DC Investors Share Insight on 2011 Market Dynamics

Washington, DC continues to jostle with New York for the title of top investment market in the nation. A highly educated workforce, steady job growth, high barriers to entry and the stabilizing presence of the Federal Government combine to make Washington, DC a favored destination for institutions; pension funds; REITs; private investors; and, yes, developers.

Recently, a panel of DC experts gathered at the Ronald Reagan Building & International Trade Center in Washington, DC for a roundtable discussion moderated by Real Estate Forum and Transwestern. Held immediately before Transwestern’s annual TrendLines event, the roundtable featured some of DC’s most active and prominent investors discussing issues likely to impact the market, both regionally and nationally, in the year ahead. The roundtable discussion was moderated by Sule Aygoren Carranza, editor-in-chief of Real Estate Forum, and me. A full list of the panelists appears below. (This article touches the highlights. For a complete report on the Roundtable, please watch for Real Estate Forum’s February/March issue.)

Being the nation’s capital, there was a political undercurrent running through a number of issues. How would a proposed federal pay freeze, budget cuts and a focus on deficit reduction manifest itself in a commercial real estate market where the Federal Government is the single largest space user? Most respondents anticipated a relatively modest impact on the region. The Fed accounted for nearly 30% of all leasing activity in the DC metro area in 2010, double the 14% average from 2006 to 2008. As stimulus dollars recede and rents begin to stabilize and rise in many markets, it’s likely that Federal Government leasing will return to more normal volume levels. As the two houses of Congress remain divided between the major parties and with the White House clearly at odds with the budget-cutting sentiment in the House of Representatives, it is difficult to foresee a dramatic reduction in lease requirements that would have a material effect on the real estate market. Further, any moderation in the amount of GSA leasing would likely be counterbalanced by a resumption in private-sector lease activity as the economic recovery continues to gain steam.

The resurgence in sales activity in 2010 and rapid reduction in cap rates to pre-recession levels were also hot topics of discussion. Few expressed surprise at how quickly the market rebounded in terms of both pricing and velocity. A stable local economy, solid market fundamentals, and the potential for economic growth make the region very attractive to real estate investors. For instance, the record $900-per-square-foot price paid for 1225 Connecticut Ave. in December 2010 was seen not as an anomaly but as a harbinger of things to come. The next plateau, a $1,000-per-foot office building sale, was seen as likely to be breached in the next 24 months. As the Downtown market tightens, rate appreciation accelerates, and with cap rates expected to remain near record lows, it’s simply a function of mathematics and time until we have our first four-digit sale. Looking at the opposite end of the investment sales market, many panelists bemoaned the lack of distressed real estate sales opportunities. On a per-capita basis, the Washington area ranks among the lowest in the nation on the distress scale. Given the minimal number of distressed properties that came to market and the avalanche of capital chasing those few projects, the prospect of achieving fire-sale pricing failed to materialize to any meaningful degree.

That’s not to say however that the opportunity to purchase assets at steep discounts in the Washington region never existed. In fact, there were numerous examples of quality buildings bought at the low point of the market that have subsequently flipped generating remarkable returns. For example, 1501 M St., purchased for $60 million in the middle of 2009, traded for $79 million at the end of 2010; 3101 Wilson Blvd., purchased for $71 million in the middle of 2009, traded for $112 million just 18 months later; and 1331 L St., purchased by CoStar for $41 million in February 2010, traded just one year later for $101 million. So while the opportunity to achieve outsized returns was clearly present, there was a consensus that the window had closed. While a few bold investors were handsomely rewarded for what proved to be very savvy risk taking, the resurgence of the market and flood of capital looking to find a home in the DC region make similar outcomes exceedingly unlikely.

Our panelists weighed in on numerous other issues, submarkets, and trends that are destined to shape the Washington, DC real estate market in the year ahead, fully covered in the Real Estate Forum article. Watch forf it.

David Popp is a senior vice president with Transwestern, overseeing the delivery of investor services in the firm’s Mid-Atlantic region. He can be reached at David.Popp@transwestern.net.

Real Estate Forum/Transwestern Trendlines Panelists

Todd Bassen, Director of Acquisitions, Invesco Real Estate; Scott Dalrymple, Vice President, Prudential RE Investors; Marc DeLuca, Director, ING Clarion; George Duke, Managing Director, LaSalle Investment Management; David Hamm, Vice President of Transactions, RREEF; Jim Hedges, Senior Vice President, Acquisitions and Dispositions, Brookfield Properties; Jeffrey Kovach, Managing Director, Beacon Capital Partners; Chuck Lindwall, Regional President, KBS Realty Advisors; and Nick Smith, Chief Investment Officer, First Potomac Realty Trust.