A strong job market, attractive debt pricing and the increasing expense of new construction have made multifamily properties in the nation’s capital a hot investment.
When apartment REIT Equity Residential announced its $167 million purchase in early April of 425 Mass, a 559-unit luxury apartment building in downtown Washington, D.C., it was a bold exclamation point on a trend that many local real estate investors had been discussing for months. Demand and pricing for multifamily communities in the D.C. metro area are among the strongest in the country.
“We may as well be on a different planet here,” says Dave Nachison, Washington, D.C.-based Director at Holliday Fenoglio Fowler, a real estate investment, sales and financing firm. “There’s nowhere that gets the attention and aggressive pricing that Washington, D.C., is getting right now. There are a lot of people who want to buy into the D.C. market and very few deals available.”
Many buyers see D.C. as an attractive investment because of its stable job market, fueled by government hiring, Nachison says.
While cap rates have shrunk to about 5.5 for A communities and 6 to 6.5 for B communities, investors still think it’s an ideal time to buy because apartment community incomes have been depressed by rent concessions, says Asheel Shah, Vice President of Real Estate Investment, overseeing acquisitions, dispositions and joint venture equity for McLean, Va.-based apartment developer Kettler.
At the same time, developers are finding it difficult, expensive and time-consuming to find financing for new construction and get new projects started, while Fannie Mae and Freddie Mac are offering attractive financing to buyers interested in purchasing existing communities.
“So what’s driving the feverish pitch is discount to replacement cost,” Shah says. In short, it’s often less expensive for developers to buy an existing community than it would be to secure a piece of land and build it. Equity’s purchase of 425 Mass for less than $300,000 per unit is an example. “You could never build that asset for what they bought it for,” Shah says.
Despite the strong demand, apartment owners aren’t rushing to put their communities on the market. “If I was an owner, I’d feel pretty good about the economy getting better,” Shah says. “Anyone who bought in the last four years probably bought for more than they could sell it for now. If they’re cash flowing and there’s no immediate maturity, there’s no compelling reason to sell.”
And while pricing is becoming more established for high-quality, trophy properties, owners may not know what price they can get for an A-minus or B property, Nachison adds.
Sales activity is picking up in 2010, however, as cap rates stabilize at low rates, Shah says. Developers also are beginning to turn their eyes to new development. Shah says, “As cap rates continue to come down or stabilize at lower levels, the prospects for new development get better and better.”