Developers building the nearly 6,000 residential units in the greater Capitol Hill pipeline are betting big on rentals. Why?
This article appears in The Hill Rag’s September issue, available at newsstands now.
Greater Capitol Hill is poised to add nearly 6,000 new residential units: more than 600 units near the Potomac Avenue and Eastern Market metros and more than 5,000 in the Capitol Riverfront are either planned or will be under construction in the next few years. The vast majority of those units will be apartments.
Financing, market forces and unique qualities about each development lot are driving the skew towards rental units both on the Hill and across the District.
Mary Mottershead, executive vice president at EastBanc, says developers look at several critical factors when deciding whether to hold onto a project as an apartment or to sell it and move on:
- Financing markets
- Tax issues
- Market demand for units
- Marketing risk
Apartments for the Hine School
EastBanc, Inc. the developers behind the Hine School project in Eastern Market recently secured construction loans for an apartment development across from the Eastern Market metro on Pennsylvania Avenue. Surely a condo project literally steps from the metro could sell quickly–why go the rental route?
For starters, the move to rentals is not set in stone for the Hine project. Mottershead says the project is financed as apartments, but is being built with high-end finishes and larger unit sizes the leave a window open for condo sales at a later date.
“We have the continued flexibility at any point in time to decide whether the units will be marketed as rental apartments of sold as condominiums or any combination thereof,” said Mottershead.
Millennials Rule the Roost at the Capitol Riverfront
At the Capitol Riverfront nearly 4,700 new rental units are either under construction or will be within a year (as of the second quarter of 2015), compared to about 650 for-sale units.
Following the recession financiers have favored rental units, in no small part due to the demand for rentals and delay in first-time home buying among Millennials, according to Michael Stevens, the president of the Capitol Riverfront Business Improvement District.
The Capitol Riverfront is second to only Dupont in the District for its share of Millennials. 41 percent of the neighborhood’s residents fall within the demographic and the average age in the Capitol Riverfront is 31.4, according to data from the 2013 American Community Survey.
“Due to large student debt and other factors, [Millennials] have decided to delay purchasing homes or condos and have opted to rent for several years,” said Stevens.
Return on Investment
In addition to a strong rental market and the corresponding preference for financing rentals, Mottershead said another factor driving the construction of apartments is the demand for purchasing completed apartment buildings.
Mottershead said institutional buyers have been paying “incredibly high” prices for completed buildings, as high as $800 per square foot. Condo in the same neighborhood were also selling for $750 to $800 per square foot, but the return is less due to expenses for marketing and closing costs, etc.
The tax rate is higher on condos because you are paying tax on each unit’s sale. Selling an entire apartment building falls under capital gains taxes, Mottershead explained.
“Why would you take the risk to market anything if somebody is buying the vacant buildings for basically the same price?” remarked Mottershead.
That return on investment is a big factor for developers when they are weighing sale versus condo, according to Phil Guire, a Capitol Hill real estate agent with Compass*. Guire said developers start by looking at what their break-even point is and then compare that with what is happening in the market to help them determine a price for condos or if they should ultimately go rental.
Insight on the Hill
Insight Development recently did that calculation for two properties just a stone’s throw from one another on the Hill and came to two different conclusions. The group recently received approval to developer for-sale condo and townhouse units on the site of the former Buchanan School between D and E Streets on 13th Street SE. Around the corner Insight is putting together a zoning application for propose to build 160 rental units on the Bowie’s trash (1337 E St. SE) and Signature Collision (1355 E St. SE) lots.
The Buchanan School site has significant street frontage a historic building that needs to be incorporated into the new development. Townhouse units would work well with the street frontage available and will meet the demand for family housing on the Hill. Larger, townhouse units like that do not typically rent well said Trent Smith a partner at Insight during a recent community development meeting.
In addition to the lot size and layout, the historic building was another factor that pushed them to a for-sale project.
“It’s difficult to make the math work on the historic building as a rental,” said Smith.
Meanwhile the lot on E Street is unusually deep with very little street frontage.
“The site really lends itself to a more efficient apartment complex,” said Smith.
In the Same Boat
The decision to sell or rent can also come down to the developer’s business model: do they want to deal with the hassle of owning and managing an apartment building? Is it worth the tax savings?
“We like to hold things long-term. If you sell off condominiums you’re not holding them forever,” said Mottershead.
Developers, really, are making the same determination Millennials are when it comes to housing. Rent or own? It just depends.
*Compass is the sponsor of District Source.
Featured image is a rendering of the townhouses proposed for the Buchanan School site. Image courtesy of Insight Development.Comments