Multifamily Market Outlook for the Washington D.C. Metro

[Peter Firehock]

Introduction:

My name is Peter Firehock, I am currently an Acquisitions Associate for a multifamily investment fund in Washington D.C., BPG Holdings. Multifamily real estate has traditionally been a stable asset class, and the Washington D.C. metro has traditionally been a stable market area, making the two together a good safe bet, especially for anyone with a long-term view of their investing strategy. In this market outlook report, we will take a look at the current and future outlook of cap rates and interest rates, the market fundamentals for the multifamily sector as a whole, the falling net deliveries and vacancies of multifamily units in the coming years in the D.C. Metro, the rising median household income and population growth in the D.C. Metro, and the expected spike in rent growth in the D.C. metro over the next few years

Summary:

After analyzing the data outlined below, I believe that investing in a value-add, multifamily property today has very strong potential for success. This poses the opportunity to acquire a distressed property today, spend the next 3 years to fully stabilize the property, capitalizing on the coming spike in rent growth, falling vacancy, falling interest rates, and compressing cap rates for multifamily real estate in the D.C. metro, as well as the option to hold the property as a safe and lucrative long term investment given the macro factors coming to Washington D.C. and the fundamentals of the multifamily sector.

Cap Rates, Interest Rates, and the Best Sellers to Target to Get Deals Done

Market Cap Rate, DC Metro, (1/7/2025)

Period	Market Cap Rate
2030	5.1%
2029	5.1%
2028	5.2%
2027	5.3%
2026	5.4%
2025 EST	5.6%
2025 YTD	5.7%
2024	5.7%
2023	5.6%
2022	4.9%
2021	4.4%
2020	4.8%
2019	5.0%
2018	5.1%
2017	5.1%
2016	5.1%
2015	5.0%
2014	5.1%
2013	5.3%
2012	5.3%
2011	5.3%
2010	5.5%
2009	6.2%
2008	6.2%
2007	5.5%
2006	5.4%
2005	5.6%
2004	6.1%
2003	6.7%
2002	7.3%
2001	7.9%
2000	8.4%

Cap Rates

In the next few months, cap rates on the right deals should be rising, making it an opportune time to buy. The 10-year treasury is currently sitting at 4.62% as of 1/24/2025 up from 3.73% on 9/13/2024, reflecting a 23.8% increase over the last 4 months (Source). This sudden jump in rates has not fully caught up with market cap rates yet since especially in the commercial and multifamily property markets, transactions typically take 6 months to transact, creating a lag effect between interest rates and market cap rates since interest rates adjust daily. As sellers realize that buyers cannot pay the same price for the same income stream as before due to the higher rates dampening overall buyer returns over that 6-month market cycle, sellers will eventually transact at lower prices, making it more apparent to sellers where the current market pricing is.

Best Sellers to Target

This will make deals more difficult to come by however, since many sellers may opt to wait until interest rates decrease and cap rates follow suit in the coming years to get a higher price on their properties if they are not being forced to sell at this time. This makes targeting distressed sellers, such as those in pre-foreclosure, or those with ballooning debt that was taken out in 2020-2021 when the interest rate was 7.37x lower (8/09/2020 the 10-year treasury was .56%, 1/15/2024 the 10-year treasury is 4.69%) making it very difficult for those that underwrote the property in 2020 to have predicted refinancing at these rates and likely a sale is their only option. Other types of sellers that are making deals easier to get done are those with assumable debt available, and sellers with the ability to seller finance there properties. These are the best options for finding sellers willing to transact in today's market at cap rates that make sense to the current interest rate environment, in order to capitalize on the upcoming favorable market conditions over the next few years such as spiking rent growth, falling vacancy, and compressing cap rates.

Interest Rate Projections

Looking at the Federal Reserves Dot Plot, which is released every quarter and is the federal reserves outlook on where they believe the Fed Funds Rate, which does not control fixed-rate financing but does influence it, as well as directly affects floating rate financing, is predicted to be 3% - 3.25% by Year End 2027 (Source), currently sitting at 4.25% - 4.5% today. Donald Trump has also expressed several times he will do everything he can to influence the Federal Reserve to reduce interest rates, although he cannot directly control what the Fed ultimately does. The overall trend of the 10-year treasury appears to be downward reflecting as well right now, with the most recent high of 4.8% on 1/13/2025 failing to touch the previous high of 4.98% on 10/19/2023 and now sharply falling to 4.62% today (1/24/2025).

