Summary Findings and Recommendations
The Friendship Heights Housing Market (1995)
I. Introduction
II.
Findings
III.
Housing Demand
I. Introduction
Friendship Heights is probably the strongest multi-family housing market in Montgomery County, and one of the strongest in the region. Housing in the Sector Plan Area includes rental apartments with some of the lowest vacancy rates and highest rents in the County as well as a number of condominium buildings, including one of the County's most elegant condominium complexes. Although prices are generally high, the area also contains a number of moderately priced condos.
The key to the appeal of Friendship Heights appears to be its desirable location on the edge of the northwest section of Washington, D.C., its many urban amenities, and its attractive image. Metrorail is one of its primary amenities. Friendship Heights' combination of local and regional retail is another attraction, as is its aura of safety. This area is one of the few places in Montgomery County where it is possible to live comfortably without a car. Most of the housing is within easy walking distance or a convenient Metro ride to a wide variety of daily destinations, including jobs, shopping, restaurants, parks, and most of the cultural and entertainment opportunities of Washington, D.C.
Much of the commercial area commonly considered Friendship Heights is in Washington, D.C. However, all of the multi-family housing in the community is currently in Montgomery County. According to the Washington Metropolitan Area Council of Governments, nearby neighborhoods in Washington, D.C. included just over 1,500 households in 1990, most of them in single-family detached houses. This study concentrates on multi-family housing because Montgomery County policies for Metro station areas, land prices, and land availability discourage any significant single-family development in the Sector Plan Area. However, townhouse development may be appropriate in some areas.
II. Findings
Friendship Heights is a very strong multi-family housing market:
- Turnover rents are higher than County-wide high-rise rents for each unit size. Friendship Heights' rents average $259 more per unit per month.
- Vacancy rates are even lower than the County's already low rates. Friendship Heights' rates of 3.3 percent in 1993 and 2.8 percent in 1994 are a signal that the market could support additional housing.
- Condominium prices are varied and sales are strong. Prices ranged from just under $40,000 for a unit in an older building to $740,000 for a unit in Somerset House II in 1994.
- There is demand for 800 to 1,100 new housing units in Friendship Heights in the next 15 to 20 years:
- More than 90 multi-family units are needed to alleviate the current tight market, evidenced by very low vacancy rates.
- Expected employment growth will require about 620 multi-family units to maintain the same share of workers by 2010. If additional job capacity, and subsequently more jobs, are added in Friendship Heights, as the result of this Sector Plan or other actions, the need for housing will increase.
- The area should support between 100 and 300 townhouses. This number would create a townhouse share of the housing stock in Friendship Heights that is less than half the County average.
- Some of this demand can be met by the maximum of 273 units in Somerset House that are currently approved. Another 132 rooms have been approved in the Marriott Brighton Gardens project, but these will not be full living units and are designed for the frail elderly. Consequently, they will not serve the demand identified in this study.
III. Housing Demand
Number of Units
There is no simple formula for determining demand for housing. In a discrete geographic area, the combination of job growth, household formations, mortality, and mobility yields a reasonable approximation of the number of housing units needed. In a specific subdivision or apartment complex, the degree of competition, market preferences, turnover rates, and nearby employment growth indicate demand for a specific product. Demand for a specific type of new housing without overall growth in demand may mean the loss of residents in existing housing, however, and may not contribute to good planning.
In a large metropolitan area, such as Washington, D.C., mobility within the region negates the effects of household formation and mortality on housing demand in a specific place. Instead, two main indicators of local area demand are forecast employment growth in areas where residents can be expected to work and signs of an already tight housing market, such as low vacancy rates and high rents. Both of these indicators point to a market for additional housing in the Friendship Heights Sector Plan Area.
Tight Market
As the housing supply analysis indicated, the housing market is tight in Friendship Heights, especially the market for rental housing. Vacancy rates for 1993 and 1994 of 3.3 and 2.8 percent respectively are well below the County-wide average of 5.3 and 4.3 percent in those years. These rates are also well below industry financial expectations of an average 5 percent vacancy rate. In addition, the low vacancy rates have not been achieved at the expense of adequate rents. In 1994, in fact, Friendship Heights rents were an average of $259 per month higher than County-wide average rents for high-rise apartments.
In a tight market, development to a level that would yield a 5 percent vacancy rate is indicated. The 1994 vacancy rate means that a minimum of 35 units must be added to achieve a 5 percent vacancy rate. Another 56 condos would be needed to maintain the current balance of condos and rental apartments, a balance that appears to suit the current market, which has emphasized condos since the early 1980s. Adding only 91 units is very conservative. It means that one vacancy would be created somewhere in the Friendship Heights Sector Plan Area for each additional unit. It seems unlikely that the equivalent of all the new units would be vacant, especially in the case of new rental product in a popular area that has not had any new rental construction in over 20 years.
Employment Growth
Capacity to adjust for the vacancy rate responds to an immediate type of demand. In a Metro station area, future employment growth is a reasonable indicator of future needs. The primary employment location for Friendship Heights high-rise residents is Washington, D.C. Over 1,200 residents, 57.5 percent of all who work, are employed in the District. No other work location approaches this number.
