All Forum Posts by: Peter Firehock

@Jens Hansen Hey Jens, shoot me a direct message and I'll connect you with a great Cost Seg expert. BP doesn't let us share contact info on here unfortunately!

When deciding where to buy a house or investment property, it’s important to consider the neighborhood, city, and county that you are investing in to determine if that investment has stability and growth in the near and long term future. In this Investment Thesis, we’ll explore North Bethesda and the I-270 Corridor, and how it is positioned for strong future home price appreciation and rent growth through its stable and growing job market, future developments, and prime location.

North Bethesda was mostly a residential, suburban area until 2010 when the Pike District began to be planned out to create an Urban core in the area centered around it’s two Red Line Metro stops, easy access to I-270, I-495 and Washington D.C., and outstanding public schools. Since that time, the famous Pike & Rose open air shopping mall, completed in 2014, has brought a ton of attention to the area, along with the boom in the Life Sciences and Biotech industries which feature many major employers along the I-270 Corridor famously dubbed today as ‘DNA Alley”. Now it’s being further built out as the "epicenter" of the Life Sciences and Biotech community in Montgomery County in addition to its already strong job market and desirable infrastructure and amenities.

The area is also positioned very well to capitalize on the changing world we see today post pandemic. Neighborhoods like these that feature modern open air malls like Pike & Rose, good proximity with easy transportation access to many different major employment hubs, options for a suburban / urban lifestyle mix with proximity to essential services and entertainment / experience focused retailers while offering tight knit community aspects and the ability to buy at a lower price per square foot, and much of their total infrastructure and development pipeline in the future that will keep in mind current preferences of residents, are the types of neighborhoods that are setup perfectly to appease to what the vast majority of people are looking for in a rapidly changing, post pandemic, hybrid work environment. (Source)

North Bethesda is centered around the Pike District which is the urban core of North Bethesda and in the Pike District Plan from 2010 it was slated to include 5.7M square feet of commercial space and 9,800 new housing units at it's completion. Roughly 1.5M sqft of Retail, 1.1M sqft of Office, and 3,221 multi family units has been completed thus far, with the landmark Pike & Rose mixed use development delivering in 2014. Pike & Rose features high-end retail, restaurants, and entertainment, with over 50 shops & eateries, anchored by REI, Sephora, West Elm, L.L.Bean, and Uniqlo. iPic Movies (8‑screen), Pinstripes (bowling/bocce), and AMP by Strathmore (200‑seat music venue). The community also has parks and outdoor activities scattered throughout including a country club and access to Rock Creek Park. North Bethesda was also just approved for a new 5 bay Fire Station expected to be completed by 2029 (Source)

This clearly leaves a lot of development left to complete based on the original plans for the Pike District, and much of it is already lined up in the pipeline to deliver in the coming years, which will lead to continued transformation of the area with new retail, office, housing, and hotels. These include several smaller residential and commercial developments currently working through approvals, but the two big developments coming to the area that will drive significant growth are Project Connect and the Whiteflint Mall Redevelopment.

Project Connect - In May of 2025, Metro selected Hines to build out improved access via a new entrance to the North Bethesda Metro station, two new public space plazas, new bus station as part of the new MD-355 Flash Bus Rapid Transit infrastructure build out (Source) , and a 1.9 million square foot Life Sciences District on top of the metro, with the University of Maryland Institute for Health Computing already lined up as the Anchor Tenant for the space. Marc Elrich and other members of the Montgomery County Executive team have had a vision of North Bethesda being the “epicenter of the bio and life science community” in Montgomery County, and this development is a major step in solidifying that. The anticipated completion date for the project at this point is 2030. (Source)

Whiteflint Mall Redevelopment - The demolition of the old Whiteflint Mall began in 2015 and was recently completed in 2023 with plans to redevelop the 45 acres into previously approved 5 million square feet of new retail, office, and residential space right by the North Bethesda metro stop. The project was put on pause due to infrastructure concerns for the development, but recent talks for financial assistance by means of a TIF (Tax Increment Financing) from Montgomery County could bring the project back to life. This will be an important development to watch, as once approvals are finally agreed upon, this will be akin to another Pike & Rose type development just down the street leading to continued exponential growth. (Source)

