WASHINGTON, DC-To hear Greg Leisch tell it, it has never been a better time to be in commercial real estate than now. Leisch, president of Transwestern’s Delta Associates, was the keynote speaker at last evening’s Trendlines—a standing room only event held at the Ronald Reagan building. His take on CRE at the moment: it provides superior yield, has been attracting record funds even with the strong returns of the stock market. Also, leverage is cheap, Leisch said—and as an added bonus, real estate is an excellent hedge for inflation, which is showing disconcerting flickers of life.
Also, to hear Leisch tell it, it would never be a better time to own a time machine to take you back to 2010 or pre-crisis than now – if that is, you are industry player in the Washington market. In short, Washington is not returning to “normal”, Leisch said – that is, the Washington that before the crisis that could always count on more demand than supply for product. Instead, it has morphed into a competitive market, like the rest of the nation. This has its good points and its bad points.
For example, Washington area local governments have become more development friendly, Leisch said, pointing to streamlined measures Prince George’s County and the District have put in place. The local economy is still creating jobs – some 48,000 in fact — but these jobs are lower paying and require less office space. Workers, including government employees, are occupying on average, about 180 square feet each. At the same time, though, these new jobs are likely to be filled by apartment dwellers. “Companies are going to recalibrate their expectations on a lot of different levels,” Leisch said.
The good news is that last year’s drop in asset prices will be temporary. “Cap rate compression is over,” Leisch predicted, “and we will see volume and pricing trading in the normalized range.” He also thinks last year’s negative absorption rate will reverse itself sometime this year.
- Delta expects GSA leasing activity to remain around 10 to 15% of office market demand in the near future. GSA accounted for approximately 65% of total Washington-area leasing activity during 2010; its appetite declined to 45% in 2011 and 12% in 2012.
- Tenants will continue to push for smaller and more efficient space. Delta predicts that the average square foot leased per worker will be 182 by 2015.
- Delta Associates expects effective office rents to decline approximately 1% in 2013 before gaining traction and rising 1 to 2% in 2014. By 2015, Delta expects the office market to have returned to landlord conditions and rent growth of 3 to 4%.
- For multifamily, 2013 is likely to see Class A apartment effective rent change of, on average, negative 2%, as vacancy rises. Next year Delta expects rents to edge up, with growth of positive 0.25%.