RealShare EXCLUSIVE: Can the Good Times Continue in DC?

During the leadoff state-of-the-market Town Hall meeting, Scott Brody, vice president and general manager of real estate for Opus East, said that despite high construction costs, fundamentals are strong enough that the firm has began speculative development in the suburbs and is planning on doing so in the District as well, beginning with an initial 225,000 sf of office space at Rock Spring Park in North Bethesda, MD.

Brody added: "DC is still the strongest-demand location in the country for new product to the point where we're able to sell partially empty or empty buildings for close to the same margins that we would have on a stabilized basis. That's a phenomenon that's probably only occurring here and in Southern California."

However, David Bevirt, senior vice president of leasing for Metropolitan DC at CarrAmerica, questioned the amount of new construction. "We're cautiously optimistic about what we're seeing in the pipeline. There's 4.5 million sf under construction for 2006 and another two million sf that's in the pipeline for '07. That's a daunting amount of properties that are coming to the marketplace. If demand continues at its normalized pace under good conditions, which is anywhere between 1.5 million and two million sf, then we'll be doing pretty well."

Overall, Bevirt said that DC has a very strong market for demand and that Carr is "very bullish about the market" in the near future. He said he believed that a backlog of several major GSA deals would "break free over the next couple years" and that the agency would return from the sidelines. Meanwhile, he said there is 2.1 million sf of real demand from law firms, not just tenants in negotiations on renewals, and that this would continue over the next four years.

There was also discussion about the disconnect between sale prices and rents. Joe Stettinius, senior vice president of Equity Office Properties, said, "The reality is that B product is leasing at A rents now. There is a question about whether the bread-and-butter tenants can pay rents that are required to justify some of these valuations. There's also less discipline on the underwriting side today, certainly in the last three to six months."

A new session for the RealShare Conference Series, "Pardon the Interruption--RealShare Style," paired Jeff Neal, principal of Monument Realty, and Ray Ritchey, Boston Properties' executive vice president and national director of acquisitions and development, to offer rapid-fire commentary on 11 topics pertinent to the DC-area real estate community. The men had only about a minute each to sound off on issues ranging from BRAC ("really overplayed," said Ritchey) to Mayor Anthony Williams (who "put the city on track for some great things, but there's a lot left undone," said Neal, citing education reform, waterfront development and the new baseball stadium).

Asked what each would do if he was mayor, Neal first joked, "Cut real estate taxes in half!" then answered seriously: "A lot of regulations in green building and affordable housing legislation are taxes on development. There's an attitude among some politicians and voters that we should just make developers pay for it, but that tax squishes down development and makes it more difficult."

Ritchey said he would "seriously look at raising the height limit," noting the restriction forced DC law firm Wilmer Cutler Pickering Hale and Dorr to take three adjacent buildings that it must interconnect to meet a 400,000-sf space requirement. He qualified that developers could still be limited in blocking views of landmarks, but that heights could be raised easily in high-growth potential areas such as the Georgia Avenue Corridor, Wisconsin and Connecticut Avenues and the Anacostia Waterfront.

Another highlight was an Inside the Real Estate Mind interview session with Mitchell Schear, president of Charles E. Smith Commercial Realty. Schear sat down with Real Estate Forum editor-in-chief Michael G. Desiato to discuss the intersection of life, business and real estate.

Finding it difficult to shed his hands-on management style, Schear revealed: "The thing that's the most challenging is running an organization of our size, with the number of deals we have, and knowing for certain that there's no possible way that I can do all of them."

And how much longer does he think the good times can last in the DC market? "I just can't possibly imagine that the slope could be as steep as it has been over recent years," Schear said. "It has to level off a little bit because how low can cap rates go? There's not much more room for them to move. We're in a good market but there are clearly threats out there, like a recession and the threat of terrorism worldwide. We just need to be thoughtful, careful and not get too ahead of ourselves."