North Bethesda sits directly along the MD-355/Rockville Pike corridor, an established commercial spine of Montgomery County that runs directly through Bethesda, Rockville, and Gaithersburg. North Bethesda sits in the middle of all these major employment hubs, while also being a major employment hub itself. Montgomery County, and specifically the four cities / census areas, were dubbed “DNA Alley” by Time Magazine due to the massive concentration of Biotech and Life Sciences employers (public and private) located along Rockville Pike and I-270. Montgomery County's total Biotech workforce made up 51,490 employees in Q4 of 2024, giving the area a strong reputation in the Biotech / Life Science sector while also having other diversified between federal health agencies, biotech, defense, and hospitality. Within North Bethesda, major employers include Lockheed Martin Corporation Global Headquarters (~3,000-4,000 jobs), The Nuclear Regulatory Commission (~3,000 jobs), Rock Spring Office Park (~1,500 - 2,500 jobs), Choice Hotels International Headquarters (~400-500 jobs) Federal Realty Investment Trust (~200-300 jobs). Nearby major employers include the National Institute of Health (~20,000 jobs post DOGE cuts, ~2 miles), Food and Drug Administration (~10,500 jobs at it’s White Oak Headquarters Campus, ~9 miles) Walter Reed National Military Medical Center (~5,800 jobs, ~3 miles), Marriott International HQ (~3,500 jobs , ~3 miles), AstraZeneca (~3,500 jobs, ~8-10 miles), Suburban Hospital (~2,500 - 3,000 jobs, ~2.5 miles) Leidos (~1,500 - 2,000 jobs, ~10-12 miles), General Dynamics (~1,000-1,500 jobs, 5-7 miles)Emergent BioSolutions (~1,200 jobs, ~8-10 miles) GlaxoSmithKline (~500 jobs, ~5-6 miles), Qiagen (~800-900 jobs, ~13-15 miles), and many other AAA employers.

Two Red Line metro stops in North Bethesda make it feasible for people to live here and take the metro into Bethesda, Rockville, Gaithersburg, Washington D.C, or Tysons Corner. Washington D.C. and Northern Virginia, specifically Tysons Corner in Mclean Virginia (~15-18 miles away) are also relevant to North Bethesda given the metro access, especially as one of it’s metro stops, the North Bethesda Station, undergoes a big renovation, more on this later! Tysons Corner features the United States 8th largest mall, and notable employers include Capital One Headquarters (~10,000 - 12,000 jobs), Booz Allen Hamilton Headquarters (~7,000–8,000 jobs), Freddie Mac Headquarters (~6,500–7,000 jobs), MITRE Corporation (~3,000–3,500 jobs) and Northrop Grumman Corporation (~2,500-3,500 jobs). Washington D.C. is home to 20 Smithsonian museums and galleries and hosts over 100 festivals and cultural events annually. North Bethesda has easy access to some of the most coveted areas of D.C. such as Georgetown and Tenleytown with Rockville Pike turning into Wisconsin Ave, which runs directly through all three areas, as well as good access to Woodley Park, Adams Morgan, and Dupont Circle which are all also highly coveted downtown areas of D.C.. The District is also home to 40 accredited University campuses, including some of the top schools / research facilities in the country like Georgetown University and Johns Hopkins. Employers relevant to North Bethesda would lie more in the Northwest area, which include Georgetown University and Medical Center (~10,000 jobs) The George Washington University (~9,000 - 11,000 jobs including health facilities) State Department (~7,000 - 8,000 jobs), The World Bank (~6,000 jobs), and Environmental Protection Agency (~4,000 - 5,000 jobs).

Job Growth and Wage Growth are two very important factors for future home values in a neighborhood, but it is also important to analyze the likelihood of that growth continuing. Factors to consider that affect continued growth are: What is the main industry and how likely is that industry is to continue to grow? Is there a concentration of jobs in one industry? Is there a concentration of jobs in one employer?

Although well diversified with federal health agencies, biotech, defense, consulting, hospitality, and other sectors, North Bethesda and Montgomery County as a whole clearly have a strong concentration in the Biotech and Life Sciences industry. The Biotech and Life Sciences industry is very likely to see continued growth given the demographic shifts of an aging population in America as Baby Boomers continue to move toward retirement. Slowing birth rates mean older adults are projected to outnumber children under age 18 for the first time in U.S. history by 2034 (Source), and Americans ages 65 and older will increase from 58 million in 2022 to 82 million by 2050, a 47% increase (Source). The number of Americans 85 and older is expected to double by 2035, and triple by 2060 (Source) It is also the larger macro trend in America that people are becoming more health conscious, especially post pandemic. One study that polled 2,000 people noting that 70% feel they became more conscious of their physical health post pandemic (Source). Biotech and Life Sciences are also on the leading edge of many major breakthroughs such as Advanced Gene Editing, mRNA Vaccines, 3D Bioprinting, Cell Therapy, Microbiome Engineering, AI-Designed Drugs & Protein Folding, and Biomanufacturing.

