Improved Multifamily Fundamentals Foreshadow Renewed Investment in Core Submarkets

The United States multifamily sector proved its resilience in the face of economic uncertainty during the COVID-19 pandemic, significantly outperforming investment in other commercial real estate classes. According to Newmark’s most recent Multifamily Capital Markets Report, annual apartment sales volume reached $335 billion in 2021, while investment as a percentage of the nation’s overall commercial real estate market rose to 42 percent, the highest allocation to multifamily on record.

However, the unprecedented increase in multifamily transaction volume did not occur evenly across markets. Temporary declines in effective rents, occupancy and overall demand, brought on by the pandemic, were particularly pronounced in more urban, core submarkets, leading investors to largely favor assets located in suburban, non-core submarkets. As residents moved to the suburbs, capital followed.

The Washington, DC area followed a similar trend. According to Real Capital Analytics, the region experienced a record-high $11.8 billion in multifamily sales volume in 2021, even with a shift in investor interest to non-core submarkets and a yearlong pause of the city’s Tenant Opportunity to Purchase Act (TOPA), which effectively placed a moratorium on all DC apartment sales.

Vastly improved apartment fundamentals in core submarkets of the DC metro area and the resumption of in office work foreshadow renewed investor interest in densely populated areas. As illustrated in the graphs below, effective rent and occupancy among Class A and B assets in the Virginia, Maryland and DC core submarkets – Arlington, Tysons Corner, Bethesda, Rockville and most neighborhoods in Washington, DC – grew immensely throughout 2021, returning to, or even surpassing, pre-pandemic levels as of the fourth quarter.

Improved rent growth and occupancy metrics have led to an increased number of investment opportunities in greater Washington’s core submarkets. Approximately 55 percent of all institutional-grade multifamily assets introduced to the market in the first quarter of 2022 were located in these areas, with nine properties situated within the city limits of Washington, DC. As residents, once again, are drawn to urban areas, capital in these regions will likely return.

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*Sources: Delta Associates, Newmark Research

Note: Northern Virginia core submarkets include Arlington, Alexandria, and Tysons Corner. Suburban Maryland core submarkets include Bethesda, North Bethesda, and Rockville.