WashREIT Expects Strong 2017 Despite Big Vacancies Looming
Engility is vacating its 134k SF office at WashREIT's Braddock Metro Center. The firm sold its USAID business last month and is consolidating the remainder of its operations into a different location. This leaves WashREIT seeking to replace a major tenant at the four-building Alexandria office complex it bought in 2011. Engility's lease expires in September.
WashREIT CEO Paul McDermott said the firm is in active negotiations with a new tenant to replace Engility's lease, and it also plans to reposition the building while it works on signing a new tenant.
"We’ve developed a comprehensive repositioning plan for the asset and have seen excellent activity due to its Metro-centric location," McDermott said on a quarterly earnings call Friday morning.
The REIT was already seeking a tenant to replace The Advisory Board at 2445 M St. NW. McDermott said it has gotten interest from law firms and other large tenants. He does not expect to find one tenant to fill the 325k SF space, and said WashREIT may sign an anchor and other smaller tenants.
Despite these challenges, the REIT is expecting to have its strongest year of net operating income growth in recent history. WashREIT is projecting overall NOI growth between 4.75% and 5.25% and growth of 7% to 7.5% in its office portfolio.
The REIT recently renewed a 50k SF lease with Hughes Hubbard & Reed at 1775 Eye St. NW for 16 years.
"The fact that a highly coveted tenant chose to stay with us speaks to the value of our brand," McDermott said.
In April, WashREIT sold its 1.2M SF suburban Maryland portfolio for $240M in an effort to focus its office portfolio on core transit-accessible properties.
McDermott said an increase in federal defense spending would boost its office portfolio, which is 15% occupied by defense contractors. At the end of 2016, WashREIT had 285k SF of vacant space to fill. McDermott said it is in talks with more than 770k SF of tenants and has another 1.1M SF of prospects.
"We feel optimistic about our office portfolio," McDermott said. "We believe demand is accelerating."
On the multifamily side, WashREIT is preparing to break ground on two major projects in the next two years.
After its 2015 purchase of The Wellington Apartments, a 711-unit Columbia Pike complex, the REIT is preparing to break ground this year on an additional 400-unit building, dubbed The Trove, on vacant land next to the three-building property. It is also planning to build a 550-unit building on the site of The Riverside, an Alexandria development it acquired last year. That project is expected to break ground in late 2018.
It is also renovating each of the existing buildings on a unit-by-unit basis as they turn over. It has renovated 219 units at The Wellington and 100 at Riverside and expects to spend a total of $23M on these renovations through the end of 2018.
McDermott said, despite record levels of new supply in the region, the REIT was able to increase rents and occupancy on a year-over-year basis for more than half of its multifamily portfolio in 2016. He said it was not able to increase both metrics at any of its properties in 2015.
The REIT is benefitting from owning Class-B assets, which McDermott said are outperforming Class-A properties, and from not owning product in submarkets experiencing major surges in supply like Capitol Riverfront.