Washington DC Market Report

WASHINGTON DC OFFICE & INDUSTRIAL REPORT

The single tenant Office/Industrial market is highly competitive today, however, this competitiveness varies due to the nature of the tenant and the relevant market. High credit tenants in primary – especially urban – markets are among the highest in demand. According to Costar the market for single tenant NNN investments is averaging 10,000 transactions a quarter. A majority of those were Retail spaces, Corporate and Regional HQ’s in Primary and Secondary Markets.  

Of these primary markets, none is more interesting than Washington DC. Many Investors and Corporations have excess cash holdings and seek less volatile investments than the open stock and bond markets. 

This trend has been realized through the increased activity of  Institutional  Investors, Private Equity Groups, and both publicly and privately traded REIT’s D.C. is particularly fascinating with the inclusion of Government and Government Contracting Tenants such as SAIC, Booz Allen, Lockheed Martin, Northrop Grumman, etc. 

http://calkain.com/reports/research/calkain_research31.pdf

A New Storm's for Office Market

 Mushrooming in Office Markets Throughout The Country

Penn Mutual Towers, an office complex across the street from Independence Hall in Philadelphia, has seen its vacancy rise and income fall after one big tenant left and another renewed its lease for 15% less than it had been paying. Its creditors are foreclosing on the property, according to data company Trepp LLC.

Similar problems are mushrooming in office markets throughout the country, foreshadowing a new wave of real-estate trouble. While the housing market was at the heart of the most recent real-estate crisis, office buildings—the center of past meltdowns—until now haven't been a major source of concern. 

Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work.

To be sure, office vacancy rates have slowly improved in some markets as companies added jobs, and owners will benefit even more if the economy gains steam. Also, values of office property have increased in New York, Washington, Boston and other major cities, easing the stress on some properties.

For example, in New York, values of some office buildings are approaching boom-era highs, especially properties that are mostly occupied by credit-worthy tenants on long term leases. But six out of seven New York City's sub markets all have effective rents-which includes landlord incentives—down 15% or more since end-2007, according to Reis.




http://online.wsj.com

D.C. Worst Performance for Lease Office Market

The Washington region's office market in the third quarter registered its worst performance since late 2009, a sharp contrast to a boom the area saw throughout 2010.Now owners are adjusting to the likelihood that the public sector and its sprawling support system in the private sector will halt its growth in coming years—or even shrink.

"For us, it'll mean a relatively flat market, which we're not used to," said Douglas Donatelli, chief executive of First Potomac Realty Trust, a large office landlord in the region. "We're used to a market that absorbs space."

The federal government is by far the largest occupier of space in the region. The General Services Administration alone, which handles the bulk of federal leasing, accounts for 15.3% of the privately owned office market, according to brokerage CBRE Group Inc. Washington, by contrast, was the envy of landlords in most other cities through much of the recovery. Even when times were rough after the economy turned in 2008, Washington managed to escape with fewer scars than most other cities—likely aided by increased federal spending—and then roared back to be the best-performing office market in 2010.

In the first half of the year, investors were paying up for office buildings at values above those reached in the market's prior peak of 2007. For example, Beacon Capital Partners sold a 680,000-square-foot office building known as Market Square to Wells Real Estate Investment Trust II in March for a record $905 a square foot.  The recovery in the Washington D.C. metro office market is expected to continue at a slow pace throughout the remainder of 2011 and into 2012.

