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Largest Deal Of 2018 Brings Momentum Back To D.C.'s Investment Sales Market

After 2018 began with a flurry of D.C. office sales, the pace of deals slowed down for several months. But now, with D.C.'s largest property sale of the year closing last week, another major sale going under contract this week and several other properties hitting the market, brokers see a surge in momentum that could help end the year with a bang. 

An aerial view of D.C.'s Central Business District and East End.

Between December and January at least 10 D.C. office sales closed for over $100M, including a deal that set a new record of $1,278/SF. But then with the inventory of available properties depleted, the market experienced a slowdown. 

The second quarter saw some notable deals close, including JPMorgan Chase buying a regional HQ for $140M, DSC Partners making a $100M acquisition and an East End office building trading for $54M, but the overall pace was well below the first quarter.

The total of $1.4B of D.C.-area office investment sales that closed in Q2 was down 31% from Q1, according to JLL's research. But the region is still on pace to record its second-highest annual volume in over a decade, JLL projects, and new deals moving forward since the end of Q2 prove that is a strong possibility. 

Last week, Georgetown's Washington Harbour complex sold to Israeli-backed Global Holdings Group for $415M, the year's largest deal so far. HFF Director Matt Nicholson, who represented the seller along with Stephen Conley, Jim Meisel, Andrew Weir and Dave Baker, said the property received strong interest from domestic and foreign investors, especially those looking to hold the property long term, which is GHG's strategy. He sees foreign investor demand as a key driver in the D.C. market going forward. 

"We see global capital circling the market and you're going to continue to see that through the rest of 2018," Nicholson said. 

The office building at 2099 Pennsylvania Ave. NW

Wednesday morning, Paramount Group announced it put 2099 Pennsylvania Ave. NW under contract for $220M, over $1,050/SF. The New York-based investor expects the deal to close in Q3, but it did not announce the buyer. A source tells Bisnow the buyer is a JV of Commonwealth Partners and CalPERS

Another Downtown D.C. building, 1200 New Hampshire Ave. NW, has recently gone under contract, a source tells Bisnow. The 311K SF building is owned by Aion Partners and PM Realty Group, and the source says it is being acquired by New York-based GreenOak Real Estate for $190M. 

Several other office buildings have recently been put on the market or are expected to hit the market soon, which could create another surge of big deals before the year is out. 

Discovery Communications retained JLL's Bill Prutting and Steve Collins to market its 540K SF office building in Downtown Silver Spring after it announced its move to New York in January. The JLL team has given tours to 41 potential investors and received about 12 offers on the property, Prutting confirmed, but he could not comment on when the deal is expected to close. 

"It has received a tremendous amount of interest," Prutting said. "Everyone realized a building like that is going to draw tenants from Downtown D.C., the [Rosslyn-Ballston] Corridor and Bethesda." 

The office building at 1001 Pennsylvania Ave. NW

TH Real Estate recently retained HFF to market the 773K SF office building at 1001 Pennsylvania Ave. NW, a deal that would likely eclipse the price tag of Washington Harbour. HFF is also marketing the 380K SF building at 425 Eye St. NW, the 206K SF building at 2550 M St. NW, the 68K SF building at 1100 Vermont Ave. NW and Portals I at 1250 Maryland Ave. NW, each of which were put on the market in the last two months. 

Additionally, multiple sources tell Bisnow that the Warner Building at 1299 Pennsylvania Ave. NW and the office building at 1501 K St. NW are expected to hit the market in the coming weeks. 

In the D.C. investment sales cycle, it is common for a large number of properties to come on the market right after Labor Day, once everyone gets back to their desks from their summer vacations, Newmark Knight Frank Executive Managing Director Jud Ryan said. 

"People talk about the summer being slow in real estate, and that may be the case for leasing, but for capital markets that's oftentimes not the case, because owners start thinking about assets they may want to transact by year-end and in order to do that, owners are looking to bring property to market in September," Ryan said. 

In addition to a string of new buildings hitting the market, Transwestern Executive Vice President Gerry Trainor said he has seen an increase in the urgency of investors to acquire D.C. properties. 

"Buyers were not as hungry or aggressive [earlier in the year]," Trainor said. "In the second and third quarter, there has been more pressure to get money out, so we've seen more projects go under contract. The market has definitely heated up." 

A JLL chart showing the D.C. region's investment sales volume and average cap rate over time

With the potential of several major deals closing in the coming months, 2018 could end up surpassing last year's investment sales volume for the D.C. region. JLL projects $7.7B in office investment sales will close this year, exceeding 2017's total of $7.5B. Northern Virginia has increased its share of the region's investment sales as the market has seen improving leasing demand, and Prutting expects that trend to continue. 

"We're starting to see it pick up in Northern Virginia a little more than Downtown D.C.," Prutting said. "Now that we have positive net absorption there and growth from tech and service companies, we expect it's going to be a huge contributor."