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Luxury-Apartment Boom Favors D.C.’s Millennial Renters

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Apartments for Lease in D.C.
Rents in the Washington, D.C. region, including the suburbs of Maryland and Virginia, declined 0.1 percent in the second quarter, compared with national average gains of 3.3 percent, according to apartment-research company Axiometrics Inc. Photographer: Heather Perlberg/Bloomberg

Aug. 27 (Bloomberg) -- Mandy Johnson was priced out of Virginia Square Towers, a luxury-apartment building rising across the Potomac River from Washington, D.C., where about $3,000 a month would bring perks such as a swimming pool, yoga studio and a game room with virtual golf and zombie dodge ball.

Less than 24 hours after declining to sign the contract in June, she got an e-mail from a leasing manager offering two months’ free rent. That brought the monthly payment down for Johnson and her roommate by about $450 over the term of the lease and put the place within reach.

“The building is still under construction, so we have to deal with that part, but we are also able to have this brand new apartment for the same price as one in older buildings, so we went for the shiny object,” said Johnson, 28, who works at a nonprofit that gives scholarships to military families.

Renters like Johnson are coveted in the Washington metropolitan area, which has become the worst U.S. market for apartment landlords. While rents across the country are approaching record highs on demand from young Americans who are waiting longer to buy, a glut of construction in the nation’s capital has limited gains in leasing costs and given bargaining power to tenants who can afford higher-end housing.

Rents in the Washington region, including the suburbs of Maryland and Virginia, declined 0.1 percent in the second quarter, compared with national average gains of 3.3 percent, according to apartment-research company Axiometrics Inc. That follows a jump in inventory, with 14,840 newly constructed units coming to the area this year, an 86 percent increase from 2013, data from the Dallas-based firm show.

Upper End

Renters at the upper end of the market, where new projects are concentrated, have enjoyed the most benefits in a city that remains relatively expensive. The average monthly rent in Washington, at $1,605, was 39 percent higher than the U.S. average last quarter, according to Axiometrics.

“As supply comes online, landlords are forced to reduce rents to fill up and stabilize the new properties,” Stephanie McCleskey, vice president of research, said in an e-mail.

That gives renters leverage and options for homes that some of them wouldn’t otherwise be able to afford. Landlords are offering concessions such as a free month’s rent or removing fees for parking or pets, according to Rick Gersten, chief executive officer of Urban Igloo, a company that helps renters find places to live in Washington, Virginia, Maryland and the Philadelphia metro area.

Sticker Shock

“We have a lot of renters coming back to us who have sticker shock after that first year,” Gersten said in a telephone interview. “They’re getting hit with rent increases because the buildings are now at 95 or 96 percent occupancy and the millennials, who this market is catering to, will literally move across the street if they feel like they can get a better rent at another building leasing up.”

Johnson said she’ll probably have to move if her rent is raised back to market rate at the end of her lease. She expects the flurry of development will give her room to negotiate.

“I’ve heard if you’re a good renter and always pay on time you can finagle a little bit and tell them, ‘We’ll stay here if you leave us at the same price,’” Johnson said in a telephone interview. “If they did raise it to the normal amount I would probably be in trouble. I hate moving, but there’s so much being built around us.”

Building Boom

Washington-area building began booming in 2010. Rents during the real estate crash fell half as much as in the rest of the country and began climbing sooner. The region was among the top three U.S. markets for job growth, and developers began work on 5,186 apartments that year, according to Axiometrics.

The construction wave gave rise to towers and residential enclaves with amenities such as sundecks with grilling stations and free fitness classes catered to urban millennials -- about 85 million people born from the early 1980s through 2000 -- who want to live close to work.

The excess of new luxury-housing units wasn’t mirrored at the low end. Since 2000, Washington lost half of its low-cost rental units, those with monthly rent and utility expenses of less than $750, according to a 2012 report from the D.C. Fiscal Policy Institute. The number of apartments with costs of at least $1,500 more than tripled.

Mayor Vincent C. Gray has been fighting back. He set aside $100 million for affordable housing this year after creating a task force in 2012 with goals to build or preserve 10,000 affordable units by 2020. So far, 5,938 units have been built or are under construction, with an additional 5,861 expected to be produced or preserved in the next two years, according to a document from the Office of the Deputy Mayor for Planning and Economic Development.

Pushed Out

The city’s effort hasn’t eased rising rents or building in some of its hippest neighborhoods, which has pushed out many of the longtime, lower-income residents, said Rolf Pendall, director of the Metropolitan Housing and Communities Policy Center at the Urban Institute in Washington.

“More low-income people are finding housing outside the boundaries of the district, either in Prince George’s County in Maryland or in more distant locations like Prince William County in Virginia,” he said in a telephone interview.

The high cost of land makes building affordable housing a serious challenge, and preserving units in a hot real estate market can be difficult because owners of buildings that were subsidized for a limited period may want to opt out and offer homes for rent or sale to upper-income residents, Pendall said.

There were 25,481 Class A, or high-end, apartments either under construction or being marketed midyear, according to Delta Associates, an Alexandria, Virginia-based property-research firm. The average rent in central Washington, which includes some of the city’s most expensive neighborhoods, was $2,847 as of the end of June.

REIT Downturn

That’s still not high enough to benefit investors such as real estate investment trusts, which may experience a lengthy downturn into 2016 in Washington, “the weakest apartment market in the country right now,” said Haendel St. Juste, a Morgan Stanley analyst.

Equity Residential, the country’s largest publicly traded apartment landlord, projects revenue for its Washington-area properties will fall 1 percent this year, Chief Operating Officer David Santee said last month on a call with investors.

Cities including Seattle, San Francisco and Denver, where there’s a strong job market, are expected to produce more than 5 percent revenue growth, according to the Chicago-based REIT.

Landlords in cities including Austin, Texas, and Charlotte, North Carolina, that are experiencing slower job growth may face challenges similar to Washington in absorbing the new supply of apartments, St. Juste said.

U Street

UDR Inc., a Highland Ranch, Colorado-based apartment REIT, said last month that its worst-performing Washington property in the first quarter had about a 4 percent drop in revenue. It was a building in the U Street corridor, where up and down both sides of bustling 14th Street, new projects are emblazoned with signs that read “Now Leasing.”

They’re likely to fill up eventually. The share of young adults living with their parents is near a many-decade high and long-term demographic changes mean more new households will be created and headed by young people, Jed Kolko, chief economist at San Francisco-based Trulia Inc., said in an e-mail.

“We’re at the point of the recovery when young adults are starting to move out of their parents’ homes,” Kolko said. “Few will move from their parents’ basements directly into homeownership. Most will rent first before they buy.”

For now, young renters like Johnson, in her luxury Arlington, Virginia, building, can take advantage of discounts from landlords competing to a keep their new apartments full with free breakfasts and lounges where they can drive golf balls into a screen, or play games like zombie dodge ball, where players throw balls to knock down virtual marauding zombies in a video game.

Johnson expects to have a courtyard view from her floor-to-ceiling windows when construction on the outdoor space is completed. And when the rent does go higher, she knows she has options in the area. This apartment is her third home in less than five years.

“It’s nice,” she said. “At the price it is now.”

To contact the reporter on this story: Heather Perlberg in Washington at hperlberg@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net Daniel Taub

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