According to JP Morgan, the fact that the 10-year treasury has not moved lower than where it was during the first cut is very odd, as when looking at the last seven cutting cycles of the Fed, the 10-year treasury was below where it was when the Fed began cutting 100 days after the first Fed cut 100% of the time. The reasons cited for the market not following suit this time are concerns that increasing GDP, especially in Q4 of 2024, and policy changes such as tariffs could lead to a resurgence of inflation and thus a change in the Fed’s projections, with there being 150bps of variance between certain Fed members projections (Source). For this reason, it would be prudent to not overleverage yourself in this type of environment in order to wait and see where rates do end up falling, as there is consensus in the market we are moving into a falling rate environment, the exact timing of when rates will be falling is unknown and different scenario analysis should be added to underwriting refinance periods to be sure the project is sustainable if inflation resurges and a refinance is delayed. In the case of floating-rate loans, interest rate caps would be a prudent measure to take as well.

Multifamily Sector Fundamentals

The underlying fundamentals for the multifamily sector are very strong right now. This comes from several data points, the first being the average age at which people are choosing to stop renting and buy their first home. The average age that people stop renting and buy their first home in the United States in 2024 is now 38 years old in Washington D.C. (Source) This is up from 35 years being the average age the year prior.

Cost to Rent vs Own and Return to Work Policies

This can mostly be attributed to the massive increase in home prices, particularly from 2010 to today, making people opt to rent for longer, especially today in the elevated rate and home price environment making renting the substantially cheaper option, on top of historically low inventory to choose from. On the other hand, many landlords were able to obtain low mortgage rates during the historically low interest rate environment during the Pandemic, allowing them to offer a much more attractive housing cost to renters. As of January 2025, the average cost to rent is $2,450 (Source) in Washington D.C., while the average home price is $635,000 (Source) (at a 7% interest rate, 10% down payment, 30-year mortgage that would be $3,802 a month).

Another positive fundamental of the multifamily sector is the continuing trend of return-to-work policies. With the prevalence of remote work policies, many people opted to leave affordable apartments living near work in and around metros to live an hour or two outside of their work location to get much more space for their money. This hurt apartment demand as a big attraction to apartments is usually their convenience to the metro and people’s offices. As of October 2024, 75% of remote work employees now have some sort of in-person work requirement, up from 63% in 2023 (Source). Major employers like JP Morgan and AT&T are pushing for these policies as well, and specifically in the D.C. region, Amazon HQ2, the Washington Metro Area Transit Authority, and the Executive Branch of the government have required all employees to return to work 5 days a week at those locations.

Fundamental Lack of Residential Supply

Another interesting driver of demand is the fundamental lack of supply of housing stock due to the fallout effects of the 2008 housing crisis, slowdowns in housing construction during Covid-19 primarily in 2020, and a good amount of 2021 from supply chain issues, labor shortages, and rising construction costs. This fundamental slow in housing starts has caused household formation to outpace new homes (single and multifamily) by 2.3 million between 2012-2022 (Source). While more development did happen over the last few years from development projects started in 2021 and 2022 when rates were lower and developers could outlast supply chain issues, the upcoming supply is expected to drop again, as we will discuss later on, with the relatively sharp rise in interest rates that has dried up investment capital due to the fear in the market, sellers opting to hold out on their land and or properties until cap rates and interest rates subside again as is expected in the coming years, as well as banks being cautious to lend on real estate due to this sharp rise putting many projects that were started in 2021 suffer greatly from a 7x increase in rates over the following 40 months that had adjustable rates or 5-year terms which is very common in larger multifamily investing. This continued imbalance in housing supply to household formations and population growth.