These employers are likely to continue to stay in the area for the proximity to Washington D.C. for regulation influence, proximity to the NIH in Bethesda, proximity to other firms in their industry to collaborate, and the large administrative and HR issues that would arise from trying to relocate headquarter or large campus offices since such a large number of employees have already planted roots in the area. The area has attracted a very large number of significant employers as we’ve discussed, but there is somewhat of a concentration in the immediate 3-5 mile radius of employment in the NIH, which could be seen as a risk given the rhetoric of government cuts, with the NIH having been an agency of discussion for the current administration. Current plans are to reduce the workforce to 2019 levels (~17,888 employees) meaning 2,500 additional jobs could end up getting cut. However, it is likely that the exponential increase in NIH cuts will likely reverse in future administrations, especially with the coming breakthroughs in the health field that are desperately needed in America given the aging population and general health crises in diabetes and obesity, and some laid off NIH employees are also likely to find employment at similar private sector employers in the area.

The D.C. Metro as a whole is of course populated with every industry and highly stable employment given the desirability of companies to be close to the federal government, be close to other companies there looking to do business with, and the stability of the federal workforce. But aside from the Biotech and Life Science industry standing out in Montgomery County, there is also notably Data Center Alley (Loudon County, ~25-35 miles from North Bethesda) and the Dulles Technology Corridor (~15-30 miles from North Bethesda) in Northern Virginia within the DC Metro. Data Center Alley in Loudon County houses an estimated 70% of the world's internet traffic, and the Dulles Technology Corridor contributes significantly to making the DC metro the 3rd largest pool of Tech talent in the United States and 8th largest pool of Tech talent in the World, and the 4th largest city for space leased by AI companies (Source: JLL - not public). These industries help further diversify the area from being solely concentrated in

North Bethesda presents an excellent opportunity to invest in a market that is on the brink of major developments, already supported by strong employment, in an area featuring great infrastructure, schools, transportation, and alignment with consumer trends for living preferences post pandemic. These factors position the area excellently for home price appreciation and rent growth looking out into the future.

@Stephen Nelson Good catch and thank you for that correction! If you don't mind me asking, how do you achieve material participation with only 5 hours per week?

 Thank you!

@Michael Baum @Ken Boone Thanks for the feedback, I will consider that moving forward!

@Ken Boone Hey Ken, totally understand where you're coming from, as this is 100% legal and some may misinterpret it. I choose to use that terminology as that's what the strategy is commonly referred to.

A loophole generally is based on a legal law in the tax code that can be used by people in a way that it was not originally intended to be used. I think given these rules were written in 1986 before Airbnb was around, it does make some sense to call it that although I do wish there was a better name that people easily recognized we could use! 

*This article is not tax advice and you should always consult with your CPA before making tax or financial decisions.

Intro

The Short Term Rental Loophole is a tax strategy where you change the losses on your Real Estate from Passive to Active. Normally, Real Estate is considered a Passive Loss when it comes to depreciation of the building, and any other expense. This means that you can only write off these Passive Losses from your Passive Income, and not against your W-2 or 1099 income which is considered Active Income. To execute this strategy, you will simply change your real estate from this Passive Loss to an Active Loss, which would then allow you to write off your real estate depreciation and expenses against your W-2 and 1099 Income.

In this article I’ll explain the basics of the Short Term Rental Loophole and current trends in the Airbnb market. By the end you will know if this strategy could potentially work for you or not and is worth pursuing further.

Material Participation

In order to change your real estate into an Active Loss, you must be “Materially Participating” in the property, or be classified by the IRS as a “Real Estate Professional”. This means the average stay at your property cannot be more than 7 days, you will need to pass the tests of Material Participation or being a Real Estate Professional, and keep a log of the hours you spend performing “activities” for the real estate.

In order to Material Participate, you need to pass one of the seven tests for Material Participation on the property. The two main ones that apply to most people are you either spend more than 500 hours Materially Participating on the property, OR you spend 100 hours Materially Participating on the property and no one else spends more hours than you. Make sure to consult with your CPA about which hours can be used before starting your hours log.

Here are the indicators that put you at risk of an Audit that the IRS looks at with this strategy::

(Source)

Real Estate Professional

If you don’t have the ability to invest these kinds of hours into a property, you can become a Real Estate Professional under the tax code, or have a wife or husband become a Real Estate Professional, which then will turn your Passive Losses into Active Losses on your real estate.

To become a Real Estate Professional, you need to have:

(Source)

As long as you work 750 hours in real estate (14.42 hours a week excluding vacation), AND half your time is spent on real estate activities (so you could still do other work for 12-13 hours a week), you can qualify as a Real Estate Professional. One thing to be mindful is to be sure that 500 of those 750 hours are spent in a materially participating way to make sure you meet the Material Participation test, which is why it is best to consult with your CPA about your hours log before getting started, since not every hour spent on the property will necessarily count as Material Participation, so it’s best to know where to prioritize your hours and where to outsource.

