If there was a dominant theme in the fourth quarter in Washington real estate, and the rest of the country for that matter, it was a growing sense of urgency around housing affordability. A recent study from the Urban Institute estimated that the Washington region needed 370,000 new housing units over the next ten years to accommodate the growing workforce. This is approximately 100,000 more units than local leaders previously thought were needed, and the region is not even on a pace to produce that amount of housing. Additionally, 75% of the demand in the Urban Institute study is needed at a price below current rents or sales prices for new housing. As the production cost of housing continues to rise, and it has, more and more people are being priced out of the market. Cost increases are being driven by rising materials costs, the increasing costs of labor and public sector mandates (school fees, storm water retention costs, contributions to infrastructure such as road improvements, sewer and water upgrades etc.). In the past the public sector response has been to increase the affordable housing mandate for private sector projects, which reduces rental income and project value, thereby reducing supply. These kinds of policies have exacerbated the very problem we are trying to solve. This has been the experience in cities in California, Oregon and other markets across the country. Unsurprisingly, these are the cities that have seen the greatest rise in homelessness.
What we need are strategies to increase the amount of housing across the region, and the public sector is getting on board. The Metropolitan Washington Council of Governments has reached out to local jurisdictions, requesting an update of housing plans and a pledge to include the increased number of units in the Urban Institute study. This is a good start. There is also new collaboration taking place between the public and private sectors focused on increasing both affordability and supply. New capital strategies are emerging. Local jurisdictions are becoming more receptive to development projects that deliver both new supply and affordability. The future growth of the region will hinge on its ability to increase the rate of housing production across the affordability spectrum. We are hopeful that these are green shoots that will lead to more sensible policies that produce more housing.
Local Market Update
The Washington real estate market closed out the year in strong fashion with a local economy that produced approximately 60,000 new jobs on a year-over-year basis. The apartment market absorbed 11,500 units during the year which was 1500 units above the 10-year average and rents rose across the region by 2.9% according to NKF Research. The apartment market has continued to absorb a record number of units at higher and higher rents, and apartment construction continues to grow despite a continued fear of overbuilding. Considering this growth with the dramatic fall off in single family construction, there is an undersupply of total new housing in the region.
The regional office market absorbed 3 million sf of space in 2019. This is the best performance in a while, reflecting growing demand as the region continues to rebound from the Great Recession. However, with a healthy increase in supply, vacancy rates remained static with some submarkets faring better than others. While the vacancy rate continued to fall in Northern Virginia, downtown vacancy rates rose to an all-time high of 14.2%. All in all, 2019 was a solid year.
Looking forward there are indications of the market slowing somewhat in 2020. The regional leading index published by the Fuller Institute turned negative for the year 2019 which is a warning sign for the local economy. Nevertheless, job growth predictions continue to be positive, although somewhat less robust than 2019. Office absorption will be positive based upon current activity. Look for continued falling vacancy rates in Northern Virginia which will receive the lion’s share of the demand. The apartment market continues to roll on. 2020 could be another solid year.