Written by Todd Fawley-King, Lisa Govoni
During debates and testimony about the proposed Attainable Housing Strategy, multiple participants have wondered about the housing landscape following the COVID-19 pandemic and the need to allow for more housing in established single-family zones. Will people want to live in denser housing? Will we be able to satisfy our housing needs with the empty units sitting in our downtowns? Certainly the headlines from newspapers like The New York Times and The Washington Post gave that impression: “America’s biggest cities were already losing their allure;” “The Pandemic is making people reconsider city living.” These newspapers even verged on fearmongering: “Which cities are renters fleeing, and where are they going?;” “They can’t leave the Bay Area fast enough.” Those articles did make it seem like there would be many empty units in high rise buildings in Bethesda and Silver Spring, notwithstanding the temporary eviction moratorium that helped keep families in units and vacancy down.
Except, this was all anecdotal and wrong: renters never did flee, there are not currently and never were thousands of vacant units, and demand for closely-packed urban apartments in highly amenitized neighborhoods has already picked up. At first glance it is true that multi-family for-rent apartment vacancy in Montgomery County generally increased from 2019 to 2021, with a notable spike in Bethesda but an overall decrease in vacancy in Downtown Silver Spring.
Multifamily quarterly vacancy rate in Montgomery County, Downtown Silver Spring, and Bethesda from 2015 to Q3 2021 with the period of COVID restrictions highlighted
However, when instead comparing vacancy in newly built units to vacancy in established buildings, it becomes clear the rise in vacancy during the COVID pandemic is entirely due to the increased supply of housing rather than tenants leaving older units. A spike in vacancies when new buildings deliver to the market is natural: most apartment buildings are only partially leased on the day they open, especially if multiple buildings finish construction in the same quarter. Developers usually spend a year showing apartments to prospective tenants before the building is full. The real estate industry refers to buildings that have gone through this leasing-up period as “stabilized;” such buildings then face the annual churn of some existing tenants moving out and new tenants moving in. While a sharp jump in vacancy in existing stabilized buildings is surprising and concerning, a high vacancy rate in newly built apartments is routine and expected.
Within any growing market, periodically a number of new apartment buildings finish construction in the same quarter and all start looking for new tenants. The number of new units exceeds the number of potential tenants, and vacancy rises. As more people move to the area over the coming quarters, those units get “absorbed” and leased out, resulting in the vacancy rate falling. The following chart shows this process for Montgomery County with a lot of new units opening in some quarters, the vacancy rate moving upward, then declining in subsequent quarters as those units get leased. Within Silver Spring and Bethesda, the trend is even more pronounced.
New multifamily units delivered per quarter and change in vacancy in Montgomery County between 2015 and 2021
Change in vacancy in Montgomery County between 2015 and 2021 with the period of COVID restrictions highlighted
New multifamily units delivered per quarter, change in vacant units, and change in vacancy in Downtown Silver Spring between 2015 and 2021
Change in vacancy in Downtown Silver Spring between 2015 and 2021 with the period of COVID restrictions highlighted
New multifamily units delivered per quarter and change in vacant units in Bethesda between 2015 and 2021 with the period of COVID restrictions highlighted
Change in vacancy in Bethesda between 2015 and 2021 with the period of COVID restrictions highlighted
Separating Montgomery County’s stabilized and new buildings eliminates that apparent spike in vacancies during 2020 and into 2021, revealing that the increase in vacancy during the pandemic was entirely the result of the expansion of multifamily supply rather than existing renters leaving.
Total vacant multifamily units in buildings that opened before and after Q2 of 2019
Montgomery County vacancy rate
Charts show that the increase in vacant units post Q2 of 2019 is almost entirely due to the increase in the supply of apartments in new buildings. Vacant units in buildings opened before Q2 of 2019 decline through 2020.
Looking more closely into the stabilization period, there is some initial evidence that buildings that opened in 2020 are having a harder time leasing up, but buildings that opened in 2019 and were looking for tenants during the pandemic appear to have had little difficulty. The following chart plots the quarterly vacancy for all multifamily-rental buildings built in Montgomery County by year from 2015 to 2020. The x-axis is the number of quarters since each set of buildings opened; 0 is equal to the fourth quarter of the subject year while 4 is the fourth quarter of the following year. The chart shows that new buildings open with high vacancy that rapidly falls in the following year (quarters 1 to 4) and stabilizes around 5 to 7 percent vacancy by the third year of operation (quarters 5 to 8). Buildings that opened in 2019 followed the same vacancy pattern as buildings that opened between 2015 and 2018. In contrast, but buildings that opened in 2020 had a higher initial vacancy level and vacancy has remained higher in their second year.
Vacancy rate of multifamily properties by year opened in the quarters after opening
The charts collectively show that Montgomery County’s renters never left; there were never thousands of empty apartments that would completely fulfill our future housing needs. New buildings that opened in 2020 are having a more difficult time leasing up because in the middle of the pandemic and with widespread mandatory or encouraged telework, very few people moved to big cities like Washington D.C, or even around the region.
While the supposed flight from the city was massively overhyped, it was not completely smooth sailing for the multifamily market. The increase in supply combined with a temporary lack of additional demand forced the market to reduce rents to maintain the occupancy rate (a strong indication that the cost of housing is highly influenced by the supply!). Rents did drop more in Downtown Silver Spring and Bethesda where supply as a portion of inventory expanded most compared to the entire county. This does show that apartment operators did lose considerable revenue.
Multifamily effective rents in Montgomery County, Bethesda, and Downtown Silver Spring per quarter 2017-2021
Even though Montgomery County is still under rent stabilization during an emergency (which limits the amount of rent increases during a state of emergency), coming into 2021 rents have turned around and are back at or close to their pre-pandemic level, strongly indicating the future for cities remains bright. In fact, the rise in rents is so sharp the trend is getting picked up and publicized (as is the quick and quiet reversal of last year’s flight from the city): “Rent prices are soaring as Americans flock back to cities;” “Tech workers who swore off the bay area are coming back.” With the apartment apocalypse apparently called off, we’ll see what the papers pick up as the next harbinger for the end of the city as we know it. Stay tuned!
 For the purpose of this analysis, “stabilized” is assumed to be all buildings built up to 2018 while new buildings are those that opened in 2019 or later.
Todd Fawley-King is Montgomery Planning’s real estate specialist. In this role Todd supports master planning efforts by conducting market analysis and evaluating the potential of the real estate market. Todd produces studies and reports to highlight how current trends affect the supply and demand of real estate product in Montgomery County. Prior to joining Montgomery County Planning Todd worked for a real estate consulting firm for 4.5 years supporting clients around the United States. Todd focused on the intersection of real estate, innovation, and academia by supporting university clients look at using their real estate portfolio to support their core mission of education and research. Todd is a resident of Montgomery County and enjoys taking his young daughter to explore the many amazing parks and open spaces the County has to offer.
Lisa Govoni is the Housing Policy Coordinator at the Montgomery County Planning Department, part of The Maryland-National Capital Park and Planning Commission (M-NCPPC). Lisa serves as the lead on major housing-related projects, including long-range sector planning activities and policy and zoning changes related to housing. Lisa completed her BA in Government and Politics in 2008, her MCP in Community Planning in 2011 and her MPS in Geographic Information Systems (GIS) in 2013, all from the University of Maryland, College Park.