Bonus Depreciation

Bonus Depreciation from a Cost Segregation Analysis allows you to depreciate Personal Property and Land Improvements on shorter depreciation schedules, and then accelerate some of that into the first year. The Trump administration added Bonus Depreciation in 2017 in the Tax Cuts and Jobs Act (TCJA), which allowed you to depreciate items with a “life” of less than 20 years all into year 1. Bonus Depreciation is in its scheduled phase down which started in 2023, where the percentage you could take of the Bonus Depreciation decreased to 80%, and has been decreasing 20% ever since, currently at 40% in 2025. Before the Tax Cuts and Jobs Act the Bonus Depreciation was 50%. On March 4th 2025 in President Trump's address to congress, he stated bonus depreciation will be coming back to 100% (Source) (Source 2), and Trump’s new TCJA budget framework was just passed by the Senate on April 5th. (Source). The downside to this strategy is that you will need to recapture the depreciation when you go to sell, unless you do a 1031 Exchange into a new property, in which case you would not pay any capital gains tax or depreciation recapture.

By using Bonus Depreciation with a Cost Segregation Analysis you are moving a very large amount of your depreciation write offs for your real estate into the first year, allowing you to show a large “paper loss” that year even if you are cash flowing.

Changes in Airbnb Regulations and Trends

For most people, the most realistic way to execute the Short Term Rental Loophole is through acquiring Airbnbs. However, that has come with a few challenges recently as many destination markets have clamped down on Airbnb regulations and many have also seen a dramatic increase in supply of listed Airbnbs, particularly over the last few years when the Travel sector boomed coming out of the Pandemic. For example, in September of 2023 New York mandated that all short term rental hosts must reside at the property.

To avoid regulation change issues, it is key to make sure you are buying in established Vacation markets and that your communicating with the City or County in which the property is located to understand what the current sentiment of the people and stance of the city is on coming Airbnb regulations, and avoiding properties located within HOAs / Condo Associations / Co-Ops. You also want to make sure you protect your downside in the case regulations do emerge down the line, by looking at the Mid Term and Long Term Rental rates on the property as well to make sure it is something you could live with in the case there was a change.

With the amount of Airbnb listings continuing to grow rapidly, it is become increasingly more important to provide a quality service to make your property stand out among the rest. The advantage of Airbnb vs Hotels is that they offer more of an experience and immersion into the place where they are located, and if the property isn’t offering that at a high level it won’t stand out among the rising supply of listings. Hiring a professional Interior Designer who can help you set up the space and create a theme for the house, and a consulting a professional Property Manager who can teach you how to give exceptional hospitality to the guests and marketing to the property, is the winning formula for creating a profitable listing in the current environment. Hiring a full time Property Manager will likely make it difficult to execute the Short Term Rental Loophole, but many Property Managers offer consulting to allow you to fast track your learning curve on providing exceptional service.

Buying top of the line furniture and amenities for guests is another way to create the highest quality Airbnb. Although these things require a greater investment up front, these are additional expenses that can be used as write offs against your W-2 and 1099 income on top of the accelerated depreciation in Year 1, and in the long term will result in a well known Airbnb in your market that keeps your guests coming back to book every year, increasing your Occupancy and Average Daily Rate over time.

(Source)

Conclusion

By turning your real estate losses from Passive to Active, you unlock the ability to write off those real estate paper losses against your W-2 and 1099 income, which for some people, if you have the ability to execute on this strategy, can result in massive savings. Trends in the Airbnb space are moving toward higher quality Airbnbs, and these luxury amenities provided can contribute toward your tax write offs toward your W-2 and 1099 income, however it is important to do thorough due diligence and to have a backup plan in the case Airbnb regulations change in your area.

In order to execute this strategy, you’ll want to build a team of a CPA that specializes in these types of tax filings, a Cost Segregation Engineer, Interior Designer, a Loan Officer, Insurance Agent, Short Term Rental Consultant, and a Title company, all of which a Realtor specializing in Airbnbs should be able to refer to you. There are many ways to use this strategy based on your personal situation, and consulting with the right team is the difference in executing this strategy successfully.

Thank you for reading my article on the Short Term Rental Loophole, I hope you enjoyed it and found it helpful!

@Jillian Ez

Like Russell said, this was a fabricated story by a local realtor team that caught fire in the news. Lisa Sturtevant, a Chief Economist at MLS, had a great post on LinkedIn about this that broke down the current listing data: Linkedin Post Link

We have been in a sellers market overall the last few years due to the "lock in effect" causing historically low inventory. However, condos and small multifamily properties are still seeing higher days on market and price reductions from the effects of people moving out of the city from remote work over the last few years. That is changing now with the new return to work mandates from the Federal government and Amazon HQ2 and the coming changes from the DC government to make the city more attractive to residents, but the effects of that are slow moving making now still a great time to opportunistically invest in a condo or small multi investment. Of course, on top of all the reasons listed above, most importantly, coming rent growth and falling interest rates over the next 2-3 years, allowing you to also opportunistically refinance

Shoot me a private message and I'd be happy to continue the conversation!

