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December 13, 2007


Sponsor update:  Architecture, Inc had a big night at the recent NAIOP awards, bringing home honors for three projects:  Northridge at Westfields Phase, Leesburg Business Park, and Kettler Capitals Iceplex.  Nice work!

A veteran real estate analyst since 1970, Delta Associates CEO Greg Leisch has seen it all: the highs and lows, the booms and busts.  So now what? Money will be made in the industry, he says, with “surgical knives, not meat cleavers.”  Huh?

Greg claims he doesn’t normally wear Snoopy ties into the office, it just so happened the day we visited was the annual Delta holiday party and he was feeling festive.

Greg explains:  2004-2006 was the “no-brainer period”;   money could be made with a meat cleaver – any submarket, any product type, any financing structure.  Looking forward, you’ll need precision:   Cash will come from focusing on niche product types (eg, senior housing, medical office buildings) and operating in specific sub-markets.


Greg broke down the local commercial real estate forecast for us:

  • That pesky “R” word again.  There probably won’t be a recession at the national or local levels as defined by economists (2 quarters of negative GDP growth) but it’ll feel like one because things will be a lot slower than the 2003-2006 expansion.   Things in DC will remain healthy compared to other parts of the country, but we don’t compare ourselves to Denver, we compare ourselves to last year. 

  • The power of negative headlines.  The slowdown is being driven mostly by falling consumer confidence due to media attention given to the sub-prime mess, and by the illiquidity we are feeling because of the re-pricing of risk.  

  • The slowdown is occurring at a time we’re dealing with an excess supply of product coming to market.  Between 2008 and 2010, we’ll have to fill up 18M SF of new office; 33,000 apartments; and 19,000 condos.  Job growth continues and we’ll generate 35-40k new jobs next year but we’d need double that rate to meet this supply.

Greg came to DC in ‘70 and founded the highly respected Delta Associates in ’80, acquired by Transwestern in ‘95.  He says the worst downturn he’s seen was 1990—by far.  Federal government employment actually shrunk and there was 12 years worth of oversupply in the market.  The saying on the street then: “Figure out something else to do until 2002.”  We actually caught up by 1996.

  • This excess will cause vacancies to edge up in almost all categories.  Upward rent pressure will continue metro wide but will stop by late 2008.  The one exception is retail where rents will increase as we continue to under-produce retail product, especially in DC and close-in areas.

  • Investment sales will fall off from the record highs of 2006-2007 but there still isn’t a better investment than real estate, and there are hundreds of billions of dollars on the sidelines earmarked for it.  No other asset class has emerged as a better alternative.  Stocks remain too volatile and bonds too shaky.  And of all markets for real estate investment, DC is among the best.  There will be fewer bidders and most leveraged buyers are out for the time being, but the deals will continue.  Investment sales volume should come in around 65%-70% of ‘06-‘07 levels.

  • In the leasing market, rents will continue to rise through 2008 inside the Beltway but have stopped outside.  But unlike other cities, there will be no major rent correction.  Rents dropped 20% or more in San Francisco in early 2000s but we won’t see anything like that.
The main indicator of when things will pick up again?  "Look for Warren Buffet to buy $50-100B of re-priced debt."


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