Changing Demographics and Preferences

People are also waiting longer to start families (Source), and people are valuing more the flexibility that renting provides in the remote work and online business era as well as the sense of community apartment complexes can provide in our digital and post-pandemic world where people feel less connected to the community than before (Source). Newer buildings now have state-of-the-art amenity packages with pools, gyms, co-working spaces, high-speed internet, and community gathering spaces where savvy property management groups will have apartment building events to encourage this sense of community, all being a level of convenience and neighborhood community people cannot get anywhere else. All these factors contribute to the average age of first-time homebuyers rising to the highest ever at 38 years old and looking at the demographic data of the population by age, this should result in high demand for rentals over the coming years as a large portion of the population, especially in the Washington D.C. Metro (38%), is between 20 - 39 years old (Source)

Net Deliveries and Vacancy Rates

CoStar: Apartment Net Deliveries, Apartment Vacancy, DC Metro (1/7/2025)

Period	Net Deliveries	Vacancy
2029	9,737	6.920%
2028	7,844	6.985%
2027	7,078	7.148%
2026	6,967	7.225%
2025 EST	7,845	7.225%
2025 YTD	-	7.459%
2024	16,059	7.470%
2023	13,676	7.054%
2022	12,352	7.047%
2021	13,813	6.496%
2020	14,973	8.506%
2019	12,925	6.548%
2018	10,918	6.409%
2017	11,794	6.900%
2016	11,730	6.773%
2015	12,240	6.758%

Below is a table from CoStar outlining the upcoming net deliveries of multifamily units in the D.C. metro area. As you can see, the net deliveries are expected to majorly decline in the coming years, most notably a 51.14% decline in net deliveries of apartment units from 2024 to the end of 2025.

This is because the feasibility for developers to build new units declines sharply as interest rates rise this rapidly, and the end effect is not seen until the units that had already begun being built when interest rates were lower are completed a year or two later. This makes complete sense given the sharp rise in rates from the beginning of 2022 to today. At the beginning of 2022, the 10-year treasury rate was still in the mid-1% range, meaning 2 years later when those units are being finished, we are seeing those high deliveries in 2024. At the beginning of 2023, we see rates in the mid 3% range, reflecting in development starts slowing in 2023 and 2024 resulting in much lower net deliveries in 2025 and onward as rates continue to remain elevated and bank financing requirements remain tight.

As you can see, this has put downward pressure on Vacancy rates, since the lower supply of oncoming units coupled with a continued expected population growth in the D.C. Metro area will lead to there being fewer total units available, and higher occupancy in multifamily buildings.

Population Growth

CoStar: Population Growth, DC Metro, United States (1/7/2025)

Period	Washington	United States
2030	0.758%	0.498%
2029	0.758%	0.500%
2028	0.757%	0.507%
2027	0.765%	0.515%
2026	0.834%	0.532%
2025	0.966%	0.563%
2024	0.983%	0.569%
2023	0.707%	0.500%
2022	0.262%	0.423%
2021	0.004%	0.189%
2020	0.123%	0.285%
2019	0.946%	0.514%
2018	0.947%	0.562%
2017	1.058%	0.657%
2016	1.079%	0.762%
2015	1.125%	0.785%

Washington D.C Proper surpassed 700,000 residents for the first time since 2019, showing the continued resurgence of the city since issues that arose for the city during the Pandemic (Source). This can be expected to continue as more employers, most notably employers like Amazon’s Headquarters 2 and the Executive Branch, are requiring employees to return to the office 5 days a week. Many employers are seeing now as a great time to opportunistically buy or lease, usually downsizing, into new office spaces in the district during this period where there are still depressed prices, even on some Class A office spaces.

The Resurgence of the Office Market in D.C.

The resurgence of employers returning to the city with the pandemic fears now in the rearview mirror is apparent with Q4 of 2024 being the first quarter of positive leasing absorption for office space in the District over the last 10 quarters (Source) Another example is Boston Properties Group (NYSE: BXP), the largest publicly traded developer, owner, and manager of Class A Office space in the United States, is building a 320,000 square foot new trophy office in Downtown DC, with 5 floors already pre-leased to the global law firm McDermott Will & Emery as well as the Rockefeller Group developing a 422,000 square foot office building slated for delivery in 2026 at 600 Fifth St.NW, which is similarly 50% pre-leased (Source). These developers are reacting to the market trend that, particularly in Washington D.C., there is a much lower vacancy in Prime office space, which CBRE predicts that trend will continue with vacancy levels being below pre-pandemic for Prime space by 2027 (Source)

Many people who work in the D.C. metro will still be able to work hybrid or fully remote due to the nature of their jobs or company incentives. Given this, proximity to employment has not been a concern for many people, which is what led to population declines in Washington D.C. during the Pandemic as well as other health and safety concerns. For many of these hybrid and remote employees today, the main attraction to living in and around a major city like D.C. is the easy access to retail and entertainment areas, especially experience and community-focused retail areas.