@Bruce Lynn That's a good point and is something to pay attention to for sure. However, actually about 83% of federal jobs are not in Washington D.C. Source , but for the ones that are that could be a risk if Trump and DOGE's plans to cut those jobs ends up reducing a significant amount of the jobs in DC. I'm hopeful this results more so in DOGE finding more efficient and effective means of outsorucing government functions rather than blankety reducing the positions.

Introduction:

My name is Peter Firehock, I am currently an Acquisitions Associate for a multifamily investment fund in Washington D.C., BPG Holdings. Multifamily real estate has traditionally been a stable asset class, and the Washington D.C. metro has traditionally been a stable market area, making the two together a good safe bet, especially for anyone with a long-term view of their investing strategy. In this market outlook report, we will take a look at the current and future outlook of cap rates and interest rates, the market fundamentals for the multifamily sector as a whole, the falling net deliveries and vacancies of multifamily units in the coming years in the D.C. Metro, the rising median household income and population growth in the D.C. Metro, and the expected spike in rent growth in the D.C. metro over the next few years

Summary:

After analyzing the data outlined below, I believe that investing in a value-add, multifamily property today has very strong potential for success. This poses the opportunity to acquire a distressed property today, spend the next 3 years to fully stabilize the property, capitalizing on the coming spike in rent growth, falling vacancy, falling interest rates, and compressing cap rates for multifamily real estate in the D.C. metro, as well as the option to hold the property as a safe and lucrative long term investment given the macro factors coming to Washington D.C. and the fundamentals of the multifamily sector.

Cap Rates, Interest Rates, and the Best Sellers to Target to Get Deals Done

Market Cap Rate, DC Metro, (1/7/2025)

Cap Rates

In the next few months, cap rates on the right deals should be rising, making it an opportune time to buy. The 10-year treasury is currently sitting at 4.62% as of 1/24/2025 up from 3.73% on 9/13/2024, reflecting a 23.8% increase over the last 4 months (Source). This sudden jump in rates has not fully caught up with market cap rates yet since especially in the commercial and multifamily property markets, transactions typically take 6 months to transact, creating a lag effect between interest rates and market cap rates since interest rates adjust daily. As sellers realize that buyers cannot pay the same price for the same income stream as before due to the higher rates dampening overall buyer returns over that 6-month market cycle, sellers will eventually transact at lower prices, making it more apparent to sellers where the current market pricing is.

Best Sellers to Target

This will make deals more difficult to come by however, since many sellers may opt to wait until interest rates decrease and cap rates follow suit in the coming years to get a higher price on their properties if they are not being forced to sell at this time. This makes targeting distressed sellers, such as those in pre-foreclosure, or those with ballooning debt that was taken out in 2020-2021 when the interest rate was 7.37x lower (8/09/2020 the 10-year treasury was .56%, 1/15/2024 the 10-year treasury is 4.69%) making it very difficult for those that underwrote the property in 2020 to have predicted refinancing at these rates and likely a sale is their only option. Other types of sellers that are making deals easier to get done are those with assumable debt available, and sellers with the ability to seller finance there properties. These are the best options for finding sellers willing to transact in today's market at cap rates that make sense to the current interest rate environment, in order to capitalize on the upcoming favorable market conditions over the next few years such as spiking rent growth, falling vacancy, and compressing cap rates.

Interest Rate Projections

Looking at the Federal Reserves Dot Plot, which is released every quarter and is the federal reserves outlook on where they believe the Fed Funds Rate, which does not control fixed-rate financing but does influence it, as well as directly affects floating rate financing, is predicted to be 3% - 3.25% by Year End 2027 (Source), currently sitting at 4.25% - 4.5% today. Donald Trump has also expressed several times he will do everything he can to influence the Federal Reserve to reduce interest rates, although he cannot directly control what the Fed ultimately does. The overall trend of the 10-year treasury appears to be downward reflecting as well right now, with the most recent high of 4.8% on 1/13/2025 failing to touch the previous high of 4.98% on 10/19/2023 and now sharply falling to 4.62% today (1/24/2025).

