Investors Flock to Washington, D.C., Commercial Real Estate Markets
While the rest of the country copes with job losses, an uncertain economy, and diminished corporate spending, the Washington, D.C., metropolitan area remains strong because of increased government spending. In fact, the government added nearly 50,000 office jobs in the second quarter alone, according to Cushman & Wakefield. “Government services are the main force here and we're extremely fortunate to have it,” says Keith W. Summers, CCIM, of Grubb & Ellis in Vienna, Va.
Due to the government's presence, “Investors continue to view downtown Washington, D.C., as the top real estate market in the country,” says Francis J. Coppola, CCIM, GRI, of Spaulding & Slye Colliers in Washington, D.C. “Capital is pursuing well-leased, quality assets with credit tenants in stabilized markets. [This] market fulfills each of these criteria.”
Retail's Popularity Soars Sales activity in the Washington, D.C., CB Richard Ellis office illustrates the retail market's strength, says Prakash R. Kamath, CCIM.
“Our team sold more than 40 centers in the last three years alone. On each and every transaction, there were multiple bids at, near, or sometimes even above the asking price. In some cases, investors were willing to post large, nonrefundable deposits in order to make their offer more attractive,” he says.
Retail occupancy in the greater metropolitan area is well over 90 percent; lease rates are skyrocketing due to rampant demand; and “buyers are offering [prices] at never-before-seen levels,” Kamath continues. Due to stock market volatility, both institutional and private investors are pouring more money into retail real estate, driving down capitalization rates.
Although many owners are selling to attain these record-low cap rates, others are taking advantage of low interest rates, refinancing, and investing in expansion or capital improvements. Even the 2.1 million-square-foot Tysons Corner Center, the 10th largest U.S. mall, is expanding “to meet the needs of the area and avoid any chance of getting tired,” Kamath says.
Most new development is occurring in suburban Virginia, especially Loudoun, Fauquier, and Prince William counties, to serve exploding residential growth. In Washington, D.C., “the goal has been to develop in order to provide goods and services to an underserved, densely populated area as evidenced by several new grocery store developments and the addition of Home Depot and Big Kmart,” he says.
Investors Want Industrial
Industrial investment sales “are off the charts,” Summers says. “With so much money on the sidelines, companies want to own rather than lease their facilities.” Also, institutional investors like industrial properties' long net-lease terms. For example, Washington Real Estate Investment Trust recently purchased three buildings totaling 137,405 sf in northern Virginia from Cambridge Property for more than $10.5 million. Likewise, Argus Realty Investors acquired a 184,204-sf flex property from MacFarian Real Estate for more than $26.2 million, or $142.31 per square foot, according to Advantis/GVA.
Unlike sales prices, industrial lease rates have plummeted as much as 30 percent in the past three years and now reside around $3.50 psf triple net, Summers says. Tenants signing major leases include the Federal Bureau of Investigation (83,333 sf), the U.S. Department of Defense (62,000 sf), Geico Insurance (63,000 sf), and Vertis (108,120 sf), all in suburban Maryland and Virginia.
High land prices have forced large distribution and manufacturing users west to the Interstate-81 corridor. Companies with projects under construction in that submarket include Home Depot, Sysco, and Ford Motor Co. FedEx recently purchased 114 acres in Maryland on which it plans to construct a 400,000-sf building, and Lowe's Home Improvement Warehouse and Nitterhouse Concrete also have projects planned, Summers says. “Available land and space will get tighter over the next two to four years,” he predicts.
Downtown Redevelopments Increase Multifamily Supply
Almost $400 million of multifamily real estate traded hands in the metropolitan area during the first half of the year, according to Marcus & Millichap's Apartment Research Report . Second-quarter median unit prices jumped to $76,500 from $42,600 one year previous. Notable transactions include the $130 million sale of the 1,119-unit Berkshire Towers in Silver Spring, Md., and the more than $53.2 million sale of the 408-unit Brittany apartment complex in Arlington, Va., according to the report.
Downtown revitalization initiatives in the metropolitan area are responsible for the bulk of new multifamily development. For example, the 326-unit Metropolitan at Pentagon Row luxury apartment community, developed by Kettler-Scott, is part of Federal Realty Investment Trust's Pentagon Row mixed-use development in Arlington. The more than $36 million project is scheduled for completion in mid-2004.
Silver Spring recently received its first new multifamily development in more 12 years. In July, the Tower Cos. completed the 78-unit Blair Towns, the area's first Leadership in Energy and Environmental Design-certified apartment community. The $17 million project coincides with the Silver Spring downtown redevelopment plan.
Office Recovery Expected
Several signs point to the metropolitan office market's recovery: Since year-end 2002, the overall vacancy rate has declined 0.5 percent; available sublease space has fallen by 500,000 sf; and absorption has risen to 4.9 million sf, Coppola says.
The technology industry's plummet hit northern Virginia submarkets the hardest, and lease rates have dropped 30 percent since peaking in 2000. The U.S. Office of Army Administration recently leased 525,000 sf in Crystal City, Va.; Titan Corp. and Unisys Corp. signed approximately 280,000 sf apiece in Reston, Va. Of the 5 million sf under construction, 83 percent is pre-leased, including the U.S. Patent and Trademark Office's 2.5 million-sf headquarters, Coppola says.
Washington, D.C., and suburban Maryland office lease rates also have decreased, but a cessation of speculative developments should help stop the decline, he says. Government agencies signed most of the significant suburban Maryland leases this year, including the Federal National Mortgage Association, which took space in Bethesda, Coppola says.
“[Washington, D.C.] is in the best shape leading into a recovery period … Outer submarkets, especially those outside the Beltway in both northern Virginia and suburban Maryland could take some time to recover,” he predicts.
Alberta Rises Above
Oil, gas, and related manufacturing industries drive Alberta's strong economy. Recent export restrictions hurt the province's beef industry, which previously generated multibillion-dollar revenues, but it is expected to recover rapidly, says Greg G. Glenn, CCIM, SIOR, of Royal LePage Commercial in Calgary.
Due to high construction costs and little available product in southeastern Alberta, “any multifamily property that makes it to the open market is sold very quickly,” says Joanne Birtz, CCIM, of brec.ca in Medicine Hat. Vacancies range between 0.7 percent and 1.5 percent, and buildings sell for as much as $62,000 per unit.
In Calgary, western Canada's logistics hub, lease rates are stable, and sales prices have risen in response to increased investor demand, Glenn says. “The financial institutions, insurance companies, and real estate investment trusts are literally trying to outbid each other on every sale that has taken place in our market,” he says. Most new construction is user-driven, says Paul Derksen, CCIM, of CB Richard Ellis Alberta Ltd. For example, Westfair Foods recently completed a 280,000-square-foot distribution center in northeast Calgary.
“Historic overbuilding [in Edmonton] has resulted in an unusual retail hierarchy when compared to other North American cities of like size,” and properties such as the West Edmonton Mall that offer retail entertainment lead the pack, says Philip J. Milroy, CCIM, of Westcorp. Despite the glut of space, the occupancy rate is a healthy 94 percent, he says.
Oil company merger and acquisition activity and the technology industry's downturn have added large blocks of sublease space in Calgary, according to Royal LePage Commercial's Office Leasing Market Update . Suburban markets are faring a little better, as absorption remains positive at nearly 300,000 sf for the first half of the year, the report says.