Will Amazon Save the Swamp?

From Attom Data Solution, Housing Report, May 2018, Vol. 12 Issue 5
By Joel Cone

The nation’s capital is eagerly awaiting the selection of a candidate that could dramatically shift its fortunes in 2019 and beyond.

Many in the region are hoping that one of three candidates located in the District of Columbia and its surrounding counties will beat out 17 others from around the country to be selected as the new location for Amazon’s second company headquarters known as HQ2.

“We have the kind of talent in the categories they are looking for. It would be good for this economy. It would diversify it and it would attract other businesses,” said economist Stephen Fuller, director of the Stephen S. Fuller Institute for Research on the Washington Region’s Economic Future, Schar School of Policy and Government at George Mason University.

The three potential candidates in the metro area are Montgomery County, Maryland; Washington D.C. itself; and Northern Virginia. Over the past few years Jeff Bezos, founder and CEO of Amazon, has laid the groundwork for selecting the company’s new headquarters, with Amazon’s final top 20 candidates announced in January.

Now considered the world’s richest billionaire according to the Forbes 2018 list, Bezos has already established a presence in the D.C. metro area. First he bought the Washington Post back in 2013 for $250 million. He followed that with paying a reported $23 million to purchase the former Textile Museum in 2016, for the purposes of converting into a residence. Located in the Kalorama neighborhood, and made up of two homes on the National Register of Historic Places totaling a combined 27,000 square feet, when renovated it will be the largest home in the nation’s capital.

Best for Housing

Not all Amazon employees have a multi-million dollar budget for buying a home, so Housing News Report looked at median home prices and six other factors affecting housing and quality of life in each of the three D.C.-area markets to determine which might be most appealing for prospective homebuyers and homeowners.

Among the three HQ2 candidates in the region, Northern Virginia — comprised of 15 counties and cities in the D.C. metropolitan statistical area — had the lowest median home price at $390,000 followed by Montgomery County, Maryland at $400,000 and the District itself at $520,000, according to ATTOM Data Solutions.

But homes were more affordable in Montgomery County thanks to higher wages there, according to an ATTOM Data Solutions analysis of price-toincome ratios.

Based on all seven factors considered in the housing and quality-of-life analysis — home prices, appreciation, affordability, school scores, crime rates, property taxes and environmental hazards — Montgomery County ranked highest among the three in the D.C. metro area but was still ninth when compared to all 20 Amazon HQ2 cities, with Raleigh, North Carolina, Atlanta, Georgia, Pittsburgh, Pennsylvania, Nashville, Tennessee, and Austin, Texas ranking as the top five.

If any of the three local venues are chosen to house the new HQ2, it could be a game changer to that area’s economy and housing market, bringing as many as 50,000 jobs and increased demand for more housing.

For Clint Mann, president at Urban Pace, a company that provides sales, marketing, leasing and advisory services for builders and developers, the choice of any of the three D.C. venues would be good news.

“If that happens my job security just got a lot better,” said Mann. “We work in every submarket in D.C. and at every price point. It’s a good end result for whatever municipality gets HQ2. The question is how quickly will they see the benefits for the broader market.”

Swamp Drain Diluting Jobs

Although still strong, the broader economy in the D.C. region has been showing some signs of weakness, according to Fuller.

“All the job growth has been in the non-federal sector,” he said. “The job base is diluting in terms of salary. We’re adding more lower-paying jobs and losing higher-paying jobs.” Fuller noted that the D.C. area has the highest share of Ph.Ds. as a percentage of the workforce in the country, but added that outmigration of those Ph.Ds. and others is a problem. While fairly large numbers of people are moving to the metro area, they tend to move out when they see that the economy is doing better elsewhere. And those outmigration numbers have recently outpaced the in-migration numbers, resulting in a net loss of population, according to Fuller.