The Montgomery County Planning Department cooperates with other Washington, D.C. area jurisdictions through the Council of Governments (COG) to forecast growth in jobs, households, and population within the region. The forecasts distribute future demand for housing and jobs on the basis of zoning capacity, approved development, planned development, historic trends, and other factors.
To maintain its current share of Washington, D.C. jobs, Friendship Heights would need almost 620 new housing units. This number results from applying the current percentage of jobs held by Friendship Heights residents in Washington, D.C. to the 2010 forecast of Washington jobs and applying the percentage increase in jobs to the number of housing units. It assumes that the share of residents working in the District will remain fairly steady and that the number of workers per household will also remain essentially unchanged. It might be that if more housing were available, more workers would choose to live in Friendship Heights to take advantage of the excellent transportation available and the area's many other amenities and facilities.
This analysis accommodates growth in the sizable population of residents over 65 years of age by calculating the increase on the basis of workers per household and by assuming that the non-working population will retain the same share of the total population. (According to the 1994 Census Update Survey, there were only 0.71 workers per household in Friendship Heights.) Actually, the growth in the elderly population will be fairly slow between 1995 and 2015 as the relatively small depression and World War II population groups dominate the population of persons over 65. The increase in the elderly population in the Bethesda-Chevy Chase Planning Area over the period is expected to be only about 3.2 percent. During this period, new construction in Friendship Heights may attract more young and middle-aged professionals who prefer more up-to-date housing. This is a temporary situation, however, because by 2011 the baby boomers will begin to reach 65 and will swell the numbers substantially.
In the Friendship Heights area, the slowest growth in the elderly population may be in the nearby single-family detached houses rather than in the apartments in the Sector Plan Area. Many area residents bought their houses in the decade after World War II and may become unable to care for them in the fairly near future. In such cases, a frequent choice is to sell the house and rent or buy a nearby apartment. This could contribute to the demand for units in the Sector Plan Area. When older owners sell, younger families are most likely to buy their houses.
The demand calculations are also unlikely to be affected by the coming of age of the small baby bust population. This group is in its teens and twenties, age groups that are typically small in Friendship Heights. The relatively high housing costs have already priced them out of this market. Twenty to 30 year-olds represent only 14.6 percent of the high-rise residents in Friendship Heights, compared to 20 percent of high-rise residents County-wide.
The major unknown at the current time is whether and to what degree the federal government will "downsize." A major reduction in federal spending in the Washington, D.C. area will, undoubtedly, dampen the local economy. It could easily delay, or in the worst case, severely reduce area growth. The Friendship Heights market is so well located and so strong that a delay seems more probable than an end to foreseeable growth. Past experience with the federal government indicates that spending reductions are usually more moderate than expected beforehand. However, the current political atmosphere appears to be different from previous periods and is difficult to predict.
Housing Types
- Single-family detached - Montgomery County policies favoring comparatively intensive land use at Metro stations, high land values in Friendship Heights, and limited land availability mean that single-family detached housing is probably not feasible in the Sector Plan Area.
- Townhouses - Townhouse development would add a housing choice that is not
currently available in Friendship Heights. Townhouses also
tend to serve as a good transition between higher density
land uses and adjacent single-family neighborhoods. Finally,
townhouses would provide the three- and four-bedroom units
that are quite scarce in the CBD. Because this unit type tends
to attract younger and larger households, they could increase
the age diversity in the Sector Plan Area. The average size
of households that live in townhouses was 2.76 according to
the 1994 Census Update Survey, compared to 1.64 for high-rises.
Since there are no townhouses in Friendship Heights and a very limited number in the Bethesda-Chevy Chase Planning Area, there are not enough comparable sales to predict possible prices. The high rents in the area and the high price of single-family detached housing, a median of $549,900 for new units in the Planning Area in 1993, imply a market for townhouses with the higher prices that might be necessary to justify the land costs.
Townhouses would add a missing element to the area market and would appeal to a different demographic group: younger, larger households. Thus, demand for them would be in addition to the demand for apartments and condos calculated on the basis of the current market and its demographic profile. Slightly more than 17 percent of the County's total housing supply consists of townhouses. The majority of these are in suburban locations. Due to high land costs and limited land availability, Friendship Heights may not have the potential for that high a percentage. However, demand for up to half the County average, or 100 to 300 units, is reasonable. -
Multi-family housing - The same factors that discourage single-family detached development in Friendship Heights encourage multi-family construction. Apartments are suitably high intensity. They are also an efficient use of limited, expensive land.
-
Garden Apartments - Similar to townhouses, garden apartments are not currently available in the Sector Plan Area and are in limited supply in the Bethesda-Chevy Chase Planning Area. Most, if not all, of the existing units in the planning area are many decades old. As such, their current turnover rents are not indicative of the rent levels the market would support in new construction. Although there is no rental history for them, these units could be an attractive addition to the local housing supply. Their typically larger units and low-rise configuration would accommodate families with children and other households who want more space.
- High and Mid-rise Apartments - This type of housing has a proven
track record in Friendship Heights, as the discussion of rents,
sales, and vacancies shows, and no indications of market resistance.
