June 4, 2012
GLOBEST: DC May Be Down, But Not Out—For Long
By Sule Aygoren Carranza
WASHINGTON, DC—A rapt audience of 175 industry professionals listened intently to a series of panels on local market during the 10th annual RealShare Washington, DC conference, held on Friday at the Ritz-Carlton. The half-day program focused on current trends and prospects for development, leasing and investment in this dynamic market.
The first session, “The Next Chapter of Development” took a look at the reasons behind the latest projects in multifamily, office and retail. In multifamily today, the developers concurred that it’s all about the amenities. That, said Stonebridge Carras principal Doug Firstenberg, is how you justify your rents. But it’s important to “keep it simple. Too many uses can make projects too complicated.” Financing sources understand this, he added, and so do tenants.
Apartments have become so amenitized that their development is “becoming almost like the hotel industry these days,” said Dick Knapp, a Foulger-Pratt SVP who moderated the panel.
That’s a reason why most multifamily going up nowadays tends to be part of a great mixed-use project. And in almost every mixed-use project in region, “the most important component is retail,” shared Robin McBride, Federal Realty Investment Trust’s vice president and Mid-Atlantic region COO. All of FRIT’s projects have their own “flavor”—be it an arts theme, or high-end shopping—but in any of the communities, “the biggest amenity is what's on ground.” Movie theaters and restaurants, the speakers agreed, are major draws in mixed-use projects.
A good retail component helps to kick off a mixed-use project, in terms of securing debt and equity financing, said Chris Spitz, president of DRI Development Associates.
Some of the trends in multifamily development, such as the projects’ hipness or edginess, are spilling into the office sector as well, Knapp noted.
In their office projects, Penzance founder and managing partner Victor Tolkan said, “If we have new features and amenities, we're going to attract from the older buildings around us.” The interesting thing today, he added, is that tenants don't care too much about rents. “If you're offering a better product than others in market, they’ll pay more.”
Firstenberg, too, is bullish on selectively building office, but it depends on location. With the existing stock in the market, there’s a tremendous opportunity to lure tenants away from older assets into new projects.
Another major trend across all sectors, but especially office and multifamily, is acquiring older properties and repositioning them to be "like new," according to the panel, which also included MRP managing principal Bob Murphy.
Meanwhile, landlord and tenant brokers made some interesting revelations on demand and changing trends of office space during the Dealmakers session. Brendan Owen, Vornado/Charles E. Smith’s chief leasing officer, Brendan Owen, noted that, which the exception of stimulus spending by the government in 2010, DC hasn't had much absorption in past 2.5 years. Still, the market’s very steady and stable, which is why institutions love to be here.
There’s definitely been a flight to quality, said Avison Young principal Bruce McNair. “Conditions in trophy assets are improving.”
But some owners aren’t taking any chances. Dave Bevirt, regional vice president of leasing for Brookfield, said his firm is reaching out to tenants 18 to 24 months in advance of their lease expirations. “In some cases, especially when the space is 120,000 square feet of more, it's 36 months. We’re trying to avoid a long-term vacancy.”
It’s not entirely a tenants’ market, though. Most concessions like free rent have burnt off, but there are non-cash concessions. Many tenants want option to shrink or expand, noted Jones Lang LaSalle managing director Derrick Mashore. “There's an ‘accordion component’ in leases today.”
And a letter of credit is important in current lease deals, said Owen. “Tenant debt is something that scares landlords these days.” He also pointed out that speculative development around the City Center is unlikely, at least until the market recovers more and financing loosens a bit. “We will get back to what this market was in 2007-08, eventually. DC will be back to normal sub-7% vacancy. It will again be the darling city that it's usually been, and won't take five years to get there.”
Mashore concurred: “Between renewals and large users about to make moves, the market will be greatly improved within two to three years.” And even though the government sector and defense contractors are shrinking, other sectors, such as new media/tech firms, are coming into the market. “For-profit education market and healthcare sectors are dynamic growth opportunities not just in DC, but also throughout the country.”
