DC Is Primed For A Strong 2007

Washington, DC-The DC metro area has long been a favored destination for institutional investors and private equity seeking to invest in safe class A markets. After Tuesday’s sharp stock market drop, participants at the RealShare Washington event, held at the Renaissance Mayflower Hotel on Wednesday, largely agreed the city is poised to attract even more investment as capital flocks to quality assets and markets as the perception of an increasingly risky equity market takes hold.

More than 600 industry professionals–a record for the DC event– gathered to hear the outlook. The RealShare Conference series is presented by Real Estate Media, publishers of GlobeSt.com, Real Estate Forum, and a range of regional magazines and newletters.

“Cap rates and interest rates will remain stable here for the next two years,” predicted Jim Lee, president and COO of Opus East.

The larger question is whether the liquidity available for real estate investments overall will start to dry if the stock market plunges again, rattling even sanguine investors. Lee wondered out loud whether real estate will ever be considered a “risky investment” again. “Money moves in herds,” he said, both coming and going into a particular asset class.

The good news, though, according to Bob Murphy, managing principal of MRP Realty, is that the current liquidity in real estate is largely “smart money.” For instance, investors have all but abandoned speculative building in Miami’s condo market, he said.

There are a number of factors working in the DC market’s favor.For starters, supply and demand fundamentals are aligned to provide healthy returns to investors for the foreseeable future, said Philip Thomas, managing director and regional director of Tishman Speyer. “We are coming off of a record year for net absorption.” The CBD and East End have absorbed some 1.6 million sf, which is balanced against some 800,000 sf of uncommitted deliverables, he noted. “The core of the city is in a great position for significant rent growth, as well as the nearby submarkets.”

Congressional gridlock as well will prove to be good for the local market. Plus the government will continue to be a key tenant, Lee noted. Indeed, the day’s events was kicked off by David Winstead, commissioner of Public Buildings for US General Services Administration, who reported that the government is in the market to occupy 5.6 million sf of new and renewed space this year. “GSA’s consumption of office space is still growing,” he said. The federal government’s [space needs] will continue to provide stability to the city and surrounding areas.”

Other votes of confidence came from Mitchell Schear, president of Vornado/Charles E. Smith, who said that investment sales activity here has been “staggering.” The pace of investments may slow somewhat, he added, but the high per-square-foot sales prices are unlikely to drop. Future construction costs are also likely to stabilize, according to Patrick Marr, EVP of CB Richard Ellis, which should buttress the drop in speculative building. He pointed to a 5% to 10% drop in concrete futures as one indicator that construction costs are set to slow.