Sequestration: Who's Hurting

WASHINGTON, DC-True, sequestration has not been the nightmare first envisioned--or perhaps better put, portrayed. But while the worst-case scenario about sequestration can be dismissed, at least for 2013, some companies in the Washington DC region are definitely noticing an impact. As we explained in the first part of this series, GlobeSt.com dug through recent earnings statements of companies based here, or with substantial operations here, to see what executives had to say about sequestration. We continue with that survey now.

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Some companies, such as Vornado Realty Trust, are determined to see the bright side of sequestration.

The REIT noted in its recent earnings call that 2013 is starting out as sluggish year in terms of its Washington assets due to "long-anticipated" automatic federal spending cuts of sequestration. It is repositioning its portfolio, it said, by supplementing government tenants with more private sector tenants. It gave the example of 1750 Pennsylvania Ave., which had two major leases expiring: US Treasury for 121,000 square feet and the IRS for 92,000 square feet. Through a combination of renewals and re-leasing, it repositioned this 276,000 square foot building for next ten years, it said.

First, it renewed US Treasury for 121,000 square feet for a ten-year term, and then re-leased nearly 100,000 square feet to "new high-caliber private sector tenants including United Nations Foundation for 84,000 square feet and AOL for 15,000 square feet."

Best of all, it said, through the aforementioned leasing, it raised rents from $40 per square foot to $47 per square feet.

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Home Properties CEO Ed Pettinella did not dwell much on sequestration until asked about during the earnings call.

"Here's my feeling," he answered. "The noise about DC … started almost two years I think it was last -- in July, August of 2011. But, we've continued to hold up well. It is our number one market. I think I keep saying each quarter that ticks by, we are more protected, more insulated because of our locations and our resident base. And, we still, after the first quarter, we feel even more strongly about it for us even though our rent and our NOI is not as strong as others right now this deep into the cycle -- the up cycle. We still think it will perform quite well for us."

Pettinella went on to say that after querying the property managers in DC, which oversee about 12,000 units in the region, "they do not seem to think that there is a lot of impact. There is a sub-market in Bel Air and Baltimore that we might say has a little more impact to it in talking to our head of property management just this morning. But, other than that, from a broader perspective, we have not seen much impact."

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Post Properties CEO Jamie Teabo, however, was a bit more concerned about another submarket – Tysons – and the effects sequestration is having on its assets there.

Rents were already pressured in the submarket, he said, although in recent weeks he has seem more pricing power emerge.

"Where we are struggling in the DC market today is our Pentagon Row asset. We have lost a lot of government business there over time and when the sequestration hit, we lost some other business we were anticipating getting that ended up canceling and not coming in. So, we have really, really struggled there on finding a sweet spot on the rents that is going to get the occupancy where we would like it to be. Specifically, Tysons and Pentagon are at the assets having the most issues in that market."

Stay tuned for more sequestration musings in this multi-part series.