These are housing types that work well in a Central Business
District (CBD). They use land efficiently, while offering
residents security and proximity to the amenities and facilities
of the CBD. The demand calculations in the preceding
section are based on anticipated demand for mid- and high-rise
apartments.
Multi-story apartments are the most expensive multi-family units to build. High-rise construction has a median cost of $67.80 a square foot compared to $46.60 a square foot for garden apartments, according to the 1993 Means Building Construction Cost Data. Mid-rise construction is in the middle, at $58.35 per square foot. Local builders report costs around $70 a square foot for high-rise construction.
The building community reports that it is almost impossible to build a typical high-rise unit for less than $100,000 and almost impossible to achieve average rents below $900+ per month. Average rents for buildings completed in the last 10 years range from $904 to $1,300 per month. The lower prices of older housing stock moderate the overall average high-rise rent County-wide to $823. The weighted average rent for apartments in six rental high-rise buildings constructed during the last 10 years was $1,022. These rents are comparatively high County-wide but well within the current price range for Friendship Heights. In spite of its much older housing stock, the 1994 average rent for an average apartment was $1,094 per month in Friendship Heights.
The one source of concern if high-rise zoning is selected is that Montgomery County currently has zoned capacity for an additional 24,500 high-rise units at Metro stations and in Rock Spring Park. The County has absorbed an average of about 460 such units per year during the last 9 years. This means that there is more than a 50 year supply of appropriately zoned land. On the other hand, this housing type is particularly appropriate and successful in Friendship Heights. If there is to be more high-rise housing in the County, County policies and economics clearly support Friendship Heights as an appropriate location.
Mid-rise construction may also be appropriate in the Sector Plan Area. These buildings of four to eight or nine stories served by elevators appear popular with their residents. Mid-rise vacancy rates are lower than either high-rise or garden apartment rates. Prices for the Carleton, the one mid-rise in Friendship Heights, are higher than any building other than Somerset House. Granted the Carleton is newer than all but Somerset House, but it is still over 12 years old. Mid-rises generally offer the security and amenities of high-rise buildings, but are a little less expensive to build and a little less imposing to live in or near.
Summary of Demand
This analysis indicates that the Sector Plan Area needs a minimum of 90 additional units to alleviate the current tight rental market. During the period of the Sector Plan, another 620 units, or more will be required to maintain the area's share of Washington, D.C. employment at the current number of workers per household. Finally, construction of 100 to 300 townhouses would round out the area's housing supply. This is a conservative estimate of demand, producing only 50 percent or less of the average townhouse share of the housing supply County-wide. Combined, there appears to be market support for between 800 and 1,100 new units during the period of the Sector Plan.
Somerset House III is already in the pipeline of approved development and could account for between 140 and 273 of the total units demanded by the market. Brighton Gardens will provide 132 rooms for frail elderly residents. Most of these people are no longer able to live alone. Consequently, they are not part of the market for standard dwelling units. The 100 to 150 condos proposed for the southeast quadrant of Wisconsin and Western Avenues in the District will most likely be competitive with housing in the Montgomery County section of Friendship Heights. However, this analysis is based solely on Montgomery County residents' employment patterns and the Montgomery County rental and condo market conditions. Washington, D.C. demand factors should create most of the market for this housing. Thus, only a small number of the units will count against the Sector Plan Area demand.
IV. Other Issues
Ownership
The Friendship Heights Sector Plan will not determine whether new multi-family housing is rental or condo. However, the market appears suitable for both types of ownership. Both are currently successful in Friendship Heights.
Affordable Housing
Affordable housing would be very appropriate in Friendship Heights. The proximity to public facilities, especially transit, is especially desirable for lower income households. While the Sector Plan Area contains a number of fairly reasonably priced units, this area is generally very affluent. The difficulty in providing affordable housing lies in the area's success and its relatively small size. The limited amount of land being employed in very lucrative uses means very high land values. Land assessments for existing rental buildings, for example, are in the range of several million dollars per acre.
As a result, affordable housing in the area will most likely be achieved through the Moderately Priced Dwelling Unit (MPDU) law. Every new development of 50 or more units is required to include 12.5 to 15 percent units affordable to moderate income households. Alternatives to this requirement, such as contributions to the County's Housing Initiative Fund, should be avoided if at all possible in Friendship Heights. The major difficulty for providing MPDUs in expensive housing tends to be the condo fees, which are often beyond the reach of moderate income households. Developers and County officials need to be creative in finding ways to solve this problem while providing the moderately priced units. At least a partial solution would be to "unbundle" the condo fees as much as possible so that MPDU residents pay only for services they need, not for facilities and amenities they do not need or cannot afford. An endowment fund to subsidize MPDU condo fees as part of the development amenity package might be another option.
The high land costs mean that any other type of affordable housing will require fortuitous circumstances to achieve. Strong support should be given to any such possibilities.
Appearance
The older residential buildings in Friendship Heights are nicely landscaped and well kept. Their facades, however, are quite utilitarian in appearance. Upgrades to the facades during the next 15 or 20 years would help maintain the attractiveness of the area.