Contact Us
News

WashREIT's Paul McDermott and Boston Properties' Ray Ritchey On Why D.C.'s HQ2 Fixation Is Overblown

Want to get a jump-start on upcoming deals? Meet the major D.C. players at one of our upcoming events!

Speculation about where Amazon will build its second headquarters has permeated seemingly every conversation in commercial real estate, especially in the D.C. market, where the odds of landing it appear to be high, but two executives at large REITs say their investors are too focused on the spectacle. 

WashREIT CEO Paul McDermott and Boston Properties' Senior Executive Vice President Ray Ritchey
WashREIT CEO Paul McDermott and Boston Properties' Senior Executive Vice President Ray Ritchey at Bisnow's 2018 D.C. State of the Market

WashREIT CEO Paul McDermott said he was at the NAREIT conference recently, and many of his meetings with investors started with them asking about Amazon. 

"I was kind of caught off guard about the myopic nature of some of the investors," said McDermott, speaking in front of a 500-person audience Tuesday at Bisnow's D.C. State of the Market at Skanska's 2112 Pennsylvania Ave. NW. 

While McDermott said HQ2 would be a great win for the region, he thinks it is being discussed at the expense of some other key economic drivers. What people investing in the region should be talking about is the new federal budget that was passed earlier this year, McDermott said. WashREIT's third-party consultants estimate the budget could create a $28B capital infusion in the region, he said, the biggest surge in at least five years. 

"Everybody is so fixated on Amazon here and its 50,000 jobs over 10 years," McDermott said. "We want it to happen. It could be the icing on the cake, but the real catalyst is happening right now and that is the budget, getting the money spent and getting that job creation. In the back half of 2018, 2019 and 2020, we should feel the residual effects." 

WashREIT CEO Paul McDermott and Boston Properties' Senior Executive Vice President Ray Ritchey
WashREIT CEO Paul McDermott and Boston Properties' Senior Executive Vice President Ray Ritchey

Boston Properties Senior Executive Vice President Ray Ritchey echoed McDermott's sentiments on HQ2, saying investors are not focusing enough on the strong leasing successes his company has achieved in recent months. The developer has signed Fannie Mae, Leidos, WilmerHale, Marriott International and the Transportation Security Administration to major leases, all anchor deals that are kicking off new developments. 

"Obviously we're very excited about our friends at JBG and their pursuit of Amazon, and we wish them absolutely the best," Ritchey said. "But what's really interesting is in the last year we've signed five build-to-suits totaling over 3.3M SF of space pre-leased. That is our Amazon." 

Ritchey also highlighted deals Boston Properties has done in San Francisco, where it opened the 1.4M SF Salesforce Tower fully leased, and its growth in Boston, New York and Los Angeles. He said that absorption has not fully translated into stock market growth, and he believes the REIT is trading at a discount. 

"Since the first of the year our stock is up 10% and JBG is up 15%. Am I bitter? No," Ritchey said to laughter from the audience, including his son, JBG Smith's head of leasing, Dave Ritchey. "But that shows you the runway you have in the public markets, and the disconnect between real estate fundamentals and the perception of markets." 

JBG Smith's stock has risen largely because of speculation over its Crystal City portfolio landing HQ2, but the REIT has also signed several new leases recently.

Ray Ritchey and McDermott also highlighted what they see as the biggest investment opportunities and challenges in the D.C. market.

McDermott said Class-B properties, both in the office and multifamily sectors, have been among the strongest in WashREIT's portfolio. On the office side, the reduced stock of Class-B properties and high demand from value-concious tenants has created a landlord's market in that segment. 

WashREIT's Class-B properties have seen tenant incentives drop 21% and free rent drop 6.5% over the last three years, he said, the opposite of the trend happening in the Class-A market. Being able to reduce the amount the landlord gives away to office tenants is attractive to investors in the public market, he said. 

On the multifamily side, McDermott said WashREIT has targeted Class-B properties where it can renovate, add value and still have a more affordable product than new, Class-A construction. 

"If you look last year at the new jobs created in the region, the average salary was $60K, so that sets up for B space," McDermott said. "We like that space and are going to continue to play in that space." 

One of the challenges in the D.C. market right now, Ritchey said, is finding new development sites. Boston Properties has signed build-to-suit deals on most of the available sites in its portfolio and he is now looking for new land, but he said he has had trouble making the economics work. 

"The key challenge we face is we're running out of the raw material, and that's the development sites," Ritchey said. "It's not that the sites aren't out there. There are plenty of sites. We turned down three or four because we couldn't make the numbers work. It's so hard to find new sites with the pressure on rents to justify going ground up. That's why we try to do build-to-suits pre-leased."

Tuesday's D.C. State of the Market featured three other panels with industry leaders such as Cushman & Wakefield's Roberta Liss, EagleBank's Ron Paul, Akridge's Matt Klein and more. Stay tuned for additional coverage of the event.