An Overview of the City’s Property Market
Between 2000 and 2019, the District of Columbia property market experienced remarkable growth. According to annual District property assessment data, the total value of all taxable property grew from $46.6 billion in 2000 to $224.4 billion (382.4 percent higher) in 2019 (Figure 1). The value of the residential sector grew at an annual average rate of 9.5 percent over the period, and the commercial sector grew at a slightly slower annual average rate of 8.7 percent. The higher growth rate for the residential sector caused the share of all residential value to increase to 56.5 percent in 2019 and the commercial sector share to decline to 43.5 percent (Figure 2).
Whereas most of the value of all taxable real property is attributed to the residential sector, most of the value of property sales subject to total deed taxation is commercial property. Based on annual deed tax data from the District Recorder of Deeds, we estimate that the total property value subject to total deed taxation grew from $4.1 billion in 2000 to $17.4 billion in 2019 (Figure 3). The value of the residential property sold grew at an annual average rate of 7.3 percent over the period, and the value of the commercial property grew at an annual average rate of 8.7 percent. And while there are many factors (nationally and locally) that contributed to the rapid appreciation of property prices and values, the 10-year treasury rate also fell from 6.05 percent in 2000 to 2.05 percent in 2019. And in contrast to the rapid growth in property values, the national consumer price index only grew at an annual average rate of 2.1 percent between 2000 and 2019.
Additionally, the faster growth of property sale values in the commercial sector caused the share of all commercial value to increase to 51.1 percent in 2019 and the residential sector share to decline to 48.9 percent (Figure 4).
Figure 5 shows that commercial property sold as a share of all commercial property in the city was 13.4 percent in 2001, and residential property sold as a share of all residential property in the city was 13.4 percent also in 2001. The slight but general downward trend in the ratios over the years in the figure reflect the robust annual growth on the total value of both sectors since 2000. In 2005, a record high of 23.2 percent of the total commercial property value in the city was sold. This reflects the brief period of very rapid expansion in commercial office space in the city prior the Great Recession. A record of 50 investment grade office buildings were sold in 2005 (Delta Associates).
Annual Fluctuations in the Property Sales Market
The above figures may suggest that the property sales market has grown in a relatively smooth upward trending fashion, but that is not the case. Figure 6 shows that more recently the Great Recession caused deed recordation taxes to decline 35.4 percent in 2009. It appears that major broad-based cuts to federal spending (or threatened cuts) in 2012, 2013 and 2015 contributed to deed taxes declining significantly in those years. The figure also shows that the current COVID-19 pandemic (and resultant national recession) also caused deed tax collections to decline 23.6 percent in 2020. (Coincidentally, the District increased its deed recordation and transfer tax rates from 1.45% to 2.50% for commercial properties valued at $2 million or higher in October 2019. We estimate absent that tax rate increase, deed tax collections would have declined approximately 38 percent in 2020 compared to 2019, making it the largest decline in deed tax collections in over 20 years.)
Figure 7 shows the annual percent change in deed tax collections by class. In years of major decline, there tends to be a greater reduction in commercial sales activity than in residential sales activity. The greater contraction in commercial sales activity caused the value of all residential sales to account for 50 percent or more of all value sold in those same years (Figure 8). (Interestingly, the commercial office sales activity in the city began to decline in 2006, three years before the Great Recession of 2009. Hence, this sector may at times be a leading indicator of the broader economy and not just a lagging indicator.) But more generally, figures 7 and 8 suggest that annual residential property sales are the bedrock of annual deed tax collections, and the level of sales or notably lack of sales of commercial property causes the greatest declines/swings in annual deed tax collections activity.
Residential Property Sales in 2020
There were 9,270 residential homes sold in 2019 but only 8,469 (8.6 percent less) sold in 2020. The lower number of homes sold in 2020 is largely attributed to the 23.7 percent drop in single-family attached homes (Figure 9). Interestingly, neither of these three subsectors of the residential market experienced a decline in median sale prices in 2020 (Figure 10).
In addition to single family home sales, the residential property sales sector also includes the sale of multifamily (rental) properties. When we examined the sales of the largest multifamily properties in years 2014 to 2020, we find that there were fewer sales in 2020 than in 2018 and 2019. While this subsector tended to produce an average of $594 million in transaction volume in years 2014 to 2019, only 35 percent of that average was generated in 2020. This appears to be a major factor in the 27 percent decline in deed tax collections from the residential sector in 2020 as shown in Figure 7. Consequently, the total value of residential property sales as share of the total value of all residential property value in city dropped from 6.0 percent in 2019 to 4.3 percent in 2020. The properties shown in Figures 11 and 12 are large Class A & B multifamily residential properties with more than 100 rental units that were built or renovated after 2000. The average sale price for the over 2 million square feet of large multifamily building space sold in 2019 was $373 per square foot (CoStar).
Commercial Office Building Sales in 2020
The city’s commercial sector experienced a greater decline in deed tax activity than the residential sector in 2020. In the large commercial office building subsector, there were also fewer sales and lower transaction volume in 2020 (Figure 13). Although the average annual transaction volume in this subsector for years 2014 to 2019 was about $4 billion, 2020 saw only about 42 percent of that average amount (Figure 14). Assuming 2020 would have been relatively similar to the prior years, this suggests that approximately $2.3 billion in sales transactions did not occur in 2020, which is likely a major factor in the 42.7 percent decline in deed tax collections in the commercial sector in 2020 (Figure 7). Consequently, the total value of commercial property sales as share of the total value of all commercial property value in city dropped from 8.9 percent in 2019 to 5.0 percent in 2020. The average sale price for the over 7 million square feet of large commercial office space sold in 2019 was $516 per square foot (Delta Associates).
An Interpretation of Recent Trends and Fluctuations
Over the past 21 years, DC’s property market experienced not only remarkable growth but also major market fluctuations. The greatest annual fluctuations appear to be correlated with national recessions, major broad-based cuts (or threatened cuts) to federal spending and the COVID-19 pandemic. From the perspective of annual deed tax collections, it appears that these national economic shocks took a greater toll on the city’s large commercial office building sales sector than on the city’s residential sales sector. Also, the years in which such shocks occurred were promptly followed by strong rebounds in deed tax activity in both sectors. This suggest that these shocks caused a significant slowdown in sales activity (or even a postponement of a considerable number of sale transactions) for that year and maybe the following year with a relatively prompt return to more normal sales levels resuming shortly thereafter, particularly in the large office building subsector.
The residential and commercial sectors of the city property sales market each account for about half of all taxable property value sold on an annual basis. The residential sector tends to grow healthily and is the relatively less volatile sector of the city’s property market. Hence, it can be considered the bedrock of annual deed tax collections. The commercial sector, on the other hand, has been growing faster on average and appears to be responsible for most of the volatility in annual deed tax collections activity.