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D.C. Investment Sales Market Heating Up, Expected To Catch Fire Later This Year

The market for buying D.C.-area office buildings has been much slower than usual during the coronavirus pandemic, but signs of a comeback are starting to emerge. 

The office building at 64 New York Ave. NE.

A handful of big deals closed in April, several buildings have come onto the market, and experts believe that D.C.-area investment sales volume will increase significantly in the second half of this year. 

The renewed activity in the capital markets comes as more employers are planning to bring employees back to the office this year, giving investors the confidence to place large bets on the office market's future. The bets that have been placed thus far have been on the safest assets — those with long-term, stable tenants — but experts see investors beginning to take a closer look at assets with vacancy or upcoming lease expirations that create more risk, but also more opportunity to add value. 

"What we've seen is money coming off the sidelines," Cushman & Wakefield Executive Vice Chair Bill Collins said. "It's a little clearer as to what's going on. Both domestic and international money is starting to gear up. A lot of people think the second half of the year will be the most active we've seen in 10 years. I think it's probably a bit more elongated: the second half of the year into 2022."

The D.C. area recorded $4.8B in office sales for the 12 months ending March 31, a 47.4% decline from the previous 12-month period, according to Newmark's first-quarter report. But experts say activity increased noticeably last month. 

Two major D.C. capital markets deals closed in late April. Carr Properties sold a minority stake in Midtown Center, the 869K SF home of Fannie Mae's headquarters, to a group of Korean Investors, JLL announced April 27. The firm didn't announce the price, but Real Estate Alert reported in February the deal valued Midtown Center at $980M. Last week, Boyd Watterson Asset Management paid $201.75M for the acquisition of the office building at 64 New York Ave. NE from ASB Real Estate Investments.

Prior to those deals, local investor The Meridian Group came off the sidelines in a big way.

Meridian's Gary Block, Rockefeller's Hilary Allard Goldfarb, Kettler's Bob Kettler, Foulger-Pratt's Cameron Pratt and Baker Tilly's Todd Stokes

After buying four buildings between December 2019 and April 2020, the firm took a nearly 12-month pause before buying two Northern Virginia office buildings in late March and early April.

It won a March 31 foreclosure auction to buy the 1500 Wilson Blvd. office building in Rosslyn for $58.3M. It closed on April 15 on the acquisition of a two-building office complex in Chantilly for $68.4M, property records show. 

"I'd say Q2 of this year, we saw some transparency into the market and into the world economy, and we saw sellers willing to meet our pricing," Meridian Group Chief Investment Officer Gary Block said. "Therefore, you've got a meeting of the minds, and that's where you see a transaction take place. During the previous 12 months, we just didn't see that."

Block said he plans to continue the firm's investment sales activity following the two latest acquisitions. He said he is focusing on the Northern Virginia office market because of the momentum from big technology companies such as Amazon, Microsoft and Google growing their footprints and signaling plans to fully return to the office. 

"We believe there will be compelling office opportunities now and in the future in Northern Virginia," Block said. "We're going to look at those very, very carefully and pounce like a tiger in the weeds when we see the appropriate pricing that makes sense for us." 

JLL Senior Managing Director Jim Meisel, whose team brokered the Midtown Center deal, said interest was "robust" with over 10 bidders, most of them foreign investors. In emailed responses to Bisnow questions, Meisel said the deal shows that investors still have confidence in the D.C. market over the long term, and he thinks short-term confidence is beginning to improve. 

"I don’t think the increased vaccine levels have completely alleviated concerns, but there is definitely more optimism," Meisel wrote. "I also believe that the projections of an economic snap back by Federal Reserve Chairman [Jerome] Powell and others is another reason for more investor optimism about the future. The other key is the return to work that is projected to increase dramatically between now and Labor Day."

The two-building Midtown Center development from Carr Properties

In addition to closing deals, brokerage firms have also brought a series of office properties onto the market over the last month, signaling that sellers believe the time is right to get a price they like. 

JLL brought at least two D.C. buildings up for sale last month, according to publicly released marketing materials: the 207K SF, 1970s-era office building at 2550 M St. NW and JBG Smith's newly developed office building at 500 L'Enfant Plaza. JLL has also been marketing an office building at 1333 16th St. NW since July. 

Newmark in February closed the $71.7M sale of 2001 North Beauregard St. in Alexandria to Aztec Fund and has brought three additional Northern Virginia office buildings to the market for sale. Newmark Executive Managing Director James Cassidy said he sees a massive amount of pent-up capital preparing to deploy into the office market, and he thinks a significant number of deals will close later this year. 

"I think Q4 will by far be the busiest quarter of 2021," Cassidy said. "We're starting to see a bit of loosening. People are feeling good as people reoccupy [offices], people get vaccinated, there seems to be a bit more of a regular pace returning, and that bodes well."

Jarvis Commercial Real Estate CEO Ernie Jarvis is marketing a 12K SF office building near Dupont Circle for sale to potential owner-occupiers. He said he sees a lot of interest from nonprofits to shift from being tenants to owners, and he expects deal activity in that space to ramp up significantly. 

"Our sense is the market demand is increasing for those assets where you can control your own destiny," Jarvis said. "I think there will be a lot of those smaller assets that become more attractive."

Jarvis said he has talked to multiple tenants who plan to bring 100% of their employees back after Labor Day, and he is seeing a significant increase in tenants touring the market for new space. He thinks the return to the office and leasing pickup will bring a surge in investment sales activity as buyers become more confident in the long-term value of the assets. 

"There are plenty of funds who are looking and have plenty of cash that is waiting to be deployed," Jarvis said. "The confidence in leasing is going to give them more confidence in acquisitions."

CBRE Research Director Wei Xie said the buildings that have sold thus far this year show that the investment activity is largely limited to core assets, which she defined as those that have long-term leases with high-quality tenants. These can be either new trophy buildings or older buildings with long-term government leases. 

"I think the core assets will trade more," she said. "There are a lot of headwinds in office with net absorption, and there are going to be winners and losers. But we know which buildings are the winners in D.C.: the trophy assets. They have been performing well and we have strong reasons to believe they'll continue to outperform the market."

The building Newmark sold in February has a long-term, full-building lease with a defense contractor. Cassidy said that while the sales that have closed thus far have largely been those with long-term, high-quality tenants, he sees buildings with more risk beginning to hit the market. 

"What's happened this year is we've seen stuff in April come to market, really in Virginia, that are multi-tenant, medium-term lease deals," Cassidy said. "Those have gone fairly well ... That's a good sign. Incrementally, capital moving out the risk curve is a good thing."

Meisel said he thinks investor appetite for riskier office buildings will increase as they gain more confidence in the market throughout this year. 

"We think there will be more tolerance for riskier asset profiles going forward, but the office deals that are out in the near term are still largely ones with long term stability and credit tenants," Meisel wrote in an email. 

Meridian Group Senior Vice President Andrew Pence, who works on the firm's acquisitions, said there isn't much investor demand for transitional office buildings, those that carry more risk because they have large vacancies or near-term lease expirations. 

"Without a doubt, very transitional office assets are currently out of favor, just because of the difficulty of forecasting out what office demand looks like over the immediate term," Pence said. "Sellers and buyers have not come to an agreement on what the next 12 to 24 months will look like."