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D.C. Begins 2018 With Investment Sales Boom, But Brokers Expect Pace To Slow

The D.C. investment sales market has kicked off 2018 with a bang, with several major office buildings trading hands in nine-figure deals, but brokers expect that pace to slow as the year progresses with fewer properties on the market. 

The office building at 1401 New York Ave. NW

Within roughly the last month, at least seven office buildings have sold for more than $100M in the D.C. market: 

  • German investor Munich RE acquired 1440 New York Ave. NW for $250M.
  • French investor AXA bought 1401 New York Ave. NW for $165M. 
  • Boyd Watterson bought 500 E St. SW for $119M. 
  • WashREIT reached a deal to acquire Rosslyn Tower for $250M.
  • Korean investor Hana Financial Group bought Sentinel Square II for $165M.
  • ASB Real Estate Investments acquired 64 New York Ave. NW for $186M
  • Principal Real Estate Investors bought 601 New Jersey Ave. NW for $175M

It is common for a string of deals to close around the end of the year, brokers say, but the number and size of these deals does signal that the D.C. market remains attractive for investors. 

"There is absolutely going to remain interest in D.C. as an investment, there's no question about it," Avison Young principal John Kevill said. "That flurry of deals indicates that, in combination with the natural cycle of deal flow in which year-end tends to act as a very natural creator of urgency." 

While several big deals have closed in quick succession, JLL Senior Managing Director Bill Prutting does not expect deal flow to continue at this level. Some of these deals had been in the works for several months and represented a significant chunk of the active market, he said, and he does not see enough buildings currently selling to continue the trend.

"The pace can only continue if you have product actively on the market," Prutting said. "There really are not that many properties currently on the market."

Even if the pace slows, Prutting still expects 2018 to be a good year for D.C. investment sales. Through November, the D.C. Metro-area's 2017 transaction volume totaled $7.3B, according to Newmark Knight Frank, a 14.1% increase from 2016. Prutting believes 2018 could likely surpass 2017's total and continue that trend. 

"I see it being a strong year for investment in all three jurisdictions," he said. "I think you'll increasingly see higher-quality, suburban infill properties transact and well-leased properties transact." 

Transwestern Executive Vice President Gerry Trainor

Transwestern Executive Managing Director Gerry Trainor also sees a lack of available product on the market that could slow down the deal flow in the near future. He attributed this to rising vacancy rates in the central business district causing owners to delay potential sales, and a rise in foreign capital creating more long-term holders in the market. 

"There is not enough product on the market right now, it's kind of sparse on the office front," Trainor said. "Especially downtown, there's very little on the market right now."

Kevill said he sees some activity still taking place, and he thinks the recent surge in deals could give more owners confidence to put their properties on the market this year. 

"The success of the deals that come to market early in the year are going to dictate how sellers, and buyers as well, are viewing the market," Kevill said. "It will be a leading indicator." 

NoMa's Sentinel Square II was acquired by a Korean investor in late December.

Interest in D.C. from foreign capital has remained strong, despite the city falling from 15th to 25th globally in this year's Association of Foreign Investors in Real Estate survey. While D.C.'s office vacancy has caused some investors seeking short-term returns to look elsewhere, Trainor said foreign buyers who tend to hold properties for decades see the nation's capital as a stable, long-term investment. 

The part of the world this foreign capital is coming from has begun to shift recently, though. Investors from Asia and the Middle East have been pouring money into D.C. real estate for several years, but recently European capital has begun to play a larger role in the market. 

"We're seeing an increase in interest from larger German funds, certainly interest in institutions in the U.K. and in Europe," Kevill said. 

Prutting also sees a noteworthy growth of European capital coming into D.C. real estate and expects the trend to continue. 

"It represents a transition to me that is reflective of the opportunities the European community is finding in our market relative to other markets," Prutting said. "German capital had not been that active before, so that's a good sign for the market." 

This shift in the source of capital comes in large part from the slowdown of one particular Asian investor, Unizo Holdings. The Tokyo-based company spent over $1.4B to acquire nine D.C. office buildings between March 2016 and August 2017, but has not closed a D.C. deal in at least four months. Prutting said he believes Unizo is shifting its attention to the West Coast. 

"They made a significant bet here in D.C. and are trying to diversify geographically," Prutting said. 

Trainor said he has seen Unizo tour some D.C. buildings recently, but it has become much less aggressive in moving to make deals.

"They were just on a hot streak to put a lot of money out, which they did, and they were just outbidding everybody," Trainor said. "There was pent-up demand from other groups that wanted to buy properties, but they just didn't price it as high. So once Unizo fell back, other groups stepped in."