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Washington Post: Can New Apartment Sales be Sustained?

February 12, 2012

The goal for many apartment developers — including some of those building thousands of local units at the moment — is to design and build projects that can then be sold to investors interested in holding them long-term.

Last year was a good time to sell. Overall sales prices per unit in the Washington area have recovered to 2007 levels, according to the research firm Delta Associates, having risen 22.7 percent from 2010. Eighty-one apartment deals closed in the Washington area in 2011, according to research from the services firm Jones Lang LaSalle. Four properties — View 14 and the Ellington in the District; the Palatine in Arlington; and Chase at Bethesda Metro — sold for more than $500 a square foot.

But as developers continue to add units, sometimes more than 4,000 a quarter, differing views are emerging about whether the sales market will welcome the properties when they are completed.

Several real estate investment trusts that focus on Washington apartments are predicting a busy year. For instance, AvalonBay Communities expects to sell $400 million in projects and acquire another $500 million worth in 2012. The market could begin to show weaknesses, however, in certain submarkets where overbuilding occurs.

Last year “was a very active year, and then in the fourth quarter, there was a pullback,” said Al Cissel, a Jones Lang LaSalle managing director for capital markets. Cissel said that he expects prices to remain at least at 2011 levels for 2012. With so many units scheduled to be completed from 2013-2015, he said that getting a property to market early is best.

“The sooner the better, no matter what it is,” Cissel said.

In 2011, The Bozzuto Group, based in Greenbelt, lined up 3,500 apartments in the Washington-Baltimore area for development and also sold a property, the River Pointe apartments, in Fort Washington. Toby S. Bozzuto, president of Bozzuto Development, said he had similar concerns about too many units coming to some neighborhoods, which could drive down rents.

“There has been a growing consensus that Washington has a lot of supply in the pipeline and that there are hints of overbuilding in some submarkets, within Washington, I almost would call them micro-submarkets, and it’s giving the banks and all of us a little pause,” he said.

Cissel, Bozzuto and others still say Washington remains one of the strongest apartment markets in the country, and one of the most attractive to investors around the country and the world. Cissel said top prices will likely still be achievable by properties that excel on a handful of factors: location near public transit, clear ownership structure and trendy amenities including fitness centers and WiFi-enabled lounges.

Sellers of Class B and C apartment complexes — usually defined by their age or declining condition — may see the market improve as investors turn away from markets that become overheated. In 2011, eight of the 27 Class A (or high-end) properties that sold in the Washington area were in the wealthy inner suburbs of Arlington and Alexandria. But among units that Jones Lang LaSalle says are now on the market or under contract, more than 7,000 are in suburban Maryland, where prices trend lower. Only about 4,000 are in Northern Virginia and even fewer are for sale in the District. “I think you’ll be growing demand for Class B and C product,” Bozzuto said. “Not everyone can live in luxury Class A housing.”

For Chris Donatelli, the developer who sold the Ellington in September for $100 million to TIAA-CREF, all the data and projections add up to no rush. In 2011 he floated a recently completed project at 3801 Georgia Ave. NW on the market, but he decided to hold onto it and lease it up instead. He may put it up for sale again down the road.

“It was different scenario than the Ellington,” he said. The Ellington “was an operating asset for several years and had been stabilized and was a more certain investment.”