Worries Abound Despite Robust DC Multifamily Market

Over the last year, the DC market has absorbed 14,000 apartments, an incredible number. But despite a (finally) rebounding job market, this morning speakers at Bisnow’s Mid-Year Multifamily Surge event expressed concerns over rent stagnation, small margins and oversupply that could dampen enthusiasm in the apartment market next year.

“The elephant in the room is interest rates in 2016,” Abdo Development COO Gordon Buist told the crowd. Everyone thinks the rates are going up, but no one knows when. The interest rate scare is part of what drove huge losses for REITs in the first half of this year, and the continued uncertainty isn’t helping.

Construction companies are reaping the benefits of the frenetic pace of development, but they’re not exactly Scrooge McDuck in his money room. Donohoe Construction SVP Neil Stablow says that, since the recession, building firms have just been happy to have work. But, “everyone’s been working for a while at pretty thin margins,” he says. “Everybody’s busy, but it’s hard to make a buck.” At some point, costs will start to go up.

“Nationally, construction inflation is our biggest concern,” Alliance Residential managing director John Hay, framed nicely under the Bisnow logo, says. “But DC hasn’t been as bad as other markets.” Alliance is the biggest multifamily developer in the country, John reminded the audience, and he gave a national perspective to the conversation. All over the country, multifamily is experiencing an unprecedented surge. Because of that, some lenders are pulling back. “Some lenders are holding because they just have too many multifamily properties on their books,” he says.

Slim margins aren’t the only issues construction firms are dealing with. Moseley Construction VP Jason Sherman says talent recruitment is the biggest problem facing his company. “It’s an ongoing, difficult problem for us,” he says. Neil agreed, and says the recession caused many mid-level construction employees to change industries. Now, job sites have plenty of fresh-out-of-college workers, but “a lot of senior-level people in the field,” he says. “That’s a problem.”

While construction margins are thin, so are many lending profits. Greystone managing director Keith Hires told a story of one lender just breaking even on a $100M loan in 2015, and used it as a cautionary tale. “The margins on the credit side are so tight that it doesn’t take much” to tip the scales, he says. Short-term deals are harder to come by as investors want to lock in long-term loans before interest rates spike. For bridge lenders like Keith, that’s not a pleasant trend.

Part of what’s dampening returns is rents not rising alongside demand. DC was 42nd in the country in rent growth last year, and Keith says he doesn’t expect it to be much higher in 2015. Foulger-Pratt president of residential Alison Punsalan says “everyone’s interested to see where rent growth is going to go.”

These are all real concerns, but they are still overshadowed by the good news in the multifamily market: DC is still hot, people want to live here and buildings are leasing up fast. “Supply will remain a concern,” Mill Creek Residential senior managing director Sean Caldwell says, “but demand has overshadowed that concern.”

Walker & Dunlop managing director Brendan Coleman referenced W.C. Smith’s 2M building in NoMa, 314 units that leased in nine months with very modest concessions. “I think it’s a really good story about our absorption,” he says. “It is dwindling, but people are continuing to move in.”

It’s incredible we’ve gotten this far into a story about apartments and haven’t yet mentioned Millennials, but we couldn’t leave out the generation driving what Keith called “the Golden Age of Multifamily in this country.” Rental property owners are nervous that Millennials will start buying any day now, but Alison doesn’t think that’s true. “The high quality of apartments do mimic a home,” she said during the construction and development panel, moderated by CohnReznick's Renee Mathews (right). Plus, even if the young professionals of today start to own, their successors aren’t far behind. “Generation Z might enter the rental market sooner than the Millennials because the job market is so much better,” she says.

More than 300 people attended the event this morning at the stunning Mayflower Hotel, and there was so much info that we couldn’t fit it all in one edition. Stay tuned tomorrow for more multifamily coverage.