February’s Nationwide CRE Sales Drop Doesn’t Deter DC Investors
First Potomac Realty Trust, one of the region's biggest REITs, has decided to become a "net seller," according to CEO Bob Milkovich. That's just the way the tide is turning for most of the biggest owners of real estate in the US.
First Potomac’s plans come on the heels of a sharp plunge in real estate sales nationwide in February 2016, capping at $25.1B compared to $46.2B the previous month and $47.3B for February 2015, according to Real Capital Analytics. Analysts say they believe those numbers indicate that the past six years of sales growth are leveling off. Blackstone's Jon Gray (pictured) says the cycle isn't necessarily over, but it's winding down.
But, what happens nationally isn’t necessarily what occurs in DC, largely because of the vagaries of the federal budget and the planned relocation of some government agencies such as the FBI from the District to the suburbs. So Bisnow polled several area execs to see whether the February numbers apply to our area.
“We’re pretty bullish right now in our region,” says Holliday Fenoglio Fowler senior managing director Jim Meisel, who’s primarily involved with office sales. He says the DC office market is poised to continue to show some good gains going forward, in part because of the new two-year federal budget that lifted sequestration and funding caps.
The optimism was fueled by the creation of 68,500 jobs locally in 2015, which Jim says is good news for the DC market. “That’s what drives absorption, and we had 2M SF of absorption last year.”
A one-month decline, even one so steep, does not necessarily indicate a trend, Jim says. “The national trend for offices has been that the suburban markets are considerably more active than the downtown markets. Suburbia was up 16% nationally, downtown was flat” in February.
That trend is similar here, Jim says, with more assets on the market in suburbia, especially in NoVa, than in DC.
But the DC office market “is a little counter-cyclical.” Investors who stayed away from the District in 2013 and 2014 “are sticking their toe back in the [DC] market again.” In fact, Jim adds, “We haven’t had that many sellers in downtown lately, but DC is still hot when something comes to the market.”
The DC area market “feels very different than it did the last three years,” a big reason for that being there are more properties on the market, particularly in Virginia and Maryland than there have been, says NGKF executive managing director Jud Ryan, a recent hire away from Cushman & Wakefield.
In the DC Metro area, the usual breakdown in commercial sales is 30% to 40% in DC proper, he says, with suburban Maryland and Virginia accounting for the balance.
But during the past three years, the trend has largely flip-flopped, Jud says, with the District receiving the bulk of the investment community’s interest. In fact, there have been so many transactions that “we do think we may see a smaller amount of volume this year in the District itself.”
“This may be the first year when we get back closer to the historic norm in terms of volume,” Jud notes, with the suburbs accounting for perhaps two-thirds of sales volume. Still, “the Metro area remains a very liquid market, still a very active market, still a market that investors are laser-focused on.”
Like Jim, Jud ascribes this upturn to job growth numbers. “It’s caused a number of investors to come back and focus on Washington, DC,” he says, as some of the other markets around the country have either slowed or gone in the opposite direction, such as some of the oil and technology markets.
Dean Sigmon concurs. The EVP and director at Transwestern’s Mid-Atlantic family group says, “The investor appetite is extremely aggressive still in the DC marketplace,” he says, and he has firsthand proof.
He and his team of Robin Williams and Justin Shay recently experienced that strength when they sold two properties in Northern Virginia.
“We had a record number of people interested in these two assets,” he says, referring to Sacramento Square on Claymont Drive in Alexandria and Lancaster Mill on Longwood Court in Woodbridge. Sales deals were struck rapidly.
Sounding like an opening line from a State of the Union address, Dean says, “The fundamentals are strong,” in office as well as in rental properties, with increased rental growth projected for 2016 over 2015.