Investors From Atlanta To Asia Signal Renewed Interest In Southwest DC's Office Market
Much of DC's investment sales activity so far in 2017 has been concentrated in the Southwest DC market. Investors from Asia to Atlanta, along with local players, have acquired properties and signaled a bullish attitude on the submarket that has landlords, brokers and economic development officials paying attention.
“To see that kind of interest from three different groups that diverse has us watching this stuff every day,” Southwest BID president Steve Moore said. “I listen to our board discuss their own properties and I think everybody’s attention is at high alert. Who’s out there shopping and who wants in?"
Piedmont Office Realty Trust's 600K SF office building at 300 E St. SW, where NASA's full-building lease is good through 2028, hit the market in September and brokers saw a strong level of interest right away.
“There’s a group of buyers who are really interested in long-term, government-leased properties in this environment,” said Cushman & Wakefield’s Bill Collins, who helped Piedmont market the NASA HQ building. “Particularly whenever it’s a headquarters building, that’s a little more attractive.”
A group of Korean investors is under contract to buy the property for $360M, with the sale expected to close by June. This deal would mark the second Asian investor to scoop up a Southwest DC office building in recent months.
DC's most active foreign investor, Tokyo-based Unizo, acquired the Capital View office building at 425 3rd St. SW in December for $148M. This building is also anchored by a federal government tenant, the Department of Housing and Urban Development, which last year renewed its lease for one-third of the building through 2026.
Even properties without a long-term government lease — or any lease at all — have drawn interest from outside investors. Trammell Crow developed the 342K SF National Square office building at 500 D St. SW on behalf of the AFL-CIO Building Investment Trust in 2015, and it has sat vacant since it delivered.
But the vacancy did not deter Atlanta-based Goddard Investment Group, which bought the building for $93M earlier this month. Moore said Goddard had been shopping around in the market for a while and liked the location of the National Square building to help it attract tenants.
"When a team buys an empty building, they’ve got to be very confident," Moore said.
Collins said Goddard is the type of investor that seeks a large return on its investment, rather than the foreign buyers looking to park money in a stable asset.
"What they see is that government leasing has been pretty good recently in terms of volume of leasing," Collins said. "They look at it as opportunity to buy a building that can accommodate a couple GSA-type tenants."
Over on 12th Street, Douglas Development recently acquired the Cotton Annex building for $30M in a General Services Administration auction. A much different play than the Class-A office buildings, Douglas has a wide range of options for how it could redevelop this historic property. It is too early for Norman Jemal to say what plans Douglas has for the building, but he said the decision to acquire it came in part because of all the activity happening in the Southwest DC submarket.
"Southwest is absolutely going through a renaissance, and the tide is rising," Jemal said. "We want to be a part of that rising tide. We have some very exciting ideas for it."
At least two buildings remain up for grabs in Southwest DC, and brokers say they are garnering a lot of interest.
"There's definitely a real strong interest," Collins said. "There's a pretty wide swath of investors too."
CIM is looking to sell its 400K SF office building at 370 L'Enfant Plaza and retained Eastdil Secured about a month ago to market the property. An Eastdil broker, who declined to be identified, said the firm is getting strong interest in that building.
Moore attributes the spike in interest in Southwest DC to the upcoming opening of The Wharf's Phase 1, plus the development of the new International Spy Museum and the Museum of the Bible near L'Enfant Plaza. He also credits the pipeline of multifamily projects coming to the submarket.
Collins also credits the increased demand for office product in Southwest DC to the area's development activity and said investors like the office fundamentals in the submarket.
"From an office perspective, there’s far less product being delivered, the majority is residential, retail and hotel," Collins said. "That just means there is less land available for office development, which will make stock of office product more valuable and more amenitized."