According to JP Morgan, the fact that the 10-year treasury has not moved lower than where it was during the first cut is very odd, as when looking at the last seven cutting cycles of the Fed, the 10-year treasury was below where it was when the Fed began cutting 100 days after the first Fed cut 100% of the time. The reasons cited for the market not following suit this time are concerns that increasing GDP, especially in Q4 of 2024, and policy changes such as tariffs could lead to a resurgence of inflation and thus a change in the Fed’s projections, with there being 150bps of variance between certain Fed members projections (Source). For this reason, it would be prudent to not overleverage yourself in this type of environment in order to wait and see where rates do end up falling, as there is consensus in the market we are moving into a falling rate environment, the exact timing of when rates will be falling is unknown and different scenario analysis should be added to underwriting refinance periods to be sure the project is sustainable if inflation resurges and a refinance is delayed. In the case of floating-rate loans, interest rate caps would be a prudent measure to take as well.

Multifamily Sector Fundamentals

The underlying fundamentals for the multifamily sector are very strong right now. This comes from several data points, the first being the average age at which people are choosing to stop renting and buy their first home. The average age that people stop renting and buy their first home in the United States in 2024 is now 38 years old in Washington D.C. (Source) This is up from 35 years being the average age the year prior.

Cost to Rent vs Own and Return to Work Policies

This can mostly be attributed to the massive increase in home prices, particularly from 2010 to today, making people opt to rent for longer, especially today in the elevated rate and home price environment making renting the substantially cheaper option, on top of historically low inventory to choose from. On the other hand, many landlords were able to obtain low mortgage rates during the historically low interest rate environment during the Pandemic, allowing them to offer a much more attractive housing cost to renters. As of January 2025, the average cost to rent is $2,450 (Source) in Washington D.C., while the average home price is $635,000 (Source) (at a 7% interest rate, 10% down payment, 30-year mortgage that would be $3,802 a month).

Another positive fundamental of the multifamily sector is the continuing trend of return-to-work policies. With the prevalence of remote work policies, many people opted to leave affordable apartments living near work in and around metros to live an hour or two outside of their work location to get much more space for their money. This hurt apartment demand as a big attraction to apartments is usually their convenience to the metro and people’s offices. As of October 2024, 75% of remote work employees now have some sort of in-person work requirement, up from 63% in 2023 (Source). Major employers like JP Morgan and AT&T are pushing for these policies as well, and specifically in the D.C. region, Amazon HQ2, the Washington Metro Area Transit Authority, and the Executive Branch of the government have required all employees to return to work 5 days a week at those locations.

Fundamental Lack of Residential Supply

Another interesting driver of demand is the fundamental lack of supply of housing stock due to the fallout effects of the 2008 housing crisis, slowdowns in housing construction during Covid-19 primarily in 2020, and a good amount of 2021 from supply chain issues, labor shortages, and rising construction costs. This fundamental slow in housing starts has caused household formation to outpace new homes (single and multifamily) by 2.3 million between 2012-2022 (Source). While more development did happen over the last few years from development projects started in 2021 and 2022 when rates were lower and developers could outlast supply chain issues, the upcoming supply is expected to drop again, as we will discuss later on, with the relatively sharp rise in interest rates that has dried up investment capital due to the fear in the market, sellers opting to hold out on their land and or properties until cap rates and interest rates subside again as is expected in the coming years, as well as banks being cautious to lend on real estate due to this sharp rise putting many projects that were started in 2021 suffer greatly from a 7x increase in rates over the following 40 months that had adjustable rates or 5-year terms which is very common in larger multifamily investing. This continued imbalance in housing supply to household formations and population growth.

Changing Demographics and Preferences

People are also waiting longer to start families (Source), and people are valuing more the flexibility that renting provides in the remote work and online business era as well as the sense of community apartment complexes can provide in our digital and post-pandemic world where people feel less connected to the community than before (Source). Newer buildings now have state-of-the-art amenity packages with pools, gyms, co-working spaces, high-speed internet, and community gathering spaces where savvy property management groups will have apartment building events to encourage this sense of community, all being a level of convenience and neighborhood community people cannot get anywhere else. All these factors contribute to the average age of first-time homebuyers rising to the highest ever at 38 years old and looking at the demographic data of the population by age, this should result in high demand for rentals over the coming years as a large portion of the population, especially in the Washington D.C. Metro (38%), is between 20 - 39 years old (Source)

Net Deliveries and Vacancy Rates

CoStar: Apartment Net Deliveries, Apartment Vacancy, DC Metro (1/7/2025)

Below is a table from CoStar outlining the upcoming net deliveries of multifamily units in the D.C. metro area. As you can see, the net deliveries are expected to majorly decline in the coming years, most notably a 51.14% decline in net deliveries of apartment units from 2024 to the end of 2025.