Changing Preferences for People’s Desire to Live in the Metro Area

This is likely due to the newfound appreciation for these types of community and experiential activities from the inability to access them during the Pandemic, as well as the lack of need to be near transactional retail stores with consumers now being accustomed to doing a lot of their shopping online. A good example of this is the Springfield Mall just 30 minutes outside of the District, where visitor levels are at pre-pandemic levels and average stay times are higher due to their prioritization of experience-focused retailers according to the CEO of Pennsylvania Real Estate Trust (Source).

Washington D.C. is fully embracing this trend, partnering with Monumental Sports to conduct a $800 million renovation of the Capital One area, which is home to the Washington Capitals, Washington Wizards, and other large entertainment events (Source). Washington D.C. has also finally acquired the RFK Stadium (Source) from the federal government, a long-sitting vacant stadium in the NE quadrant of the District, with the plans to have the Washington Commanders come back to the District from Landover, Maryland, and occupy the stadium after a full renovation, who are currently a top 4 team in the NFL.

With a large portion of the incoming migration coming from international residents moving to the District, emphasizing improving and bringing back Washington D.C. sports teams to the city should create a strong desire for domestic residents to want to live near a fun, community engaging activity that is very relevant to those that live in and around the city.

The District also has other programs it is running to make the District more attractive to live in outside of just working in the area, such as the Office to Anything program (Source) and the Housing in Downtown program (Source) which will incentivize developer through tax credits to convert office buildings into new construction housing and new construction retail properties, which should continue to attract more residents back to the area.

D.C. also understands that with all of these big changes we have seen, the strategy and allocation of resources from the government moving forward should be reassessed to create a city that is adapting to the future trends to remain a safe and desirable place for residents to live. This has sparked D.C. to start, for the first time in 20 years, a full rewrite of its Comprehensive Plan looking out to 2050 (Source).

Median Household Income Growth

CoStar: Median Household Income, DC Metro, United States (1/7/2025)

Period	Washington	United States
2030	$147,385.84	$94,666.35
2029	$146,202.44	$93,833.90
2028	$141,459.22	$90,508.90
2027	$136,714.80	$87,188.85
2026	$131,966.50	$83,863.68
2025	$127,488.12	$80,662.87
2024	$124,503.94	$78,412.93
2023	$121,486.93	$76,601.69
2022	$117,432.01	$74,755.01
2021	$110,354.99	$69,717.00
2020	$103,869.83	$65,006.74
2019	$105,659.00	$65,711.99
2018	$102,180.00	$61,937.00
2017	$99,669.00	$60,336.01
2016	$95,843.00	$57,617.00
2015	$93,294.00	$55,775.00

The Median Household Income in the D.C. Metro area is expected to rise in the coming years as well according to the above data from CoStar. This can be attributed to several factors, one being the continued increase in GDP in the D.C. metro area, the most recent data from 2023 showing an increase from $664.6B to $714.6B (Source) representing a 7.5% increase from 2022 to 2023. The D.C. Metro job market also remains strong, adding 36,600 jobs (1.1% increase) from November 2023 to November of 2024 (Source).

D.C. Metro’s Robust Technology Sector, Virginia Tech and George Mason Campus Expansion, Amazon HQ2

The strength of the D.C. Metro’s technology sector being the 8th largest pool of tech talent in the world and the 3rd largest pool of tech talent in the United States (Source) should continue to drive median household incomes as these highly skilled employees in the D.C. metro are become more and more essential to the 15,000 tech companies in the D.C. Metro’s business with the continued expansion and advancement of Artificial Intelligence.

Other catalysts include Virginia Tech’s new 600,000 square foot, 1 billion dollar Innovation Campus in Alexandria just outside D.C., 300,000 square feet of which was completed last week and is now open for students. The Innovation Campus will house Virginia Tech’s Pamplin College of Business graduate program with an emphasis on entrepreneurial startups and other master’s programs in engineering and computer science. At completion, the campus will bring 750 new master’s students and 100 new doctoral students to the area annually, providing talent from a top 25 public university to fill technology jobs in the D.C. Metro area.

