D.C. Staring Down Big Apartment Pipeline As Population Flatlines, Leasing Slows

The vacancy rate for new apartments in Washington, D.C., is rising fast as a historic amount of product delivers to a city whose population has flatlined since the pandemic began.

The vacancy rate for Class-A apartments in the District was 5.7% at the end of the year, up from 4.2% at the end of 2021, according to a fourth-quarter report from Delta Associates. That spike in vacancy was sharper than the increases in the Northern Virginia and suburban Maryland markets, and it arrives at a time when the future of D.C.'s in-person workforce remains uncertain, said Will Rich, president of Delta Associates.

"We've seen vacancy increase in basically all submarkets in the District, and NoMa-H Street and Capital Riverfront, two high-growth areas, are not immune to the rise in vacancy," Rich said. "We anticipate that vacancies are going to remain elevated for the foreseeable future."

Rich said some of the rising vacancy can be attributed to a strong development pipeline, which is still white-hot in the part of the District encompassing NoMa, H Street and Union Market. Delta anticipates 6,325 units will deliver in the next 12 months in the District, the second straight year with more than 6,000 units delivering.

The last time the District saw this strong of a delivery pipeline was in the mid-2010s as development boomed in the Capitol Riverfront area. Those projects pushed the Class-A vacancy rate to 6.1% at the end of 2017, and Rich expects the vacancy rate will once again eclipse 6% this year due to new deliveries.

The difference between then and now, however, is D.C.’s population growth. On the eve of the pandemic, the D.C. Office of the Chief Financial Officer predicted that the city’s population could reach 720,000 by 2022, continuing a trend of over a decade of population growth. But the pandemic brought that growth to a halt, as the U.S. Census Bureau estimated that D.C. lost 20,000 residents in 2021.

Meanwhile, D.C.'s largest employer, the federal government, has been ambivalent about bringing workers back into the office full time, fueling what some fear is the movement of federal workers to the suburbs or even out of the region thanks to relaxed in-person requirements.

Rich said the population trend lines are likely having a negative impact on demand for D.C. apartments. Delta found that net absorption for apartments in the District last quarter was down 54% compared to the same quarter in 2021, and net absorption for the region was down 47%.

As a result, there may be a "mismatch" between deliveries and demographics, Rich said.

"We're not seeing as robust growth in population now as what we were seeing back in 2017," he said. "That portends to potentially higher vacancy rates moving forward."

The District experienced slower rent growth last quarter than its neighbors. Class-A asking rents in D.C. last quarter were up 1.9% year-over-year, according to Delta Associates, compared to 4.4% in suburban Maryland and 3.8% in Northern Virginia. 

Where demand does remain strong, however, is in more affordable segments of the rental market. Vacancies rose more slowly in suburban Maryland and Northern Virginia, where average rents are lower, Delta found. Older buildings across the metro area, including in D.C., also saw stronger rent growth and a lower vacancy rate.

“There's been a lack of affordable housing development going on for years in the city, and what's coming onto the market is not necessarily the product that people can actually afford in some cases,” Rich said. “You have seen some shift to more affordable submarkets.”

The vacancy rate for older, Class-B apartments has been consistently lower than Class-A apartments in the metro area going back at least five years. At the end of 2017, Class-B vacancy stood at 3.7%, while Class-A vacancy stood at 4.7%. But over the past year, the vacancy rate for Class-A has risen much faster than it has for Class-B.

AZ Abiud, a real estate entrepreneur and chairman of apartment owner Acumen Cos., said that trend points to shifting priorities for renters since the pandemic began, as they grew accustomed to paying the same price or less for more space. 

“There's definitely a gap,” Abiud said. “The older buildings that have been there, there's not enough of them, they perform better because they're actually in line with these folks' paycheck and income.”

Still, the pool of high-income renters may be growing. In D.C., about 17% of individuals making more than $150K rent their home, the fourth-highest proportion among 20 major U.S. markets and the highest on the East Coast, according to RentCafé.

Abiud believes the number of those higher-income individuals who could buy a home but aren't is likely to increase this year, as interest rates remain high and construction pricing makes the economics of building new condos difficult. Data from Delta shows how that sector slowed: Sales activity in the condo market declined nearly 11% from 2021 to 2022, while the three-year pipeline also declined year-over-year.

“This time of year, we typically see momentum from buyers,” Abiud said. “But this year, with interest rates at [5%] and above, those buyers who were preapproved to buy ... they're gonna wait it out and see if interest rates are going to contract.”