Vacancy declined 90 basis to United States points in the final nine months of 2010.
3%
Vacancy Rate

Vacancy Rate Trends

10% 8% 6%
Metro Area United States

Demand has been especially strong in the Virginia section of the metro, where va0% cancy fell 50 basis points from July to September to 4.1 percent. Vacancy declined 90 basis points in the first three quarters of 2011 in Virginia. In Maryland, net absorpEmployment Trends -3% tion of 1,000 units reduced vacancy 20 basis points to 4.8 percent year to date. Metro Area 6%
United States Number of Units (thousands) Existing Home PriceMedian Chg.) Home Price MedianChg.) (Y-O-Y Year-over-Year Change Year-over-Year Change Number of Units (thousands) Median (Y-O-Y Number of Units (thousands) Existing Existing Home Price (Y-O-Y Chg.)

4% 10% 2% 8% 07 6% 4% 6% 10% 2% 3% 8% 0% 6%

Vacancy Rate Trends

Metro Area United States

Home Price Employment Trends Outlook: Metrowide vacancy will decrease 70 basis pointsMetro Area to 4.4 percent, this year -3% Metro Area 10% 6% United States United States after a 120-basis-point drop was recorded in 2010.
-6% 0% 3% 07 08 09 10 11*
* Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com

Vacancy Rate

Vacancy in the district decreased 10 basis -6% 07 in the08 points third quarter to 5.2 percent 3% 09 10 11* * Forecast and dropped 30 basis points since the end of last year. Since the vacancy rate peaked Sources: Marcus & Millichap Research Services, BLS, Economy.com in early 2010, an additional 1,800 units have been occupied. 0%

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

Rent Trends Vacancy Rate Trends

Asking Area Metro Rent Effective Rent United States

Vacancy Rate Year-over-Year Change

Rents

07

08

09

10

11*

-10% 0% Fueled by a gain of 2.0 percent in Maryland, asking rents have risen 1.7 percent so far this year to $1,402 per month. Asking rents in the districtPrice Trends higher Home were 1.1 percent -20% -3% year to date at $1,427 per month in the third quarter, while asking rents in Virginia Metro Area 10% United States advanced 1.7 percent to $1,481 per month.

* Forecast Sources: Marcus & Millichap Research Services, Reis

-3% 4% 6% -6% 2% 3% 07 07 0%

Rent Trends
Asking Rent Effective Rent

Marketwide concessions ticked down 20 Forecast12-Month Periodfar this year to 5.3 percent of basis ** Trailing points so Sources: Marcus & Millichap Research Services, Economy.com, NAR Sources: Marcus & Millichap Research Services, BLS, Economy.com asking rents as a result of a 2.1 percent rise-10%effective rents to $1,329 per month. In in the district, effective rents gained 1.4 percent over the first three quarters to $1,366 Construction Trends Home Price per month, lowering concessions to 4.4 percent of asking rents. AreaTrends Apartment Completions -20% Metro
12 10%
Multifamily States United Permits

08 08

09 09

10 10

11* 11*

Median Year-over-Year Change Median Price per Unit (thousands) Price per Unit (thousands) Price per Unit (thousands) Year-over-Year Change Median

-30% -6% 07 0%07

08 08

09 09

10 10

11* 11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

-3% 6% $120 -6% 3% 07 $100 0% $80

SalesTrends Rent Trends

Asking Rent Effective Rent

Effective rents in Virginia of $1,409 per month in the third quarter were up 2.1 per-30% 9 0%07 09 10 11* cent year to date. In Maryland, owners *eased 12-Month Period08 leasing incentives to about three weeks Trailing of free rent by raising effective rents 2.3Sources:6Marcus & Millichapto $1,219 per month. NAR percent this year Research Services, Economy.com,
-10%

08

09

10

11*

* Forecast Sources: Marcus & Millichap Research Services, Reis

Construction Trends Outlook: Asking rents will rise 2.7 percent in 2011 to $1,415 per month and effec3 -20% Apartment Completions 12 tive rents will gain 3.1 percent to $1,342 per month. Multifamily Permits
* Forecast * Trailing 12-Month Period Sources: Marcus & Millichap Research Services, U.S. Census Bureau Sources: Marcus & Millichap Research Services, Economy.com, NAR

$60 -3% $120 $40 -6% 07 $100 07 $80 $60 $120 $40 $100 $80 $60 $40 07

Sales Trends

Sales Trends**

0 -30% 9 07

07

08 08

09 09

10 10

11* 11*

Expanded access to financing for qualified borrowers sparked a 22 percent increase 6 in transaction velocity over the past 12 months. All sections of the market recorded Construction Trends an increase in activity, with velocity in Maryland and Virginia accelerating faster than 3 Apartment Completions 12 Multifamily Permits the metrowide rate.
9 08 09 11* In deals executed over the past year, the median 07 price was $92,600 per 10 unit. The * Forecast Sources: median price of properties sold was $110,800Marcus unit in Research Services, U.S. Census Bureau per & Millichap the prior year. 6 0

