Optimistic signs for investment
Many sectors, including apartments, medical office and trophy office towers, are drawing buyers
Scott Adams says 2015 is going to be a very good year for commercial real estate investment. In fact, “This has the potential to be the greatest year of all time,” says Adams, president of the mid-South region for CBRE.
Such heady talk has not been heard in real estate circles “for years.” Yet there is plenty of optimism out there, and here are some reasons why: The national economy is strengthening, with unemployment at 5.4 percent nationwide and just 4.8 percent in Virginia. Last year saw $367.4 billion in commercial sales nationwide, a 16 percent increase over 2013.
That resurgence is happening in Virginia as well. For example, in the Washington-area market, which includes Northern Virginia, first-quarter investments totaled $1.8 billion, up from $1.5 billion for the same period a year ago. The higher figure included a record $1.3 billion in foreign investment, according to the commercial real estate services firm JLL, formerly Jones Lang LaSalle.
Real estate investment firm Marcus & Millichap says investor confidence is strong across the board, as job growth continues and interest rates remain low, even with the likelihood that they will creep up in the near term. According to the firm’s most recent investor sentiment survey, more than two-thirds of commercial real estate investors plan to increase their holdings this year by an average of 15 percent.
New crowd funding investment models also are being hailed as a positive development. They give small-scale investors the opportunity to invest in large-scale projects. The Northern Virginia Innovation Business Center in Manassas recently got an infusion of $1.5 million in financing from Fundrise, a Washington, D.C-based company that operates an online marketplace for crowd funding in real estate.
On the innovation center, Fundrise partnered with Buchanan Partners, a firm that does a lot of development in the D.C. region. Since its founding in 2012, Fundrise says it has raised more than $50 million for more than 55 projects, with help from several established partners, including Renren Inc. and Guggenheim Partners.
According to Adams, all commercial real estate sectors are seeing gains. Multifamily and medical office is particularly strong. “Those are the property types no matter where you are that are the most sought after,” he says. Four of the top-five sales in Hampton Roads last year involved multifamily projects, and Adams expects that trend to continue. “Any large apartment complex listed will command interest from around the country,” he says. An example came in August with the $83.3 million sale of three multifamily properties in Hampton Roads. Berkshire Property Advisors sold the properties to Charlotte, N.C.-based Ginkgo Residential.
Adams also sees a strong market for Class A industrial properties in Hampton Roads because of the improving economy and the coming expansion of the Panama Canal.
The Northern Virginia region has seen its share of big deals, too. In March, McLean-based NGP Fund V bought a 258,000-square-foot office building in Fairfax in the Baileys Crossroads area for $96.6 million from JP Morgan Asset Management. NGP specializes in government-leased properties, and this property fit the bill. It’s fully leased to the U.S. General Services Administration for use by the Department of Defense.
In the Richmond region, New York-based Baker Properties made a big entrance into the market in March with the $60.3 million purchase of a portfolio of 19 buildings with office and flex space. The seller was Maryland-based First Potomac Realty Trust, which exited the Richmond market as part of a plan to focus exclusively on office properties in the Washington region.
While each market has local nuances, other big-picture elements affect real estate investment. According to the National Council of Real Estate Investment Fiduciaries, the return on directly held real estate is generally better than large-cap stocks or bonds. Over a 15-year period, real estate returns nearly 9 percent, more than twice the return of stock investments.
Still, many forces buffer the market. For instance, the availability of new stock in market sectors varies. Newer buildings have advantages that attract investors. For instance, new multifamily projects have far more amenities that tenants want, notes Adams. The same is true for newer industrial buildings. A decade ago a 24-foot building height was common, but today investors want 32 feet and they can find it. Even though there’s not much new industrial space being built in Hampton Roads, what is there “is being quickly absorbed because it has modern design and appeal,” says Adams.
The availability of capital is a significant factor, and it should be strong during the next few years. The issuance of commercial mortgage-backed securities (CMBS) is expected to climb nationwide from $115 billion this year to $150 billion in 2017, according to the Washington-based Urban Land Institute Center for Capital Markets and Real Estate’s three-year forecast. In announcing the forecast in April, Bill Maher of LaSalle Investment Management called it “almost the perfect combination of strong economic and property market fundamentals.”
CMBS levels have been volatile in the past decade, climbing to $229 billion in 2007 before dropping to just $3 billion in 2009 as the recession hit. Since then CMBS investment has been on a steady climb, according to ULI research.
Property location also makes a difference. The foreign investment that has been hitting the Washington-area market is happening mostly in the core office market in the city and not so much in the Virginia or Maryland suburbs, says Bill Prutting, a senior managing director with JLL’s capital markets group.
Those foreign deals have sparked transactions that have bumped per-square-foot costs for office sales to an all-time high, averaging $818 per square foot, according to JLL.
One major example is the January sale of the 13-story 1801 K. St. NW. It sold for $445 million to South Korea’s Mirae Asset Financial Group. The seller was Somerset Partners, which first put the building on the market in June 2013. Prutting says foreign investors have increased their D.C.-market spending in the past 24 months but don’t yet have the same enthusiasm for suburban properties. They tend to see them as a bit riskier, he says, an attitude that he attributes to their being unfamiliar with the local market.
Northern Virginia properties that might find foreign buyers will be “the highest-quality assets” such as the Gannett headquarters buildings in Tysons Corner. The company confirmed in February that it is considering a sale of the two buildings, which total 785,000 square feet. “It is a high-risk transaction by traditional foreign investment standards, but you’re buying best-in-class buildings,” says Prutting.
Buildings filled with tenants attract investors. What’s striking these days on the leasing end is the demand for transit-oriented property. In the first quarter in the Washington-area market, 92 percent of leasing volume involved buildings within a half-mile of an existing or planned Metrorail station. One driver behind this trend is Tysons, which has four new Metro stations and plenty of new commercial space. But there are plenty of properties in places like Old Town Alexandria or along the Rosslyn-to-Ballston corridor in Arlington County. “All capital is gravitating to the same fundamentals, which is Metro,” Prutting says.
The appeal of transit comes at an interesting time. Last fall Arlington canceled plans for a streetcar system along Columbia Pike, a project that already had been used by developers to market new projects that now seem stranded.
Also in Northern Virginia, the second phase of the Metrorail Silver Line from Reston to Washington Dulles International Airport has been delayed a year until late 2019.
Meanwhile in Virginia Beach, leaders are laying plans to extend the light rail system launched in Norfolk four years ago all the way to the oceanfront. A final route hasn’t been decided. Adams says supporting light rail would “send a signal to national companies that we’re a forward-thinking, aggressive community, worthy of their relocation consideration.”
“We are in the busiest cycle of our careers, trying to make hay while the sun shines,” he says.