In the March issue of the his “Washington Economy Watch” Fuller noted that the region’s economy is growing in a positive direction. Still there is concern since the federal government had 6,600 fewer jobs between Trump’s inauguration in January 2017 and January 2018.

“These jobs area important because they leverage home buying, buying a nicer car and clothes,” Fuller explained. “The average household income here is $55,000.”

Although unemployment in the District has steadily declined in the first three months of 2018 to 5.6 percent in March, job growth in January 2018 was primarily due to the dominance of the area’s three private sectors: professional and business services, education and health services, and leisure and hospitality services. It’s a job mix that favors lower value added jobs, Fuller said.

Housing Stretched Thin

Like nearly everywhere else in the country, housing inventory is stretched thin while home prices continue to rise in the Washington, D.C. market. For March, the Greater Capital Area Association of Realtors reported a 1.6-month supply of inventory and a 9 percent decrease in the total number of homes for sale from a year ago. The median days on market was 13 days or less, four days quicker than a year ago.

Median home prices in the metro area hit a new post-recession peak of $380,000 in Q2 2017 — although still 5 percent below the prerecession peak of $400,000 in Q3 2005 according to ATTOM Data Solutions, and median home prices increased 2.9 percent from a year ago in Q1 2018 — the eighth consecutive quarter with a year over-year increase.

The Northern Virginia Association of Realtors reported that days on market are down more than 19 percent to 42 days and the inventory level is down to a 1.64-month supply, an almost 21 percent decline from the year before.

Low inventory translates into bidding wars on the best properties, despite the escalating prices, according to Kent Fowler, sales associate with the Logan Circle office of Compass in Washington, D.C., covering the District, Northern Virginia and Montgomery County, Maryland.

“If the property is priced right and in a desirable area, it is not uncommon to have multiple offers,” he said. “It’s overwhelming for a lot of buyers. I think D.C. has become a more desirable place to live in the past 12 to 15 years, but it’s also more expensive to live. We’re seeing people moving here who wouldn’t have considered it 15 years ago.”

Off-Market Condo Conversions

Fowler said he is seeing a lot of investors coming into the D.C. area, trying to buy off-market properties.

“My experience is that most of them are looking for single family or what we call fee simple. They’re buying at the right price that works for them,” he said. “What they’re trying to do is find it and have more control over it to renovate it.”

He sees investors looking to turn row homes into condo conversions, and depending on the size of the row home, Fowler said an investor may be able to get as many as two or three condos out of it.

Fowler said one of the main concerns for end buyers in any transaction is whether the appraisal will come in at the sales price. Most of the time it does. Also, he is seeing a fair amount of all-cash transactions, although the majority of properties are still sold with financing.

Banking on Baltimore

A longtime investor, property manager and consultant, Tammy Phelps is directly involved in the gentrification of the D.C. metro area. Focused on multiunit commercial properties including mobile home communities, assisted living and self-storage, she spends a lot of time revitalizing properties.

“We’re taking distressed assets and repositioning them,” Phelps said.

As executive director and founder of the Capital Cities Real Estate Investment Association, Phelps said her group’s members are playing an active role in improving neighborhoods, particularly in Baltimore, a very strong market for revitalization because of Johns Hopkins University and the University of Maryland.

Phelps also noted that Baltimore City ranked first in rental yields during the first quarter of 2018 at 28.6 percent, according to the ATTOM Data Solutions Q1 2018 Single Family Rental Report.

“There’s a lot of flipping going on there. Baltimore is still affordable for first-time homebuyers, but is only 30 minutes from D.C.,” she said. “It still has some rough blighted areas but investors are revitalizing them.”

There are other neighborhoods in the metro area such as Deanwood (the northeastern corner of the District) that were once considered to be ghettos but are now seeing a lot of rebuilding, she said.

ATTOM reported that the 21239 zip code in Baltimore City was one of the 50 top zip codes for home flipping rate in 2017, with flips accounting for 19.4 percent of all home sales during the year, although down 11.4 percent from 2016. With a median purchase price of $70,218 in 2017 and a flipped price of $165,000, investors earned a 135 percent gross return on investment per flip. The average days to flip there were 218 days in 2017.

