There’s been plenty of buzz surrounding Washington, D.C.’s luxury real estate market lately.
Pegged as one of the top U.S. markets to watch in 2018 in the 39th annual Emerging Trends in Real Estate survey, issued by PricewaterhouseCoopers and the Urban Land Institute, experts say that D.C. is an attractive place to buy, as high returns are likely on the horizon for luxury real estate investors.
Redfin found that the average price of a luxury property in D.C. increased last year by more than 32%, with the average sales price in the top 5% of the market at $2.708 million.
D.C. ranks second among East Coast cities for million-dollar home sales, with 2,759 closings over the past three years, according to PropertyShark. Separately, Zillow found that over a quarter of D.C. homes were sold for more than their listing price in 2017, suggesting that bidding wars are increasingly common.
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The increased competition is a result of a sea change in the overall character of the city, said Gretchen Koitz, principal at the Bethesda, Maryland-based luxury brokerage the Koitz Group.
"What's happened over the past several years is that D.C. has morphed into a city that is not just a ‘government town’," she said. "It is home to major law firms and tech firms, as well as to developers, builders and financial firms."
A lively entertainment and dining scene further entices home buyers, from empty nesters moving back to the city after years in the suburbs, to young families drawn by educational opportunities, to foreign investors, Ms. Koitz added.
That said, there is significant variation in the strength of the luxury market throughout the D.C. metro area, which also includes the neighboring cities of Arlington and Alexandria, Virginia.
"D.C. is one of the fastest moving luxury markets," said Javier Vivas, director of Economic Research at Realtor.com. "It still takes an average 125 days to close a deal at that price point, but that’s still relatively fast for the region."
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The Changing Face of D.C.
"It wasn’t a town that was up at night," said Ms. Koitz, who grew up in Washington, D.C. "But it started changing. What’s happened is that more of the city has opened up and become more desirable areas to live."
An influx of tech companies to the region seems to be one of the major factors fueling this change. Last year, Cushman & Wakefield ranked Washington, D.C. third among the country’s top tech cities, with many companies drawn to the itss suburbs, where they can avoid capital gains taxes. The Dulles Technology Corridor, for instance, near the Dulles International Airport in Northern Virginia about 25 miles from DC, has become a major tech hub.
"There are lots of tech people coming in, and they want to be in the city," said Patrick Chauvin, a compass agent. "And with all of that come lobbyists from various corporations, who usually come in and spend big dollars on properties."
The Obama administration also brought in a flood of buyers seeking a particular lifestyle, which helped breathe new life into a number of D.C. neighborhoods.
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"The people that came into the area, compared to previous presidencies, were much younger," said Dan Galloway, an agent with Redfin. "This happened as the economy turned around and people started moving back to the city. There was already a nationwide trend toward urbanization, and then a young president came in and really helped to revitalize the city."
These shifts in D.C.’s culture have meant dramatic increases in the demand for real estate, and developers have taken note.
"Demand came first and then developers caught on," Ms. Koitz said. "And as the empty nesters leave 5,000-square-foot houses in the suburbs, they don’t want a 950-square foot two-bedroom. They want something bigger, and that’s where the luxury development started."
D.C.’s relatively small size and zoning regulations place limits on the amount of high-density development that can take place, but some neighborhoods have experienced dramatic transformations in recent years.
"The southwest waterfront has exploded recently with condos. Investors are also coming in there and taking single family properties and turning them into multi-family dwellings," said Boomer Foster, president of Long & Foster Real Estate. "It’s a neat place because it’s along the Potomac River and has gone largely undeveloped. Now it’s getting retail, office space, and condo developments."
The Wharf, for instance, is a new, mile-long development that brought residences, restaurants, and retail to the waterfront—along with dramatically increased home prices in southwest D.C., Mr. Galloway said. There’s also development afoot in the southeast neighborhood of Navy Yard, with groundbreaking for The Yards, comprising three million square feet of mixed-use space, scheduled for next year.