Office Owners Seek to Cash In as Prices Boom

NNN Lease Market News

Office Owners Seek to Cash In

Big-Name Buildings Go on Block as Prices Boom; 'Who Knows What Market Will Be Like' in a Year? says Tim Jaroch, one of the general partners who own the 1.4 million-square-foot Constitution Center.
Until recently, post-recession sales activity in the office market has been slow. Lenders have held onto distressed assets rather than sell them, frustrating many investors who hoped to take advantage of the pain of others. Even as values rise, many owners continue to resist selling because they don't like their options for investing the proceeds.
The sharp rise in values has come over the past year, a relatively short time frame in the real-estate market. Recent deals include the sale of 750 Seventh Ave. in New York's Times Square by Hines Interests for a surprisingly high $485 million and Beacon Capital Partners' sale of Market Square in Washington for a record $905 a square foot. Beacon also is considering bringing to market 1211 Ave. of the Americas in coming weeks, for which the company would look to retrieve well above the $1.5 billion that it paid in 2006, according to people familiar with the matter.
Building owners in some office markets contrast sharply with the residential market, where home prices have declined for months. Last week, the S&P/Case-Shiller Home Price Index reported home prices were down 4.2% in the first quarter of 2011.While new buyers are betting on a strong future in the market, the high prices—back so rapidly from the market's trough—have given some investors pause. Building owners in some office markets contrast sharply with the residential market, where home prices have declined for months. Large New York City developers, including Douglas Durst, have said prices have risen too high to justify acquisitions.

http://online.wsj.com/article

The Strength of Washington, D.C.'s Office Market

NNN Lease Market News

The strength of Washington, D.C.'s office market, which has lifted the values of some properties to boom-era levels, also has helped busted developments in the nation's capital.

"Where does the development derive its value? It's generally from its lease," says Joseph Fuszard, head of commercial real-estate workouts for Bank of America.

Workout experts say that in strong commercial markets such as Washington, as well as New York, Miami and San Francisco, banks increasingly are making the decision to commit to seeing commercial projects through to the end, even if that means increasing funding.
"I'd imagine we're going to see more sponsors making decisions where they might put capital into the asset in order to continue to improve it, to enhance value because they see the market coming back," says Peter Nicoletti, head of special asset services for global real-estate brokerage Jones Lang LaSalle Inc.
In addition to having a guaranteed end user and solid prospects for strong future cash flows, the NOAA project got a push from the fact that it was the pet project of U.S. Sen. Barbara Mikulski, a Democrat from Maryland, who has long championed NOAA's weather research and earmarked federal funds for the agency.
The Washington office market is one of the country's healthiest, in part due to demand from government agencies and contractors. According to researcher Reis Inc., demand is slowing, but tenants are expected to occupy one million square feet more of office space this year.

http://online.wsj.com/article

Trump Son-in-Law Strives to Hold On to Building

NNN Lease Market News
Jared Kushner, the real-estate scion and Donald Trump's son-in-law, plunged into the New York market at the top of the boom, paying $1.8 billion for a Fifth Avenue office and retail tower, the highest price ever for a single building at the time.
New to the New York office market, Mr. Kushner, then 26, took the lead in buying 666 Fifth Ave., at 52nd Street, from landlord Tishman Speyer. The price—paid for with $1.75 billion in debt and $50 million in equity and $100 million in reserves from the Kushner family and family business partner George Gellert—assumed that a string of below-market expiring office leases would be replaced with companies paying far higher prices, according to loan documents. They also planned to sell a stake in the retail portion of the building and paid off junior debt.http://online.wsj.com/article/SB10001424052748703461504576231132984824372.html
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Government Cuts Clip Office Market

NNN Lease Market News

Smaller government means less demand for office space, and that is acting as a drag on the recovery of the commercial-real-estate market.
In Washington and elsewhere, government leasing has helped prop up demand in tough times. But now cash-strapped governments are moving to cut back on office space, even as commercial real estate struggles to recover.
After the financial crisis first hit, buildings with government tenants were a safer bet. Washington emerged as the healthiest office market in the country, with rents falling much less than other cities.
Rents have been rising in some prime markets since the depths of the downturn. In Washington's Georgetown market, effective rents were up 2.2% in 2010, according to Reis. In Midtown Manhattan, rents rose 0.2% during the year.
But in many markets rents actually fell last year, with net effective rents down 1.5% nationally, according to Reis. If government agencies contract without the private sector expanding more, downward pressure will continue, some predict.
http://online.wsj.com/