Northern Virginia Apartments A 'Shining Star' In Investors' Eyes
In the ice-cold capital markets landscape, multifamily has become one of the first asset classes to thaw.
A series of large apartment buildings totaling more than 3,000 units have traded hands over the last three months in the D.C. area, primarily in Northern Virginia. That market has emerged as a top target for multifamily investors, already more than doubling its sales volume for last year and far outpacing its neighbors.
“The market is certainly live and open, and so we're out of the frozen days,” CBRE Executive Vice President Martha Hastings said.
Transaction volume in the D.C. metro this year has already outpaced 2023's full-year volume. The region has seen $5.6B in multifamily sales so far, up from $3.7B in 2023, according to CBRE.
Hastings said there are at least another $4.5B in properties that are under contract, awarded, headed to and on the market.
“There continues to be significant capital in the market looking to actually be placed,” Hastings said. “And I think gone are the days of investors just sitting on their hands saying, ‘We're going to wait this out.’”
Brokers told Bisnow the new momentum is a result of stabilizing and dropping interest rates and rent growth in the region, especially in Virginia, with a lack of new supply projected.
“It's more real activity,” Hastings said.
She said a year ago, buyers were much more hesitant to go all the way — they would make offers, but when push came to shove, they were often unwilling to transact.
“Now it's a real commitment of, ‘How am I going to figure out how to get a deal done? Because we need to get a deal done,’” she said. “So there's real capital at the table, and there's real solution-oriented minds working through, ‘How are we going to make this work?’”
Much of that capital being placed has gone into Northern Virginia, a market that has already seen $3.6B in multifamily sales this year across 35 transactions, according to CBRE. The suburban Maryland and D.C. markets have seen $1.1B and $936M in sales, respectively.
Northern Virginia's year-to-date volume is also more than double its full-year 2023 volume of $1.6B.
In just the last few months, Pantzer Properties purchased a 403-unit Fairfax apartment complex for $152M, Bridge Investment Group paid $250M for an 806-unit apartment complex along the Silver Line in Herndon, and Abacus Capital Group acquired a 631-unit community next to Springfield Town Center for $207M. Harbor Group International purchased a Wegmans-anchored 352-unit property at Halley Rise in August for $133M.
Cortland announced in August it plans to invest another $1B in Northern Virginia apartment acquisitions, after pouring in its first billion in 2022. The Atlanta-based apartment owner purchased a 298-unit apartment building near Amazon HQ2 for $104M in August.
Cortland Chief Investment Officer Mike Altman told the Washington Business Journal in August that the firm was “very intentionally focused on the Northern Virginia market,” calling the area an “epicenter of growth.”
“Northern Virginia is definitely the shining star,” Berkadia Senior Director Yalda Ghamarian said. “There's less regulation and same supply-demand fundamentals that are drawing investors in and a lot of good-performing metrics on the ground.”
Ghamarian’s team represented Fairfield Residential in its $152M sale of the 403-unit Moxley in Fairfax to Pantzer, and it repped Brookfield in offloading the 352-unit Halley Rise building for $133M.
She said her team is tracking to “easily” triple its volume by the end of the year.
“The market feels a little less frozen up,” she said. “It just feels like there's definitely more transactions, more conversations. Again, bigger deals have traded this year.”
In September, the D.C. area recorded the biggest year-over-year increase in asking rent of the 50 most populous metro areas, Redfin found. Meanwhile, Sun Belt states, which saw rents booming during the first years of the pandemic, had the biggest declines.
Effective rents, which factor in concessions like a free month at the start of a lease term, were up 3.1% year-over-year in the third quarter, according to Newmark. That was above the last decade’s average of 2%.
Much of that is attributable to Northern Virginia, which was at 4.5% growth year-over-year at the end of Q3, compared to 1.9% in the District and 2% in suburban Maryland.
Meanwhile, the quickly shrinking amount of new supply means rents are poised to get tighter and tighter. The region delivered 16,000 units in 2023 and just over 13,000 as of the third quarter of this year, Hastings said. But in the first two quarters of next year, just over 1,000 units are projected to be delivered.
“So as those deliveries drop, that rent growth is only going to be more pronounced in certain areas,” she said.
While rent grows, the level of uncertainty in the capital markets is shrinking as interest rates level off. The Federal Reserve began cutting rates in September and then again this month. And the 10-year Treasury yield dipped below 4% in August for the first time in six months.
Interest rates are still elevated above where they were during the first years of the pandemic when they were at a historic low. But there is more certainty about where the capital markets are headed, brokers told Bisnow.
“Yes, maybe rates are higher today than what people anticipated they would be today a year ago, but at least there's less uncertainty about what the capital markets will look like,” Greysteel Managing Director Herb Schwat told Bisnow. “Investors don't like uncertainty because uncertainty means risk, and so when there's more uncertainty, there's just less buyers.”
But with interest rates still inflated, property sales are a way for borrowers to pay off floating-rate debt that is building up more and more interest.
That thinking came into play in the partnership behind CityRidge’s decision to offload four of the development’s multifamily properties last week. Roadside Development and its partner North America Sekisui House sold the properties totaling 350 units to a REIT managed by Sekisui for $279M.
Roadside founding principal Richard Lake told Bisnow that the sale was meant to decrease the property’s debt amid high interest rates.
“We were hoping that interest rates would come down sooner, so this was a way for us to lay off a little bit and rightsize some of the debt on the remainder of the property,” he said.
Hastings said the majority of the sales she has seen in the region this year aren’t due to maturing debt, but it does come into play.
“Debt is always a factor,” Hastings said. “And when rates are higher than they were, they're facing a maturity, they're facing a cap expiration. If they're facing an end of the fixed rate, if they're starting to amortize or they're floating, it will certainly force the hand.”
The regulatory environment in each region comes into play when buyers are deciding where to put their cash, brokers said. Virginia lacks some of the regulatory hurdles in its neighboring jurisdictions, making it preferable to some buyers. Over the past few years, Prince George’s and Montgomery counties have instated rent controls, and D.C. has historically had a rent cap priced off inflation.
D.C. also has the Tenant Opportunity to Purchase Act, and its multifamily landlords this year have faced a crisis of unpaid rent due to tenants taking advantage of pandemic-era eviction policies.
“D.C. may have its own nuances, including TOPA, while Maryland, certain counties may have their own nuances, with rent control or a right of first refusal. Virginia, really and truly, is a restriction-free zone,” Hastings said.
The fact that rent control measures in suburban Maryland are so new is fueling that level of uncertainty about investment in those jurisdictions, Schwat said.
“While the legislation itself has an impact on sales volume vis-à-vis some buyers not wanting to invest in rent-controlled markets, I think at least as much of it is just attributable to the uncertainty of how those regulations will be implemented in the long run,” he said.