This is because the feasibility for developers to build new units declines sharply as interest rates rise this rapidly, and the end effect is not seen until the units that had already begun being built when interest rates were lower are completed a year or two later. This makes complete sense given the sharp rise in rates from the beginning of 2022 to today. At the beginning of 2022, the 10-year treasury rate was still in the mid-1% range, meaning 2 years later when those units are being finished, we are seeing those high deliveries in 2024. At the beginning of 2023, we see rates in the mid 3% range, reflecting in development starts slowing in 2023 and 2024 resulting in much lower net deliveries in 2025 and onward as rates continue to remain elevated and bank financing requirements remain tight.

As you can see, this has put downward pressure on Vacancy rates, since the lower supply of oncoming units coupled with a continued expected population growth in the D.C. Metro area will lead to there being fewer total units available, and higher occupancy in multifamily buildings.

Population Growth

CoStar: Population Growth, DC Metro, United States (1/7/2025)

Washington D.C Proper surpassed 700,000 residents for the first time since 2019, showing the continued resurgence of the city since issues that arose for the city during the Pandemic (Source). This can be expected to continue as more employers, most notably employers like Amazon’s Headquarters 2 and the Executive Branch, are requiring employees to return to the office 5 days a week. Many employers are seeing now as a great time to opportunistically buy or lease, usually downsizing, into new office spaces in the district during this period where there are still depressed prices, even on some Class A office spaces.

The Resurgence of the Office Market in D.C.

The resurgence of employers returning to the city with the pandemic fears now in the rearview mirror is apparent with Q4 of 2024 being the first quarter of positive leasing absorption for office space in the District over the last 10 quarters (Source) Another example is Boston Properties Group (NYSE: BXP), the largest publicly traded developer, owner, and manager of Class A Office space in the United States, is building a 320,000 square foot new trophy office in Downtown DC, with 5 floors already pre-leased to the global law firm McDermott Will & Emery as well as the Rockefeller Group developing a 422,000 square foot office building slated for delivery in 2026 at 600 Fifth St.NW, which is similarly 50% pre-leased (Source). These developers are reacting to the market trend that, particularly in Washington D.C., there is a much lower vacancy in Prime office space, which CBRE predicts that trend will continue with vacancy levels being below pre-pandemic for Prime space by 2027 (Source)

Many people who work in the D.C. metro will still be able to work hybrid or fully remote due to the nature of their jobs or company incentives. Given this, proximity to employment has not been a concern for many people, which is what led to population declines in Washington D.C. during the Pandemic as well as other health and safety concerns. For many of these hybrid and remote employees today, the main attraction to living in and around a major city like D.C. is the easy access to retail and entertainment areas, especially experience and community-focused retail areas.

Changing Preferences for People’s Desire to Live in the Metro Area

This is likely due to the newfound appreciation for these types of community and experiential activities from the inability to access them during the Pandemic, as well as the lack of need to be near transactional retail stores with consumers now being accustomed to doing a lot of their shopping online. A good example of this is the Springfield Mall just 30 minutes outside of the District, where visitor levels are at pre-pandemic levels and average stay times are higher due to their prioritization of experience-focused retailers according to the CEO of Pennsylvania Real Estate Trust (Source).

Washington D.C. is fully embracing this trend, partnering with Monumental Sports to conduct a $800 million renovation of the Capital One area, which is home to the Washington Capitals, Washington Wizards, and other large entertainment events (Source). Washington D.C. has also finally acquired the RFK Stadium (Source) from the federal government, a long-sitting vacant stadium in the NE quadrant of the District, with the plans to have the Washington Commanders come back to the District from Landover, Maryland, and occupy the stadium after a full renovation, who are currently a top 4 team in the NFL.

With a large portion of the incoming migration coming from international residents moving to the District, emphasizing improving and bringing back Washington D.C. sports teams to the city should create a strong desire for domestic residents to want to live near a fun, community engaging activity that is very relevant to those that live in and around the city.

The District also has other programs it is running to make the District more attractive to live in outside of just working in the area, such as the Office to Anything program (Source) and the Housing in Downtown program (Source) which will incentivize developer through tax credits to convert office buildings into new construction housing and new construction retail properties, which should continue to attract more residents back to the area.

D.C. also understands that with all of these big changes we have seen, the strategy and allocation of resources from the government moving forward should be reassessed to create a city that is adapting to the future trends to remain a safe and desirable place for residents to live. This has sparked D.C. to start, for the first time in 20 years, a full rewrite of its Comprehensive Plan looking out to 2050 (Source).

Median Household Income Growth

CoStar: Median Household Income, DC Metro, United States (1/7/2025)

The Median Household Income in the D.C. Metro area is expected to rise in the coming years as well according to the above data from CoStar. This can be attributed to several factors, one being the continued increase in GDP in the D.C. metro area, the most recent data from 2023 showing an increase from $664.6B to $714.6B (Source) representing a 7.5% increase from 2022 to 2023. The D.C. Metro job market also remains strong, adding 36,600 jobs (1.1% increase) from November 2023 to November of 2024 (Source).

