Why Foreign Investors Like DC: Our Properties' 10% Annual Return Tops National Return, S&P 500

WASHINGTON, DC—There has been a reoccurring theme about the Washington DC market that it is no longer attractive -– or perhaps less attractive than it was before --to foreign investors. Much of this is due to the annual Association of Foreign Investors in Real Estate survey, which over the past few years has been steadily reporting a decline of interest among its investors.

But other indicators suggest otherwise.

For starters there are the actual deals that foreign investors ink. For example, last week Brookfield Property Partners sold a 49% stake of a local office portfolio to joint venture partner AustralianSuper. Net proceeds of the deal total $349 million. The transaction values the eight properties, which total 2.2 million square feet and are 96% occupied, at $1.32 billion.

It was the first local investment for the Australian superannuation fund.

Also, other reports routinely suggest that DC is still a favorable destination to foreign investors. "Foreign investment in the US property markets is soaring," according to Kevin Thorpe, DTZ's chief economist who authored a report that found that commercial real estate stock held by investors hit a high of $13.6 trillion in 2014. International capital is now involved in nearly 20% of total sales volume in the US, more than double the norm, he said. New York, San Francisco, Los Angeles, Washington, DC, Boston and Chicago were North American cities in Money Into Property's top 10 global capital destinations.

Another report examines this trend – but the takeaway is a lot more bullish for DC.

The report, a recent white paper co-authored by Newmark Grubb Knight Frank's Senior Managing Director of Research Greg Leisch and Sandy Paul, NGKF's managing director of National Market Research, singled out DC as a better performing investment than many alternatives – including national office product.

When these investors look at Washington they see a market that has outperformed the national average over a long period of time, Leisch and Paul write.

They cite Real Estate Investment Fiduciaries (NCREIF), which tabulates data on core investment product. It reports that the Washington metro area office market has produced a 10.08% total annualized return over the past 20 years. The US office market, by contrast, has generated a 9.65% return over the same time period, while the S&P 500 index generated a 9.41% return and the Barclays Capital Government Bond index generated a 5.47% return.

The bottom line is this, Paul and Leisch write. "Over the past ten years, Washington's office market has performed comparably to or better than alternatives, and with less volatility. While some short-term holders of Washington office assets lost money as the sales market dried up during the recession in 2008-2009, long-term holders rode out that period and have been realizing solid gains."