Will DC Miss Out on the Healing?

The mood at Prudential Financial's fifth annual Global Economic and Retirement Outlook briefing, to hear the GlobeSt.com reporters who attended tell it, was one of moderate optimism for commercial real estate this year. "The macro environment is a little more stable than this time last year," said Edward F. Keon, managing director and portfolio manager of Quantitative Management Associates. "A European collapse is a little less likely, and in the US, there's a little less uncertainty."

In short, he said, "the healing process is underway."

Keon acknowledged that Washington—official Washington that is--could throw a wrench in the recovery pace, but for the most part he and other participants seemed confident enough that that wouldn't happen, or if it did, it would have a short term impact.

Fine, but what about Washington DC itself—the CRE part of the area, that is. During the Great Recession the CRE markets were relatively insulated from the economy, protected by the government's largeness. Today, it feels as though the real estate community is insulated from the (now recovering) economy, and at the mercy of the government's largeness, or lack thereof.

Simply put, the longer Congress and the White House take to come to some kind of accord, the harder it will be on the market. Based on the current posturing among politicos, the soonest Washington would get some certainty about the government's direction is Spring, when--presumably—the debt ceiling will be resolved, the sequestration cuts negotiated and Congress passes another short-term resolution to continue funding the government. That is a big 'presumably', needless to say, given the rhetoric both parties are using about these issues. The deadline for these events are sometime in February, March 1 and March 27, respectively.

There is plenty of evidence, both quantitative and anecdotal, that Washington's CRE markets are struggling already even before these potential landmines are negotiated (or not). Consider:

• In the Association of Foreign Investors in Real Estate's annual survey of global cities in which foreign real estate investors say they will invest-- Washington, DC was not in one of the top two positions as it usually is. Why? Well, see above.

• The DC area posted its worst year on record in 2012 in terms of absorption, Jones Lang LaSalle reports: 3.3 million square feet of negative net absorption. Much of that was due to the Base Realignment and Closure Act, but certainly some of it was due to the hesitancy of government agencies and contractors to make decisions.

• In a recent report Cassidy Turley's Garrick Brown said that if the sequestration cuts were to go through, government expenditures for contractors will be reduced by 9% in 2013, turning the contracting world on its head, possibly resulting in 18.7 million square feet of unused space. The greater Washington DC area, where federal spending accounts for 42% of the area's gross metro product, makes it the most exposed market to the proposed sequestration cuts. In addition, 23% of the private sector office space is either leased by the federal government or by private sector contractors.