“Baltimore was one of only a dozen counties in the country in which a buyer would need less than 15 percent of their income in order to purchase a home using conventional financing,” Phelps noted in a recent presentation.

Two zip codes in the District also made the top 50 markets for home flipping rate in 2017. The 20032 zip was highest in the metro area with flips accounting for 26.5 percent of the homes sold during the year, while in the 20019 zip, flips were 25.7 percent of the homes sold. Investors in the 20032 zip realized a 112.4 percent ROI in 2017 while those in the 20019 zip realized a 108.7 percent ROI.

Prince George’s County, Maryland had three zips in the top 50 for home flipping rate in 2017. Those were the 20710 zip where flips accounted for 21.0 percent of all home sales, the 20748 zip where flips accounted for 20.3 percent of all home sales, and the 20746 zip where flips accounted for 20.1 percent of all home sales.

Construction’s Slow Comeback

Cranes dot the skyline of the nation’s capital these days, but economist Fuller said construction is not back to where it once was.

“Our building permits are not anywhere near where they were before the recession,” he noted. “It may have even slowed down a bit in the past year. We’re a little overbuilt in rentals. Vacancy rates have gone to 5 percent from 3.5 percent. It’s different by submarket.”

Still, area homebuilders remain confident in the market’s potential, according to Mann.

“Builder confidence is strong in that we are still a very undersupplied market. The bigger challenge in D.C. is construction costs. And land costs have gone up, making it more difficult to get projects off the ground,” he said.

Plus, although there is demand for new housing, it is for a smaller portion of the market. Due to lack of land, building in the District is constrained, affecting affordability.

Uber-Fueled Construction

There is development happening further out, and thanks to Uber, Lyft and other ride sharing platforms, Mann said consumers are now willing to go to other areas further from the capital.

“It’s a challenge and an opportunity for us if we’re willing to build in the fringe neighborhoods and offer everything buyers are looking for,” he said. “Then we’re able to attract buyers from all across the city. Affordability is still driving many of these decisions.”

Additionally, there is new residential construction going up around the metro stations, particularly the new silver line that will service Dulles International Airport. High rise residential development is planned for Tysons Corner in Fairfax County, Virginia, and there is plenty of residential already built and being built around the Reston town center in Reston, Virginia.

In order to draw millennials and young professionals away from the District, builders need to offer the same amenities in their new housing that they have in the city, according to Mann.

“Builders have to build further out because of available land, and people are not willing to commute two hours each way. You have to drive 40 miles to find developable land that is relatively cheap,” said Fuller. “The concentration of jobs is still around the beltway and inside the beltway. High-paying jobs are concentrated inside the beltway and along the major corridors.”

Converting Churches to Condos

With available land too far for many to build, and rising construction costs, material costs and more expensive entitlements, builders are either tearing down old buildings and putting up new ones, or converting older buildings, according to Mann.

“We do everything,” he said. “Adaptive reuse, conversions. Last year we converted two churches to condos. We’ve also done school houses and office buildings.”

Currently Urban Pace has three projects in the NoMa district (an area north of Massachusetts Avenue) with modern developments replacing old industrial lots. One project is completed while the other two are set to start construction at year’s end.

Overall, Fuller believes the Washington D.C. economy is in reasonably good shape — substantially better than last year with an expectation that 2019 will be even better.

“Washington has a housing market where the demand for housing is harder to measure because so much of the population is transient. As for the homebuying market, the more expensive homes in the $800,000 plus category, a significant portion is purchased with foreign money. We have a lot more than most markets because we have 180 foreign consulates here,” he said.

Overall, Fuller said that uncertainty is not good for either the area economy or its real estate market, and there is sense of uncertainty right now associated with the Trump administration and the budget decisions it is making.