D.C. Real Estate Stalwarts Are Buying Like It's 1993

Blood is in the streets of D.C.'s commercial real estate market, and top local investors say now is the time to buy. 

Property prices in D.C.'s central business district declined by roughly 50% over the last five years, according to MSCI, the second-largest drop of all the major markets it tracks. 

This plunge in value has pulled many downtown property owners underwater on their loans and led to a wave of foreclosures and distress-driven sales, particularly of office buildings. Many firms with large portfolios in the city have lost buildings, but for those that still have access to capital, the downtrodden market is seen as a historic buying opportunity.

"Here we are in the most compelling entry point for real estate investing since 1993," said The Meridian Group Chief Investment Officer Gary Block, referring to the later stages of the savings and loan crisis.

"We are in a new era, a new cycle of investing in real estate," Block added, speaking Thursday at Bisnow's DMV Economic and Political Forecast at 1050 17th St. NW.

TMG invested $150M last year, Block said, including the acquisition of a vacant trophy office building in Tysons. And he said it plans to spend another $300M on properties in the region this year. 

Many national and international investors have shied away from D.C. over the last year as federal government spending cuts have dealt a blow to the city's economy and image. Block said outside investors largely aren't willing to invest equity in D.C. deals and are instead favoring safer parts of the capital stack, such as debt or preferred equity. 

"Part of that is good for people like us who have conviction here because we're getting incredible pricing," Block said. 

As the institutional investors that have historically dominated D.C.'s office market stay on the sidelines, a new crop of buyers has popped up, including young companies such as FarmViewVentures and Taicoon Property Partners, while longtime local players like Douglas Development Corp. and Carr Properties also ramp up activity. 

Carr Properties CEO Oliver Carr said pricing has hit bottom for obsolete office properties downtown, with many older buildings trading for only the value of their land. And he said this has made them attractive targets for investors with value-add strategies.

He is putting his money where his mouth is: Carr Properties in November paid $23.5M to acquire a 136K SF office building at 2121 Virginia Ave. NW with plans to convert it to apartments. And in January, it partnered with Barings on the $85M purchase of a 212K SF office building at 141 New York Ave. NW. 

That building is expected to undergo a renovation and remain an office asset. Carr said the company is "actively pursuing" more such deals.

"If you have an office building in a great location, that's tough for the current owner, but it also creates an opportunity for new capital to come in and breathe some life into the asset and take it in a new direction," Carr said. "We look at the market like there's a lot of opportunity. You just need to pick your spots and be selective."

Buchanan Partners in April acquired a 608K SF Rockville office park for $47M, equating to $77 per SF. Bailey Edelson, a Buchanan principal, said the firm has found deals even cheaper than that, some as low as $50 per SF. 

"In my 20-year career, I've never seen that opportunity before," she said. 

"For us, it's about finding things at the right basis, with the right structure that allows us to deliver our projects when they make sense and not get caught in some of these temporary cycles," she added. "If you take the long view, there's some really interesting opportunities at generational bases."

Shooshan Co. CEO John Shooshan also described the repricing of office assets as "generational" and said it is creating "great opportunities" for buyers.

"On the other side of that, it's not pleasant," Shooshan said. "It's painful, and you have to go through the corrective cycle." 

These investors also said they see buying opportunities in the region's multifamily market, as the construction slowdown in the D.C. area has created an attractive landscape for landlords.

"The supply-demand dynamics across the region are good," Edelson said. "We haven't been building here like some of the other parts of the country, like the Southeast, so we don't have an oversupply problem."

Block said the region has better attributes than many of the hot markets that multifamily investors have flocked to in the Sun Belt. 

"You can throw a dart in Northern Virginia anywhere and, within a 1-mile, 3-mile or 5-mile radius, you're going to have double the household income of the Sun Belt cities, yet they're getting the capital and we're not," Block said. "We have no supply, and they have tons of supply."

Menkiti Group CEO Bo Menkiti, whose company focuses on D.C.-area multifamily, said the presence of the federal government has historically made investors view D.C. as a safe place to put money, but the political "turmoil" of the last year has changed that.

"It's challenged the idea that we are a stable region to invest in, and that's something that we're working through," he said. "But I think long term we still have all these jobs, it's a great city. If you have a long view, that's more of a blip than a long-term trend."