DC Deals: An Augur of National Trends?

For instance, only the best of the best is trading and buyers are still paying cash – although some debt is creeping into some transactions. On the positive side, there appears more unofficial interest than official interest in doing deals. Offmarket activity is very strong right now, several brokers say.

Several buildings have traded in the DC area since August, including one for an eye-popping $830 per square foot – the highest price-per-square-foot trade in the District. That deal, made public in September, was inked between Vornado Realty Trust and Germany-based Deka Immobilian GmbH for 1999 K St. Other recent examples include 1099 New York Ave. in the CBD, which just traded for $90.5 million or $517 per square foot at the end of September; the 570,038-square-foot Willow Oaks Corporate Center in Fairfax, VA, which was acquired by KBS REIT II for $112 million and Potomac Center North, an office building in the city's SW quadrant that traded for an undisclosed amount.

The most recent deal was a First Potomac Realty Trust acquisition for $26 million. The REIT acquired a 173,655-square-foot business park in Germantown, MD. CEO Doug Donatelli tells GlobeSt.com it traded at a 10.5% cap rate. The deal was financed partly by debt – a departure from many of these earlier transactions where the buyers swooped in with cash.

For a city starved of transactions, these deals may seem like a banquet – but in reality they are just a few data points, according to Kevin Thorpe, vice president and research director with Cassidy & Pinkard Colliers. "There have been only 17 office sales versus 140 in 2006, the high point. So in terms of pricing you don't want to read too much into a handful of data points."

Bottom line from Thorpe's perspective: the average price per square foot fell from $411 in 2008 to $335 year-to-date. Much depends on the building in question, of course: Core product, fully leased buildings that are top quality, is stabilizing in pricing and in some cases not far off from 2007. "What we are seeing there is cap rates stabilizing at 7.5% for those buildings," Thorpe says.

Value add product, buildings that are half empty or have questionable tenant rolls, are getting heavily discounted now, Thorpe says. "There is not a lot of that product selling but if it were to sell, it would sell at 30% to 40% discount from sticker price of what somebody paid in 2006."

In the District, cap rates have ranged from 6.3% to 8.5% and in the suburbs sales have priced between 8% and 10.4%, Grubb & Ellis' Eric Berkman tells GlobeSt.com. "A premium is being paid for lease term, building quality and location." Also replacement cost and land scarcity are considerations in suburban pricing.

Despite these established ranges – 6% in the District to 10% plus in the suburbs – deals are still scarce enough that each can be considered unique, Bruce Strasburg of CBRE's Investment Properties team tells GlobeSt.com.

"Each deal has to be evaluated for its own metrics relating to credit, term, location and age – as well as the landlord's debt structure." Cap rates are affected by debt even though core product isn't necessarily priced off of debt, Strasburg adds.

Cap rates for core stabilized product in the District – what every investor seems to be interested in right now – have stabilized for the short term, he does agree. "But beyond that who knows what will happen."

There are also a large number of deals percolating in the off market, Strasburg say, an indication that sellers are overcoming their reluctance to sell in this environment. "There are lot of quietly marketed deals right now that aren't listed," Berkman agrees.

Most of these trends are likely to replicate themselves in other cities as they recover – except the interest international investors have in the city. One clear plus for the District is the interest the area holds foreign investors, HFF's Andrew Weir says, pointing to the fact that foreign investors were buyers in two of the major recent sales, 1099 New York and 1999 K St. Credit Suisse acquired 1099 New York, its first building in the United States, along with another building in Boston simultaneously, according to Lacy Ltd., which represented Credit Suisse in the deals.

"We just came back from Germany and I can tell you that there is a lot of capital that wants to come to Washington but people only want to come for the right deal," Weir tells GlobeSt.com.