Washington Real Estate Investment Trust (WashREIT) is gradually morphing into a multifamily-anchored landlord in the sizzling Washington, D.C. market. Yet some REIT analysts remain skeptical of how WashREIT is executing that transformation.
The D.C.-based REIT continues to pare its retail and office holdings as it bolsters its emphasis on class-B multifamily acquisitions, development and redevelopment. The REIT has already exited the flex industrial and medical office sectors.
In the second quarter alone, WashREIT wrapped up the $461 million purchase of a 2,113-unit, class-B multifamily portfolio in suburban Maryland and Virginia. The REIT doesn’t plan any more multifamily acquisitions this year, but it does maintain a “healthy” pipeline of apartment deals in the D.C. metro area, Chairman and CEO Paul McDermott says.
Meanwhile, the REIT is in the midst of unloading eight retail properties for $570 million, including all three of its power centers. The eight properties encompass 1.65 million sq. ft. in the D.C. market. WashREIT is also winnowing its D.C. office holdings.
“In the longer run, we believe the company is likely to sell the few remaining retail assets, while further increasing its multifamily focus by selectively selling office assets,” Dave Rodgers, senior research analyst at Milwaukee-based financial services provider Robert W. Baird Co., wrote in a July 29 research note.
During the company’s second-quarter earnings call on July 29, McDermott said that the REIT has expanded its multifamily portfolio by 56 percent, with multifamily anticipated to soon be the key driver of NOI.
“Multifamily is … expected to remain our strongest and most stable business segment,” he told Wall Street analysts.
Despite McDermott’s optimistic outlook, some analysts are a bit uncertain about WashREIT’s portfolio shift.
“While we applaud the thoughtfulness, effort and the patience from management in creating a ‘target market’ for reinvestment, we currently see no real value proposition for investors,” Rodgers wrote.
In a similar vein, Danny Ismail, an analyst at Green Street Advisors Inc., a research and advisory firm based in Newport Beach, Calif., wrote in a July 29 research note that he’d prefer WashREIT narrow its focus to one or two sectors, rather than hanging onto multifamily, office and retail assets.
Conversely, Bill Crow, managing director of real estate equity research at St. Petersburg, Fla.-based investment bank Raymond James, and his colleagues, commend WashREIT’s effort to reposition the company as an owner of primarily class-B workforce housing and well-located, non-trophy office buildings. Each of those two segments should “benefit from a greater depth of demand and less supply pressure relative to competitors’ mostly class-A positioning,” according to a July 30 research note from Raymond James.
Chicago-based Equity Residential and Littleton, Colo.-based UDR Inc. are among the multifamily REITs with a significant class-A presence in the D.C. market.
Raymond James analysts say WashREIT should continue to benefit from promising fundamentals in the D.C. market, buoyed by increased federal spending, ongoing job growth and the impending Amazon presence in suburban Northern Virginia.
To be sure, WashREIT realizes the sizeable multifamily prospects supplied by the Amazon influx. McDermott noted that Amazon is expected to generate an average of 2,400 new jobs annually over the next 15 years in Northern Virginia, with the potential for tens of thousands of spin-off jobs.
About 60 percent of WashREIT’s multifamily portfolio is no more than a 35-minute public transit trip away from the planned Amazon campus in suburban Virginia, McDermott said. Ninety percent of the portfolio comprises class-B units, with average rents hovering around $1,500 to $1,600 a month, he said.
“[The] lack of housing affordability is expected to remain an issue in the D.C. metro area, with the cost of homeownership rising even faster than the cost of renting,” McDermott noted.
During the earnings call, he stressed WashREIT’s intent to cement its status as one of the biggest value-add multifamily players in the D.C. metro area.
Apartment landlords like WashREIT are capitalizing on the D.C. area’s evolution from a government-driven market to a broader-based tech hub, according to Doug Ressler, manager of business intelligence at Santa Barbara, Calif.-based Yardi Matrix, a provider of commercial real estate data.
Aside from the Amazon project, he cites Virginia Tech’s proposed $1 billion innovation center, which will be a relatively short distance away from the Amazon campus.
The D.C. area’s apartment market continues to perform well, says Nicholas Mills, a market analyst at D.C.-based research firm CoStar Group. In spite of the addition of more than 60,000 multifamily units in the past five years, new projects in the region are experiencing healthy lease-up activity, he notes.
“Fundamentally, the market boasts tight vacancies and above-average rent growth, despite heavy supply pressure,” Mills says. “The metro’s reputation as a blue-chip apartment market intensifies because of Amazon, and investor zeal for apartment assets should persist.”
Growth of the region’s government, professional services and business services sectors should also pump up apartment demand, he says. Supplementing that growth are surging population numbers and escalating home prices, Mills adds.
Looking ahead, D.C. should mirror the overall U.S. market as demand drivers weaken and apartment construction remains elevated, especially for higher-end properties, he says.
According to CoStar data, a flurry of D.C.-area apartment construction has happened thus far in 2019. This year, over 19,000 units had been completed as of July. That’s more than the number of units built in each of the previous four years, the data shows.
In the D.C. area’s apartment pipeline are 114 properties under construction, as well as 158 planned projects and 340 prospective projects, CoStar data indicates.
On the investment front, multifamily potential remains attractive in the D.C. area, Mills says, but other metros also are compelling, including New York City, Los Angeles, Atlanta, Phoenix, Denver and Seattle.
In D.C., some attractive multifamily assets are fetching sky-high prices. For example:
- In May, a joint venture between Chevy Chase, Md.-based Polinger Development Co. and an unidentified institutional investor purchased a two-tower, 534-unit apartment project in Arlington, Va., for $228 million, or nearly $427,000 per unit. The cap rate reportedly was 3.7 percent. The property is adjacent to the future 4.1 million-sq.-ft. Amazon campus.
- In June, Milwaukee-based financial services provider Northwest Mutual bought a new 12-story, 326-unit luxury apartment building in D.C.’s NoMa neighborhood for $141.5 million, or $434,000 per unit. The cap rate reportedly was 4.5 percent.
Despite more than $6 billion in multifamily acquisitions in the past 12 months, with some of those deals commanding eye-popping prices, “D.C. provides plenty of opportunities for investors,” Mills says.
“The strategy in recent years has been twofold: acquire a value-add suburban asset that is well-positioned or pay the premium to buy in core D.C. submarkets. This strategy continues to play out,” he says.
