The Lack of Multifamily Housing in the DC Metro Area.

A very common request I get from clients, whether for a primary residence or as an investment, is that I help them locate a multifamily property somewhere in the DC metro area. In many other cities this would not be a problem. However here in DC it is a problem. We just do not have multifamily (2-4 unit) properties like you would find in many other areas. This can be very frustrating to those unfamiliar with our local housing market.

Washington, DC is largely made up of a population that is not native to the area. People move to Washington DC from all over the county….and all over the world. There are several reasons for this. The international factor of DC is largely because we are the nation’s capital. This means that we are the home to international embassies and consulates. So we literally have people here from every country in the world. So, much like New York, San Francisco and Los Angeles, we have a large international population, and in some ways possibly more diverse than those cities. Also, being the home of the federal government means that many employees of the government move here from other parts of the country. Typically many of the staff of members of Congress come from their home states. So we have individuals from every state in the nation as well. Very few people I meet are actually native Washingtonians. My wife is one of the few that I know.

So when individuals move here from places such as New York, Philadelphia, Cleveland, Boston etc, they are familiar with living in an area with a large stock of multifamily homes…and they are always disappointed when they learn that they do not exist here. But why is that?

What makes DC so different from other cities on the east coast where there are a large stock of multifamily homes? There is actually a historical reason behind this. Let’s first talk about why there is such a large stock in other northeastern cities.

New York City was founded in 1624/1625 (as New Amsterdam actually!). Boston was founded in 1630. Philadelphia was founded in 1682. Each of these northeastern cities, and many other cities like them such as Cleveland, Chicago, Hartford became the destinations of choice for poor immigrants from abroad. Different cities attracted different ethnicities, but the stories remain the same. Seeking the American dream in the mid 19th century onward, the United States became the destination of choice among the poor around the world. The Irish, Italians, Polish, and Germans moved into these cities and created a situation prime for multifamily housing.

As these immigrants came to the country, they were often poor and working class. So they could not afford a single family dwelling. It only made sense to have three or four families living on the same lot of land. Also as some previously wealthier areas with larger houses began to attract immigrants, they would often carve up a large single family home into a multifamily home. Then they would often have one generation of a family living in one unit, and another generation of the same family living in the other unit.

Much of the multifamily housing stock we see throughout New England was due to this wave of immigrants. Throughout this area we see a type of home we call a “Triple-Decker” (or “Triple-Deckah by the locals). Primarily built from about 1870 to 1920, these became the property type of choice for a large wave of immigrants. Interestingly enough, these wood frame homes were considered an upgrade over the existing fully attached brick homes, a trend that would reverse 100 plus years later when the fully attached brick homes would again become stylish. These homes were typically three units, so you do see a large inventory of 3 unit properties throughout the northeast.

Now how did the development of Washington DC differ from other cities in the northeast? DC by contrast was founded in 1790….over 100 years later than Philadelphia. As DC was founded so much later than these other cities, it did not have the economic power to create jobs for immigrants in large amounts like its counterparts further north. In 1870 when a large number of immigrants started entering the country, DC only had a population of about 109,000. Compare this with New York at 942,000 (And Brooklyn with another 396,000), or Philadelphia at 674,000, Baltimore at 267,000 and Boston at 250,000. DC was a much smaller population center that had the ability to grow by spreading out as opposed to building upward. DC was not a destination city. It did eventually hit a growth spurt and peaked out at about 800,000 in 1950. After the civil war many freed slaves moved northward and made DC their home. But after the tumultuous times of the 1960’s DC began a slow population decline that was not reversed until the new millennium.

So this is just a brief glimpse at why many northeastern cities have a large multifamily housing stock, while DC did not ever build that way in large amounts. On the Virginia side of the border in the DC metro area, multifamily housing is almost nonexistent. You will find some in the District proper, but in very limited amounts. Takoma Park, MD has some in a small area off of Flower Ave…but these do not make great investments due to the local rent control laws there. Do to the low supply of multifamily housing, we run into a simple supply and demand problem. Low supply increases demand. With increased demand we see higher prices, and thus lower cap rates. So if you were to look at single unit properties through the lens of a cap rate, they may actually have a cap rate higher than you would get in a 2-4 unit property.