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Limited Housing Supply Fueling the Market
Large waterfront projects aside, developers face significant challenges when it comes to building in D.C. The 1910 Height Act prevents the construction of buildings over 12 to 13 stories, and the city’s boundaries are quite rigid.
"We’re by federal statute a 60-square mile entity. We’re never going to get any bigger," Mr. Galloway said. "And over the past few years, we’re netting 1,000 new residents a month. We can’t deal with the increase in demand for housing as nimbly as other cities can, because we’re limited density."
And the resulting limited supply of housing means particular neighborhoods have become white-hot.
"Logan Circle and its surrounding areas have probably changed the most—they’ve become extremely urban," Mr. Chauvin said. "And on the west end, Georgetown and Foggy Bottom have a high-end luxury condo market. The Ritz Carlton is there now."
He also pointed to Kalorama Heights as a neighborhood seeing some of the most high-end sales lately. "We’ve seen that neighborhood come around because of the Obama administration, and it’s still sought after," he said. The Obamas own an 8,200-square- foot home in the neighborhood, and Ivanka Trump and Jared Kushner rent nearby as well, according to the Washington Post.
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Luxury real estate in these neighborhoods is now drawing interest from both near and far, with empty nesters, young professionals, and foreign buyers all vying for property.
"[D.C.] is a smart investment because the population keeps growing, and there are only so many square feet in the city," Ms. Koitz said. "The demand will continue to be higher than supply, and now we’re seeing that the number of international investors is continuing to increase."
Mr. Foster pointed out that the scarcity of housing bodes well for appreciation in property values at the high end, with strong potential for cash flow should investors opt to rent out their D.C. homes.
"It’s a fabulous opportunity for people worried about volatility in the stock market to diversify their portfolios into something that’s more secure," he said.
Among the biggest sales in the district in 2017 were a seven-bedroom mansion, which sold for $14 million, a nine-bedroom home that sold for over $12 million, both in Woodley Park, as well as a $7.785 million eight-bedroom near Embassy Row, according to listing and property records.
But buyers can generally expect a smaller cash outlay than would be the norm for investing in cities like New York, Miami, or San Francisco.
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"For the luxury market, the top 5% of homes in the district puts you at about $3 million, which could mean anything from a five to six bedroom townhouse in Logan Circle, Dupont Circle, Georgetown, or Kalorama Heights," Mr. Galloway said. "Ultra wealth tends to be more demure and buttoned up here. And there’s less risk in investing in a $2 million home in D.C. than $4 or $5 million in New York or Miami, since you’re spending half as much."
What’s Ahead for the Nation’s Capital
Real estate experts see continued demand for D.C. real estate in the coming years, with more suburbanites seeking a return to the city, and young professionals drawn to the region’s tech opportunities.
D.C. is now considered to be the frontrunner for Amazon’s HQ2; Amazon founder and Washington Post owner Jeff Bezos purchased a Kalorama mansion for $23 million last year.
"If HQ2 ends up here, we’ll see even more explosive growth," Mr. Galloway said. "We’re going to continue on the path we’re on now, with development moving eastward and prices going up in the neighborhoods in upper northwest. I expect more of the same over the next five years."
Mr. Chauvin said that he anticipates the real estate market to remain somewhat consistent, due in part to larger trends toward urbanization.
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"We’re not going to go gangbusters, but we are seeing a mass exodus of the suburbs back to the city, and that will keep the market strong," he said. "People want convenience at their fingertips, to walk out the door and be at Whole Foods or Trader Joe’s or the Kennedy Center. We’re seeing that a lot more in D.C."
Mr. Foster characterized D.C. as "recession-proof," noting that during the Great Recession, the district remained relatively stable, compared to other cities, with home values remaining flat rather than depreciating.
And development will continue wherever possible under the city’s strict density laws, Ms. Koitz predicted.
"The fast pace of change is going to continue," she said. "If it’s not a hole in the ground, it’s on the books."
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