WASHINGTON, DC-Some local landlords' and brokers' worst fears may be in the process of being realized. According to a new report co-published by PwC US and the Urban Land Institute, the area's perception as a safe investment haven is rapidly eroding—and not despite its role as home to the federal government but because of it.

According to the report, Emerging Trends in Real Estate® 2014, Washington, DC slipped from eighth place in the 2013 report to 22nd in the 2014 investment rankings, positioning it close to the middle of the 50 markets ranked in the report.

The report believes that "fed fatigue" is diminishing the investment appeal of the nation's Capitol. What was once viewed as an asset is now being seen as a liability, with concerns stemming from, most recently, the federal shutdown and the ongoing uncertainty surrounding federal budget cuts and government spending. "…even when these concerns are combined with a healthy supply pipeline, market participants are cautious about the prospects for returns," the report said. "The potential for rising rates will change how investors enter into new investments."

For the past few years there has been a gnawing fear on the part of some in the community that investors may come to see DC real estate as more trouble--or pricey--than it is worth, literally and figuratively. While many industry watchers will dismiss those concerns as overblown, DC's rapid descent in these rankings definitely gives pause.

The city was number one as recently as 2011.

Now, political Washington's antics are not solely or possibly even largely to blame for the city's diminishing appeal to investors. Multiple trends are brewing, some long-standing, that are also diverting investment away. For starters, gateway cities like Washington DC have always grappled with the problem of overpriced core assets that are too rich for some investors' price points. Indeed, the report noted that not just Washington but such established markets as Boston, Chicago, Los Angeles, New York City and San Francisco may be overlooked in favor of second tier cities. This is especially true now as fundamentals in these markets continue to improve and as debt and equity becomes more plentiful and more willing to invest there.

Not that this report is the final word for the city. There is plenty of evidence to suggest that institutional investors, especially foreign ones, still view a Washington property as a must-have for any portfolio.

In July, Jones Lang LaSalle reported that year to date, foreign investment in the District of Columbia had increased to $1.9 billion, including portfolio and pending sales, marking a year-over-year increase of an eye-popping 83.3%.

"Foreign investors definitely view DC as a safe haven market," Scott Homa, research director for JLL told GlobeSt.com at the time. "They recognize how durable DC is, especially its core assets."

The reasons for their interest in DC are just as durable, he also said. "The government business is not a highly cyclical one." Even despite the sequestration, the reduction in the government's real estate footprint and the general push for austerity, Homa said, "we are very optimistic about DC precisely because of its relationship to the government."

Instant Insights /

Uh Oh DC. 'Fed Fatigue' May Be Real

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