* Trailing 12-Month Period * Forecast Sources: Marcus & Millichap Research Services, Reis Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

08 08

09 09

10 10

11* 11*

Sales Trends

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Average cap rates in the entire metro are in the low-6-percent range, but vary widely 3 from supply-constrained areas inside the Beltway to suburban assets farther from the urban core. Cap rates for the best assets in the district, for example, typically vary in 0 07 08 09 10 11* the high-4 to low-5-percent range.
* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

07

08

09

10

11*

* Trailing 12-Month Period Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Outlook: The metro continues to receive intense interest from investors. Many properties in predominantly working-class areas, however, will remain off the radar due to lingering vacancy and rent collection challenges.

** Data reflect a full 12-month period, calculated on a trailing 12-month basis by quarter.

Marcus & Millichap

Apartment Research Report

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

Visit www.NationalMultiHousingGroup.com or call:

Increased Fed intervention, such as Operation Twist, should keep interest rates relatively low over the near term. As of late-October, the yield on the 10-year Treasury was hovering around 2.3 percent, approximately 175 basis points below the 10-year average. Apartment mortgage originations more than doubled in the first half of 2011 when compared with the same period last year, driven largely by agency lenders Fannie Mae and Freddie Mac, life insurance companies and local/regional banks. While agency originations increased over past year, the re-emergence of life companies and banks caused their market share to drop from 62 percent in 2010 to 44 percent in the first half. Lenders view apartments as preferred assets and are moving down the quality chain to finance Class B properties in strong locations, encouraged by healthy occupancy gains and firming values. Nonetheless, financing lower-tier properties in secondary and tertiary markets remains a challenge. Portfolio lenders generally originate new loans at 55 percent to 75 percent LTVs, while agency lenders provide up to 80 percent leverage on high-quality assets in core metros. All-in rates for $3 million-plus mortgages start around 3.75 percent for a five-year term, with seven-year loans pricing in the low- to mid-4-percent range, and 10-year notes averaging 4.5 percent to 5.0 percent. All-in rates for smaller loans are typically 10 to 25 basis points higher.

John Sebree National Director National Multi Housing Group Tel: (925) 953-1700 john.sebree@marcusmillichap.com

Submarket Vacancy Ranking

Rank
1 2 3 4
Prepared and edited by Senior Market Analyst Research Services For information on national apartment trends, contact Vice President, Research Services Tel: (602) 687-6700 ext. 6803 john.chang@marcusmillichap.com Washington, D.C., Office: Regional Manager dfeldman@marcusmillichap.com 7200 Wisconsin Avenue Suite 102 Bethesda, Maryland 20814 Tel: (202) 536-3700 Fax: (202) 536-3710 Price: $150

Submarket
Dupont Circle/Adams Morgan Takoma Park Kensington/Wheaton Western Fairfax County Seminary Road/Landmark Woodley Pk./Cleveland Pk./Van Ness Stafford County Hyattsville Northeast Alexandria/Glebe Road Gaithersburg/Germantown Southeast Fairfax County Bethesda/Chevy Chase Downtown/Logan Circle Rosslyn/Ballston Falls Church/Annandale Pentagon City/Crystal City Northeast Montgomery Frederick County Prince William County Northwest D.C./Georgetown Silver Spring Old Town Laurel Loudoun County Landover

Vacancy Rate
2.0% 2.4% 2.5% 2.6% 3.0% 3.0% 3.3% 3.4% 3.5% 3.6% 3.8% 3.9% 3.9% 3.9% 4.1% 4.3% 4.4% 4.7% 4.7% 4.8% 4.8% 4.9% 5.1% 5.2% 5.4%

Y-O-Y Basis Point Change

-80 -120 -40 -120 -120 -40 -240 -110 -260 -50 -120 -200 -80 -70 -130 -130 -20 -40 -170 -80 -100 -210 -270 -90 -90

Effective Rents
$1,537 $1,116 $1,314 $1,355 $1,343 $1,800 $944 $1,086 $1,119 $1,272 $1,352 $1,846 $1,556 $1,751 $1,367 $2,022 $1,193 $935 $1,081 $1,603 $1,396 $1,479 $1,186 $1,338 $1,068

Y-O-Y % Change
2.7% 3.1% 1.2% 2.8% 2.6% 4.6% 4.0% 2.4% 2.1% 3.5% 1.8% 3.9% 3.9% 2.7% 3.2% 3.3% 1.6% 3.8% 3.1% 2.7% 2.4% 2.2% 1.1% 1.9% 3.2%

5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Art Gering

John Chang

David Feldman

Marcus & Millichap 2010 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.