George Mason is similarly developing 345,000 square feet for a new building called the Fuse at Mason Square at its Arlington Campus, which will be fully open in August of 2025 and will house 1,000 more new students in the technology field and 300 additional faculty, continuing to bring more highly skilled talent to the technology sector in the area (Source)

The Virginia Tech campus was part of a deal made between the state of Virginia and Amazon, who agreed to add a 2nd Headquarters just up the road from the campus and to use the campus to attract high-quality talent to Amazon. Amazon HQ2 has brought 8,000 new jobs to the Metro area since beginning this expansion into Arlington Virginia, just outside D.C. in 2018, with plans to have added a minimum of 25,000 jobs by 2031 (Source). The new Headquarters also recently released a statement requiring all employees to return to the office 5 days a week, meaning these 8,000 current jobs and future ones will be relocating to the D.C. Metro area moving forward. As a part of the partnership with the state of Virginia, which included $750 million of Virginia taxpayer money for infrastructure improvements to support the Amazon HQ2, Virginia is offering Amazon $550 million in grants for hitting that hiring goals, and an additional $200 million for hiring 12,850 more employees from 2030-2034. To receive these grants, Amazon has committed to having an average annual wage of $150,000 starting in 2019, with a 1.5% increase annually, and also cannot count jobs over $875,691 toward this average, meaning they cannot skew the average higher by paying a select few employees massive salaries (Source).

Rent Growth

Apartment Rent Growth, Apartment Vacancy, DC Metro, (1/7/2025)

Period	Vacancy Rate	Annual Rent Growth
2029	7.0%	2.8%
2028	7.0%	3.0%
2027	7.2%	3.3%
2026	7.2%	3.8%
2025 EST	7.3%	5.0%
2025 YTD	7.5%	2.7%
2024	7.5%	2.9%
2023	7.1%	3.0%
2022	7.0%	3.0%
2021	6.5%	7.8%
2020	8.5%	-2.0%
2019	6.5%	2.2%
2018	6.4%	2.4%
2017	6.9%	1.6%
2016	6.8%	1.9%
2015	6.8%	2.8%

Finally, we see from CoStar that the expected rent growth over the coming years is expected to be very positive due to all the factors discussed above. It is important to note that the CoStar data in this report is for the D.C. Metro in its entirety, and each city / county and neighborhood of the D.C. Metro could have different rent growth projections, however, this is a great sign to see that the area as a whole is moving in a very positive direction.

Conclusion

Because of D.C.’s typical recession resilience from the federal government and the large presence of big-name private sector companies in the area providing stable employment, it is very rare to have the opportunity to buy real estate at a discount. However, the current market environment with relatively very high interest rates (7.37x increase of the 10-year treasury in 40 months from 2020-2024), and the slow recovery coming out of the Pandemic for the city make this a great opportunity to do just that, with many positive market factors on the horizon.

In my opinion, right now is a great time to purchase a value add multifamily asset at an attractive basis, refinance in the coming years as we are now moving into a falling rate environment, receiving your tax-free refinance proceeds from the forced appreciation coming from renovations, the spike in market rent growth, lower vacancy, and compressing cap rates during the stabilization period, The macro factors for the DC Metro and for multifamily overall should contribute to a multifamily asset in the area being a safe and lucrative long-term investment as well.

Other Notable Developments in the D.C. Metro

Other developments on the horizon that should continue to lead to the success of the area are Alexandria Virginia’s massive success so far, most notably the completion of the Hazel tunnel in May of 2024, in it’s AlexRenew program to make the Potomac River swimmable and fishable by 2040 (Source), the new Rivana development next to Reston Town Center, which will add a 9 million square foot development to the newly expanded Silver Line Metro, the first Phase including 2.7 million square feet expected to be delivered by 2027 (Source) , and a 8.1 million square foot development from JPG Smith in Potomac Yards Alexandria next to the new Innovation Tech Campus and brand new metro station in the coming years (Source). These are some of the biggest developments happening in the metro, but there are dozens more that I won’t go into here to avoid this report going on to long.

Thank you for reading my research report on the outlook for the D.C. Metro area. If you enjoyed the this report, please feel free to share it with a friend!