And when moderator Sally Wilson, a senior vice president with CBRE, asked whether the election really matters, or is DC a self-sufficient market, the answers were mixed. Dan Dooley, a managing director and director of leasing with Tishman Speyer, said that the election are one component of a greater problem in the overall market, which is the lack of certainty. The results will at least give the market an indication of which direction Capitol Hill will go.
Uncertainty hasn’t been keeping capital sources away from the market. The final panel, The Outlook on Investment Sales in the District, was generally positive. Walker & Dunlop SVP Sandor Biderman noted that capital is certainly available for the right deal. “Where it gets tricky,” he admitted, “is suburban deals, where life companies won't lend and banks are hesitant.”
The answer there, he added, is CMBS. “CMBS had a bad history, but in version 2.0, the deals have been fairly good.” But, he added, the market won’t be uneventful, especially with rising spreads. “But leveraged buyers will gain confidence in the next few years that CMBS here to stay.”
Tony Marquez, EVP and chief commercial real estate lender for EagleBank, is an admitted cheerleader for CMBS. He pointed out that it’s re-emergence is inevitable, since there won’t be enough capital for deals in our industry without conduits as a financing option.
In terms of investment opportunities, players interested in distress won’t be able to make a move in DC. Josh Olsen, vice president of acquisitions for Monument Realty, said that although there’s some distress in the suburbs, there hasn’t been much in the district. And where there has, it’s likely that the lenders and borrowers have been able to work things out between themselves.
Downtown DC office product is pretty easy to underwrite, but suburban markets that are not on or near metro stops are hard to underwrite, said Bill Prutting, a senior vice president with CBRE. What is doing well, he noted, is the hospitality sector, where current deals are being funded mainly by CMBS. “We’re also seeing tremendous demand for industrial in our market,” he added. “Most investors are underweighted in industrial.”
And as for individual investors, institutions such as pension funds continue to look at this market. But what they’re doing differently is direct investment—cutting out the middle man, so to speak. Instead of investing through vehicles, they’re now starting to invest directly with developer/operators, said Olsen. That’s because their return targets have gone down, “so they’re making up for that” by partnering with developers and owners in projects and acquisitions.
The RealShare Conference Series is produced by ALM’s Real Estate Media Group, which also publishes Real Estate Forum and GlobeSt.com.
CBRE's SVP Sally Wilson (right) moderated the "Dealmakers: Landlord and Tenant Brokers on Deals, Demand and the Changing Trends of Office Space" panel, joined by (left) Bruce McNair, principal, Avison Young; Derrick Mashore, managing director, Jones Lang LaSalle; Dave Bevirt, regional VP of leasing at Brookfield; Dan Dooley, managing director and director of Leasing, Tishman Speyer; and Brendan Owen; chief leasing officer Vornado/Charles E. Smith.
The event brought in a packed house of the Beltway's leading developers, brokers and finance professionals.
The investment panel featured Tony Marquez, EVP, Chief Commercial Real Estate Lender. EagleBank; Kevin Smith, Director, Mortgage Banking, Centerline Capital Group; Bill Prutting; Senior Vice President, CBRE; Sandor Biderman, Senior Vice President, Walker & Dunlop; Josh Olsen, Vice President, Acquisitions, Monument Realty; and moderator Nelson Migdal, Shareholder, Greenberg Traurig.
Attendees took a networking break.
Retail and amenities are the key to the success of mixed-use projects in Metro DC, according to the panelists in the “Next Chapter of Development” session. Moderated by Foulger-Pratt SVP Dick Knapp (far right), speakers included (from left) Bob Murphy, managing principal, MRP Realty; DRI Development Associates’ president, Chris Spitz; Victor Tolkan, founder and managing partner, Penzance; Robin McBride, Federal Realty Investment Trust’s VP and Mid-Atlantic Region COO; and Stonebridge Carras principal Doug Firstenberg.
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