Very few new units have been introduced to the market recently—condo construction has been limited to boutique buildings in the District with fewer than 50 units. One notable exception is District Condos, developed by JBG and Grosvenor, which started construction in the fourth quarter of 2010 without pre-sales. It is the largest new condo project in more than two years, with 125 units located in a mid-rise tower near the trendy U Street corridor. The project was designed by architecture firm Shalom Baranes Associates and will incorporate historic façades, including the former Whitman-Walker Clinic building, along with new construction and 18,000 square feet of ground-floor retail.
Selling these condo units will remain a challenge, however. Effective prices of new condos in the metro area are down 4.1 percent from a year ago, though resale prices remain unchanged. Most of the remaining new condo inventory consists of less-desirable units that have been sitting on the market for several years and compete with an additional 1,100 “certified pre-owned” condo units (condos five years old or less). As a result, developers have lowered prices to get rid of these stale units.
FINANCING AND DEALMAKING
For the most part, banks are still not willing to finance large-scale projects on their own merits. For example, today, condo projects need to pencil as apartments in order to obtain financing, which limits concrete construction to select submarkets that can support $3.00 per-square- foot rents. Those submarkets include parts of the District, the Rosslyn-Ballston corridor, downtown Bethesda, and a few others located “inside the Beltway.”
Meanwhile, on the transactional side of the business, $2.4 billion worth of investment-grade properties traded hands in the D.C. metro in 2010—nearly three times the volume of 2009. The most substantial increase in sales volume was in Class B value-add deals closing in suburban Maryland. Investment activity was powered primarily by the REITs, with cap rates averaging about 5.3 percent for Class A high-rise deals. One recent transaction of note is Liberty Tower, a 235-unit high-rise located in Arlington, Va., that sold to Equity Residential in August 2010 for $409,000 per unit at a reported cap rate of 5.3 percent.
Despite concerns that D.C. might be getting too frenzied, too fast, all signs point to a robust market with myriad opportunities for well-financed, savvy, early bird developers, owners, and asset managers.