From The Washington Business Journal:
More millennials are leaving Greater Washington than moving in, and that could spell trouble for commercial real estate developers across the region.
Those young professionals helped the region avoid oversaturation of new apartments, but the diminishing pool will likely shrink demand for those units, among other potential consequences, according to Greg Leisch, senior managing director of market research at Newmark Knight Frank. Leisch isn’t predicting a complete bust in the market, but he does expect that landlords will have to increase concessions and drop rental rates in the near term.
“You might ask so what, but prior to 2013, this in-migration of millennials is really what fueled our hip restaurant scene, retailing. It helped fill apartments,” Leisch said in a phone interview. “This reversal, that we now have a net out-migration, is going to do a reverse in terms of apartments and office space.”
The issue is one of a half-dozen MegaTrends Leisch is expected to highlight at NKF’s annual Benchmarks event Thursday evening, and I checked in with him and Sandy Paul, managing director of national market research, to get a better sense for how the landscape has changed from this time last year. At that point, Leisch told me, he saw several potential signs that the region’s commercial real estate market was on the mend after years of downsizing and diminished demand.
Since then, new research has shown that the region’s pool of millennials is diminishing. How much? Data from the Stephen S. Fuller Institute at George Mason University estimated the region lost about 2,000 people aged 25 to 34 from 2015 to 2016. Lesich said the uptick in out-migration actually started in 2011, with the loss of around 60,000 millennial-aged workers, but was more than offset by the gain of 90,000 immigrating millennials. By 2014, those figures drew even at around 90,000 apiece but have since turned in the opposite direction, as Fuller’s data shows.
D.C. millennials, according to the Fuller Institute, have largely embarked for less expensive regions, namely: Baltimore; Hagerstown, Maryland; Winchester, Virginia; Richmond; Charlotte, North Carolina; Salisbury, Maryland; and Central Florida.
The problem, particularly for apartment developers, is that there are about 33,000 multifamily units under construction that will deliver in the next two years, with absorption set to come in at a much smaller average of around 9,600 a year. That supply-and-demand imbalance will favor apartment dwellers, a likely relief for many as rental rates have been sharply climbing over the past few years.
“If you’re a tenant, that’s good news. It probably means there will be concessions, asking rents might decline. If you are a developer, an investor, it will be quite a shift from what you experienced,” Leisch said. “Do we have too many units coming to market? Yes. But is it in bust territory? Absolutely not. These units will be absorbed.”
It will take longer than some predicted just a few years ago, as Leisch expects occupancy in the region’s multifamily housing market to fall from 95.3 percent to 94.6 percent, with a more pronounced drop in the District given the larger inventory of units under construction. Rental rates, by consequence, are expected to drop by around a percent next year but start to grow again in 2019 as the overhang of new units gets absorbed and the renter-landlord balance begins shift toward neutral and then in favor of landlords again.
The outlook for office space isn’t much brighter, though millennials are perhaps somewhat less to blame for an imbalance favoring tenants there, Leisch said. The problem with office space is more of a supply problem than one of demand. Leisch said the region’s vacancy rate now hovers at around 16.3 percent, elevated due to a number of factors including densification and downsizing among federal agencies and private tenants alike.
Looking forward, there’s about 7.7 million square feet of new office space set to deliver over the next two years, with demand for only about 4 million square feet. That should cause the region’s vacancy rate to increase to nearly 17 percent and push rental rates down and concessions up by consequence.
Copyright Washington Business Journal, reprinted with permission