DC Office Poised for a Breakout?
Call 2015 a year of transition in DC commercial real estate. The office market seems poised for a breakout, but isn’t quite there yet, and while residential demand and construction is as strong as ever, people like Bozzuto Group CEO Tom Bozzuto are wary of stagnant rents and conservative lending. We'll be discussing all at our 6th Annual Bisnow DC State of the Market event on July 28 at 7:30am at the Marriott Marquis, part of our United Bank Neighborhood series.
Tom (snapped with former US Secretary of State Hillary Clinton) will be among our expert panelists and tells us that the last year in residential development has been a booming success by any standard. There are so many Millennials coming to the market that the demand just won’t quit, even as the fast-growing supply isn’t leading to scarcity. “The largest single population group in America is 24-year-olds,” he says, and they’re educated and looking to move to DC. He’s feeling confident and poetic. “It’s like being at the seashore and seeing a stream of waves that are going to keep coming at you for at least the next six or seven years. It makes you feel good about being in the apartment business.”
The buildings just keep coming. Tom says the market has been absorbing about 14,000 units a year, “which is beyond any historical comparison.” While unemployment is still below 5% and the region is adding jobs, rents aren’t keeping up with inflation, according to Freddie Mac’s 2015 multifamily outlook. Next year, property owners were hoping to see rents going up, but that’s probably not going to happen. There were more construction starts last year than any year since the mid-1980s, Tom says, and most of those buildings are expected to come on line in 2016.
For buildings still in the pipeline or in planning, the sledding could get tougher, according to Tom (snapped with Milt Peterson). Lenders are about to get more tight-fisted, meaning construction projects will have a tougher time putting shovels in the dirt. The Federal Reserve expects to raise interest rates by the end of this year. Approved projects might have to push back their start dates, or hang in limbo. “I’m not sure everything that’s in the pipeline is going to get started.”
While residential in DC might be cresting, the office market is slowly building strength. The first half of 2015 showed encouraging signs of growth, and many prognosticators believe the market is really going to kick in soon. That would mean good news for Chip Akridge (snapped with Eaglebank CEO Ron Paul) and the real estate firm that bears his name. He likes to be conservative about the market, but he says more people are “kicking the tires” on his office buildings, always a good sign.
A better sign? George Mason University economist Stephen Fuller (snapped above with our own Tyler Fisher receiving a Bizzy) predicts the region will add about 65,000 jobs in 2017, about double the current rate. More jobs means more folks need desks, and more deals get signed. That should help the office vacancy rate in the region, still above historical norms. Not helping matters is the wide swath of Class-B and C buildings that are nigh impossible to lease. Putting an employee 16 feet from a window line with an eight-foot ceiling is like putting them in a cave, Chip says, and those are not the offices employees want to work in.
The trophy and Class-A market, however, is already back. Over the past few years, trophies have absorbed about 18.5M SF of space, Chip says, which “indicates a clear flight to quality on the part of users.” Some older buildings lend themselves to a reposition, but low ceilings and too many columns might get in the way. Sometimes, you’ve just got to tear them down, like Akridge did at 1200 17th St NW, which delivered last year and has already leased up 70%, including signing Pillsbury as an anchor for 105k SF.
So what’s the next frontier? Look to the south, where The Wharf (above) and The Yards’ office properties sit anxiously waiting to be built and sign tenants. “It has Metro, it has a live/work/play environment, it just hasn’t yet emerged as an office market,” Chip says. When the land is used up in the CBD and on the East End, that’s where the next rush could be.
You can hear Chip, Tom and several other titans of the DC real estate industry speak at our 6th Annual Bisnow State of the Market on July 28 at 7:30am at the Marriott Marquis. Sign up here.