The Rise of the Premium Apartment Rental Market in the District of Columbia

Although the District of Columbia’s population is growing continuously since 2006, the city’s housing stock is growing at a slower rate (Figure 1). Since the Great Recession, this slower rate of annual growth in the housing stock is likely due in part to accelerating land and construction costs per square foot, the decreasing supply of available land lots, zoning, and the lack of preservation of family-sized housing units. Consequently, the city’s housing vacancy rate, which used to exceed 10 percent is currently approaching six percent (Figure 2). In other words, roughly 94 percent of the city’s housing units are occupied, whereas in earlier years it was closer to 90 percent. These factors have profound implications on how certain housing market sectors are evolving.

 Figure 1

Figure 1

Figure 2

Figure 2

 

 

 

 

 

 

 

 

When ranked among the states, the District of Columbia’s home ownership rate of 39.8 percent was the lowest in the nation as of the fourth quarter of 2017, according to the U.S. Census Bureau[1]. (New York and California had the next lowest rates of 51.1 and 55.1 percent, respectively.) One of the many reasons for this is likely the high cost of homes and home-ownership in the city. In 2000, half of the homes purchased in the city were priced below $178,250. But, with the median single-family home price nearly quadrupling by 2017, half of the homes purchased in the city were priced above $690,000, (Figure 3). On average, the median sale price for homes in the city increased 8.3 percent per year, while the consumer price index for the Washington area only grew on average by 2.3 percent a year over the same period.

Figure 3

Figure 3

Additionally, the number of single-family home and condo sales have grown at an average annual rate of 4.9 percent between years 2009 and 2017 (MRIS[2]). But since the city’s population has increased by an average of 15,653 people (2.5 percent) every year since 2010 (U.S. Census Bureau), a key factor in the city’s robust residential development simply appears to be population growth. Home ownership rates and population levels between 2010 and 2017 are shown in Figure 4.

Figure 4

Figure 4

For the many residents who choose to avoid a down payment and closing costs of tens of thousands of dollars on the purchase of a new home in the city, renting is the preferred housing option. Between the years 2013 and 2017, the city added over 4,200 multifamily units per year on average, in premium buildings (Class A and Class B) alone, to help accommodate the growing population (Figure 5).

Figure 5

Figure 5

In 2017, the average effective rent for a one-bedroom apartment in the city was $2,184 and $1,834 for a studio apartment (Figure 6). And, while these rental rates may be unnerving to some, rental rates have generally grown over time in line with the area’s consumer price index, unlike the prices for newly purchased homes.

Figure 6

Figure 6

Despite the very high expense of buying and owning a home in the District of Columbia, the number of single-family home and condominium sales have grown at a healthy average annual rate of 4.9 percent between years 2009 and 2017. But residential property developers, on the other hand, delivered apartments in new Class A and Class B buildings at an even healthier average annual rate of 14.1 percent during the same period. With respect to all relevant city trends, the premium apartment rental market appears to be the more popular and ascendant sector of the city’s housing market.

[1] https://www.census.gov/housing/hvs/data/rates.html

[2] Metropolitan Regional Information Systems, Inc.

2 thoughts on “The Rise of the Premium Apartment Rental Market in the District of Columbia

  1. Fahad,

    1. Why did you rank DC versus other states and not cities or metropolitan areas?
    2. Is the Census definition for DC city limits or the urban area?
    3. How does the definition of the population match with the CPI data you used?
    4. Why does a 4.9 percent growth in single-family home and condo sales constitute healthy?
    5. Similarly, why is a 14.1 percent increase in Class A and B healthy?
    6. Do you have a link to the definition of a Class A and B residential property?

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  2. Interesting stats, but I’m wondering if, in the final conclusions, an erroneous value judgment creeps in. I’m skeptical that “popularity” of premium rentals is more than incidental. Fortuitously for the developers, these new pricey rental buildings continue to fill up (albeit, as your Figure 6 shows, at rates that have leveled off). Had they constructed moderate-priced rentals, those doubtless would have filled up, too. Had it been condos, they would have sold, probably across the price spectrum. I think that it’s less about what’s popular and more about what’s available to people who want an urban lifestyle.

    The primary reason that developers are building almost entirely at the high end is the simple economics of development whenever demand outstrips supply: 98% of site owners sell to whomever pays the most, and 98% of developers can only pay the most for a site by projecting the most premium product the site can reasonably support.

    Almost all of the new buildings are rentals because, at the moment, that’s what development finance people prefer to sink money into. Recall that the previous boom was overwhelmingly condos, for the same basic reason. Also condos have a several-year “transition” period, during which significant amounts of financing are tied up. Moreover, towards the end of the previous boom, the City put an onerous recordation tax on condos which, as a byproduct (whether intended or not, I can’t say), incentivizes development of rentals. Also, during the bust, the city enacted Inclusionary Zoning, which has proven to work fairly well for rentals but rather poorly for condos.

    In DC or any other specialized, highly imbalanced market, pretty much any type of housing will prove “popular.” But it has to exist. If what people ideally want (e.g. a 2-bedroom condo in Logan Circle, preferably with private outdoor space and parking, for $500,000) doesn’t exist, then they must determine, among the options that do exist, what works best. Many figure out how to make the new pricey rental work for them, ‘cuz that’s what’s available.

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