Where Did All of the Supply Go?

WASHINGTON, DC-The $175.6-million trade of the 12-story 333,948-square-foot Arlington Gateway showed that class A product in the DC market still has its chops with investors despite the uncertainty emanating from official Washington. Although that object lesson didn't really require any illustration. Indeed, there is a dearth of class A offerings on the market which is causing some angst on the part of buyers -- and is certainly driving pricing, Bill Prutting Jr., Jones Lang LaSalle's managing director, Capital Markets.

"Based on the number of offerings on the market now, we expect pricing to continue to increase from a yield standpoint," he tells GlobeSt.com. Yields could go even lower based on the capital that is currently chasing very few offerings."

This is especially true for product of the highest quality, he says. It is also true of B product that is in a great location, Prutting says. One of the main drivers of this trend is the lack of offerings in the market, or as Prutting says, "an elasticity of demand that is transcending quality."

"Every buyer we speak with has the same angst about how little properties there are on the market and that there is no way the lack of supply can have a price impact."

One reason some companies are not putting properties on the market, Prutting theorizes, is because they are afraid of being locked out after they sell off their holdings. "Investors recognize how difficult it was to make those initial acquisition. They fear selling a property and reporting the proceeds to their shareholders – and not being able to duplicate that."

Currently, top quality buildings with long-term leases are trading in the low 4s to the mid-4s cap rate, Prutting says. Pricing for good quality B building is ranging in the plus or minus 5 to 5.5 cap rate.