WRIT's Buy Shows Strength of Core Pricing

WASHINGTON, DC—The Washington Real Estate Investment Trust ended last week with a bang, with the announcement of its $79 million, or $731 per square foot, purchase of The Army Navy Club building on Farragut Square.

The deal also illustrates the continued pricing strength of core assets in the District. A recent report by Colliers International points out that core assets in the DC area have been trading in the range of the low $700's per square foot to the mid $800's per square foot-and at cap rates at or below 5.3% or even below 4% on in-place income, and with total return (unlevered) thresholds forecasted to be in the range of 6% to 6.25% over the holding period.

The reason, Colliers concluded, is the compelling case core assets make to investors who want a better rate of return or yield compared to what alternative investment opportunities can deliver.

This is how Colliers explains it: real estate investments are usually priced at some measure of spread over a 'safe rate' such as the 10-year US Treasury Bill. However, as interest rates remain low-resulting in a lack of cash flow or ROI from annuities or corporate bonds-the markets adopted a different pricing strategy for core oriented real estate investments.

In short, the DC market has been pricing initial capitalization rates for core product at an average of 195 basis points over the 'safe rate'.

For companies that find themselves priced out of the core market, Colliers offers this: owners can create core assets via effective leasing and/or development strategies and when they do they are typically rewarded with an additional yield premium / discount of 100 basis points or more on their exit capitalization rates against the 'non core' asset class.