Donohoe COO Chris Bruch and Others Predict 2016 in DC Real Estate
From more condos to shrinking vacancy, big changes are afoot for commercial real estate in the DC region in 2016. We caught up with some local experts to get their take.
Mitchell Schear, Vornado Washington DC President
The DC region will see some steady recovery in commercial real estate, with demand perking up a bit, says Mitchell. Federal spending will help drive the recovery, along with private sector expansion in professional services of all kinds. “The government is still the biggest driver in the region, notwithstanding other vibrancies,” he added. “When the economic engine has some certainty and some increases, it has a positive ripple effect on the entire market.”
In Crystal City, where Vornado owns a large number of buildings, the submarket will continue to attract government agencies, contractors, nonprofits and innovative companies. Mitchell adds that with mandates for government to become more innovative, Crystal City is becoming a “natural epicenter for new partnerships between creative tech companies and traditional agencies and contractors.”
Chris Bruch, president/COO, The Donohoe Cos
Recent passage of the $1 trillion federal spending bill has squelched some of the uncertainty that's been stifling the economy, says Donohoe Cos President/COO Chris Bruch. “The federal government drives the local economy and that’s why we’ve been underperforming for the last several years,” he adds. The bill includes increased spending for several local agencies like DOD, NIH and FDA, which will “help local jobs and create good, solid fundamentals.”
He also predicts just as many cranes around the region in 2016 as we saw last year. They’ll primarily be working on multifamily projects, including more condo projects of 100 or fewer units. Condos have been constrained with an influx of rental products. But with rents rising and interest rates staying manageable, some want to own rather than continuing to pay rent, says Chris.
Developers will put the brakes on hotel projects because of oversupply. Chris says hotel room demand hasn’t warranted the oversupply, and there’s even more coming in the next two years.
Chris adds that one of his overriding concerns is the integrity of Metro. It’s a driver of development in the local economy and if riders and stakeholders don’t have confidence in the transit system, it will become a big problem for the region.
Greg Leisch, senior managing director of market research, Newmark Grubb Knight Frank
The DC region’s office market will continue its revival with more substantial absorption and better lease rates, NGKF's Greg Leisch says. The region is adding jobs at rates we haven’t seen in the last three to four years, and they’re the kind of jobs that fill office space—business and professional services. Greg also says shadow and sublet space are disappearing, so new jobs will generate the need for new space.
Absorption will continue rising to handle the outsized production of units, Greg says. Apartment vacancy rates will probably edge up or hold steady at modestly elevated levels. And there will be pressure on rents, which won’t rise in 2016.
Industrial will be one of the darlings of 2016, with strong absorption and rental rates on the rise. Credit cloud computing and e-commerce for industrial’s steady rise. Retail will be another darling, with around 3M SF of retail in the development pipeline—an inadequate amount to handle demand, says Greg. The DC region’s retail vacancy is among the lowest in the country, with every national and regional retailer vying for space in the market. But it also means retail rental rates have been rising.
Paul Weinschenk, president of retail division, Peterson Cos
Retail will continue to grow in occupancy and rents, Peterson Cos retail president Paul Weinschenk says. “It’s nice, steady growth as opposed to too aggressive and unsustainable,” he adds.
One thing to watch early in the year is the disappearance of those retailers who couldn’t make it work past the holidays. It will affect the DC region to the extent that those retailers are national. Landlords will have that vacancy to deal with but it’s also an opportunity to replace weaker tenants with those that will do more for a shopping center’s mix.
Other retail trends to watch include the continued rise of entertainment retailers. Peterson is pursuing several entertainment brands for its Commonwealth Center and Avonlea projects. He’d also like to see some new retailers enter the market that can offer yet another level of entertainment: Pirch, an upscale home design center; Southern Season, a mecca for specialty foods, home items and gifts; and Vom Fass, which sells olive oils, vinegars, spirits and wines.
“They’re strong examples of retailers who create compelling, entertaining stores that give shoppers a reason to get off the sofa and behind the wheel to drive to an actual store,” he says.
The region will also see more upscale grocers, Paul predicts. While 2015 was the first year that people were spending more eating out in restaurants and bars than buying groceries, Paul says grocers are developing more interesting and upscale experiences. “When you can order so much online, you have to offer consumers something that’s a little different and a compelling reason to go into the grocery store,” he adds.