D.C. Metro’s Robust Technology Sector, Virginia Tech and George Mason Campus Expansion, Amazon HQ2

The strength of the D.C. Metro’s technology sector being the 8th largest pool of tech talent in the world and the 3rd largest pool of tech talent in the United States (Source) should continue to drive median household incomes as these highly skilled employees in the D.C. metro are become more and more essential to the 15,000 tech companies in the D.C. Metro’s business with the continued expansion and advancement of Artificial Intelligence.

Other catalysts include Virginia Tech’s new 600,000 square foot, 1 billion dollar Innovation Campus in Alexandria just outside D.C., 300,000 square feet of which was completed last week and is now open for students. The Innovation Campus will house Virginia Tech’s Pamplin College of Business graduate program with an emphasis on entrepreneurial startups and other master’s programs in engineering and computer science. At completion, the campus will bring 750 new master’s students and 100 new doctoral students to the area annually, providing talent from a top 25 public university to fill technology jobs in the D.C. Metro area.

George Mason is similarly developing 345,000 square feet for a new building called the Fuse at Mason Square at its Arlington Campus, which will be fully open in August of 2025 and will house 1,000 more new students in the technology field and 300 additional faculty, continuing to bring more highly skilled talent to the technology sector in the area (Source)

The Virginia Tech campus was part of a deal made between the state of Virginia and Amazon, who agreed to add a 2nd Headquarters just up the road from the campus and to use the campus to attract high-quality talent to Amazon. Amazon HQ2 has brought 8,000 new jobs to the Metro area since beginning this expansion into Arlington Virginia, just outside D.C. in 2018, with plans to have added a minimum of 25,000 jobs by 2031 (Source). The new Headquarters also recently released a statement requiring all employees to return to the office 5 days a week, meaning these 8,000 current jobs and future ones will be relocating to the D.C. Metro area moving forward. As a part of the partnership with the state of Virginia, which included $750 million of Virginia taxpayer money for infrastructure improvements to support the Amazon HQ2, Virginia is offering Amazon $550 million in grants for hitting that hiring goals, and an additional $200 million for hiring 12,850 more employees from 2030-2034. To receive these grants, Amazon has committed to having an average annual wage of $150,000 starting in 2019, with a 1.5% increase annually, and also cannot count jobs over $875,691 toward this average, meaning they cannot skew the average higher by paying a select few employees massive salaries (Source).

Rent Growth

Apartment Rent Growth, Apartment Vacancy, DC Metro, (1/7/2025)

Finally, we see from CoStar that the expected rent growth over the coming years is expected to be very positive due to all the factors discussed above. It is important to note that the CoStar data in this report is for the D.C. Metro in its entirety, and each city / county and neighborhood of the D.C. Metro could have different rent growth projections, however, this is a great sign to see that the area as a whole is moving in a very positive direction.

Conclusion

Because of D.C.’s typical recession resilience from the federal government and the large presence of big-name private sector companies in the area providing stable employment, it is very rare to have the opportunity to buy real estate at a discount. However, the current market environment with relatively very high interest rates (7.37x increase of the 10-year treasury in 40 months from 2020-2024), and the slow recovery coming out of the Pandemic for the city make this a great opportunity to do just that, with many positive market factors on the horizon.

In my opinion, right now is a great time to purchase a value add multifamily asset at an attractive basis, refinance in the coming years as we are now moving into a falling rate environment, receiving your tax-free refinance proceeds from the forced appreciation coming from renovations, the spike in market rent growth, lower vacancy, and compressing cap rates during the stabilization period, The macro factors for the DC Metro and for multifamily overall should contribute to a multifamily asset in the area being a safe and lucrative long-term investment as well.

Other Notable Developments in the D.C. Metro

Other developments on the horizon that should continue to lead to the success of the area are Alexandria Virginia’s massive success so far, most notably the completion of the Hazel tunnel in May of 2024, in it’s AlexRenew program to make the Potomac River swimmable and fishable by 2040 (Source), the new Rivana development next to Reston Town Center, which will add a 9 million square foot development to the newly expanded Silver Line Metro, the first Phase including 2.7 million square feet expected to be delivered by 2027 (Source) , and a 8.1 million square foot development from JPG Smith in Potomac Yards Alexandria next to the new Innovation Tech Campus and brand new metro station in the coming years (Source). These are some of the biggest developments happening in the metro, but there are dozens more that I won’t go into here to avoid this report going on to long.

Thank you for reading my research report on the outlook for the D.C. Metro area. If you enjoyed the this report, please feel free to share it with a friend!