Investors view the Metropolitan Washington office market as markedly different from any other real estate market in the country. The leasing conditions are the best in the nation, benefiting from the strong tenant base of the Federal Government, government contractors, large law firms, and national associations. Because of this, investors see the Metropolitan area as a safe haven for capital where investments offer the same, if not higher, level of security than any other investment vehicle.
Highlights
During the first half of 2004, eight buildings traded hands in the District for an average price of $323 per square foot. In the suburbs, 11 sales have been transacted in Northern Virginia with an average price of $204 per square foot, and 10 sales in Suburban Maryland have an average price of $245 per square foot Currently, more than 8 million square feet of office space in some 60 buildings is on the market across the Metropolitan DC area. Seven of these buildings are under contract. The average length of time on market for a Metro Washington area property is under four months.
Activity
Metro Washington has seen a larger influx of capital than ever before due both to its increasing attractiveness and to increasing capital allocations. As a result, the amount of capital in the market exceeds the number of available properties. Competition is fierce, driving prices to never-before-seen levels. Investors are willing to make more aggressive underwriting assumptions, bringing cap rates down to the 6.5 to 7.0% range and leading to lower, but stable, return rates. At 7.25 to 8.00%, yield expectations have fallen 100-150 basis points from this time last year. In this yield-driven market, investors simply want to get capital out the door and preferably into a stable DC asset.
Outlook
The velocity seen in 2003 and early 2004 may die down into 2005 as interest rates creep up and buy-and-hold strategies return. However, fierce competition will continue from an overabundance of buyers needing to place capital into a stable Metro Washington area asset. We have, for the past 12 months, continued to see the “institutionalization” of real estate. The institutional investors in the Metropolitan DC market today are focused on the yield. In some cases, transactions are underwritten at an exit price per square foot equal to or close to the purchase price per square foot.
Contact – Brian Dawson, Principal, Capital Markets Group, Washington, DC
