WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE
A CohnReznick LLP Report Fourth Quarter 2014
TABLE OF CONTENTS EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ECONOMY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 APARTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 CONDOMINIUMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 RETAIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 HOUSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 FLEX/INDUSTRIAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 MIXED-USE LEADERS KEEP THEIR EYES ON THE BIG PICTURE . . . . . . . . . . . . . . . . 28 ABOUT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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EXECUTIVE SUMMARY Throughout 2014, the consistent (if modest) improvements in the Washington area economy influenced much of the measured performance of major real estate asset types in the region. The metro area markets should have a slightly stronger year in 2015 as the effects of Federal austerity measures continue to wane and as job growth strengthens, as in recent months. However, absolute employment growth will be modest relative to the size of the regional economy. The Washington area will increasingly depend on its private sector rather than the Federal government, and as pent-up demand for goods and services rises, the region’s highly-skilled and well-educated workforce will fuel economic activity in the intermediate term. The continued momentum of the national economy – driven by encouraging labor market conditions and rising consumer confidence nationwide – will nudge regional economic growth and will create more optimism for the local real estate markets in the year ahead. Sluggish regional economic growth in 2014 affected the office market more acutely than other major property types in the metro area. Rents and absorption were held down in 2014 due to pressure from the “densification” of space (fewer SF leased per worker). Investor confidence in the metro area’s office assets, however, remains strong, as sales transaction volume is high. As uncertainty in the private sector tapers, and more leasing decisions are made, growth in private sector demand over the next several years will overcome some of densification’s effects. By contrast, the Washington metro area apartment market held up better than expected in the face of increasing competition throughout 2014. The region saw back-to-back years of record-setting apartment absorption despite the onslaught of new supply. The rise in Millennial households and lower-wage workers who tend to/prefer to rent rather than own is influencing the regional multifamily market and is keeping apartment metrics from significantly weakening. A decline in rents and absorption is, however, expected in 2015 given a robust delivery schedule of new product. The Washington condominium market continued its rebound during the 4th quarter of 2014, despite unrelenting apartment absorption and weak job growth. Prices increased metro-wide throughout 2014 as sales volume of new units remains supply-constrained, pushing prices higher. The positive regional economic outlook will help boost demand for condominiums, emphasizing the need for more product in the near-term.
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EXECUTIVE SUMMARY Meanwhile, the retail real estate market’s performance remained consistent throughout 2014. The decline in vacancy rates continued while shopping center rents rose steadily metro-wide. The local retail market will likely gather momentum in the near-term as retail spending grows thanks to declining gasoline prices, improving consumer sentiment, and strengthening national employment numbers.
In summary, the Washington area’s commercial real estate markets are likely to experience a mixed 2015. Washington area for-sale housing metrics also ended 2014 on an upbeat note, with modestly accelerating price growth during the 4th quarter. However, in a broader sense, the regional housing market’s expansion continues to level off. Sales activity may rise early in the year ahead, however, as potential buyers take advantage of the slowdown in price increases during 2014 and of still-low mortgage rates. Lastly, the flex/industrial market remains a bright spot among the Washington metro area real estate asset types. Rents and occupancy climbed in 2014. Investor sentiment increased for flex/industrial product, driving prices and transaction activity near record highs in 2014. The near-term outlook is positive for flex/industrial properties, especially as the rise of e-commerce fuels growth in the Washington distribution market. In summary, the Washington area’s commercial real estate markets are likely to experience a mixed 2015, with condominium, flex/industrial, and retail market activity strong, while the office and single-family housing markets remain tepid and the robust apartment market cools.
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ECONOMY NATIONAL ECONOMY In 2014, the national economy continued to expand at a moderate pace, with strength building toward the end of the year. Job growth is strong and the unemployment rate continues to decline, signaling labor market conditions are improving. The Federal Open Market Committee, however, wants to see more progress before increasing the Federal Funds Rate, especially as employment for middle-skill occupations remain a concern. We project that the national economy is likely to continue experiencing moderate growth over the next few years. It will be spurred by supportive monetary policy, increasing home prices and equity values (despite some volatility), and a decreasing drag from fiscal policy. The recovery likely will proceed as it has for more than five years now: on a bumpy – but upward – trajectory. The national economy added 3.0 million new payroll jobs (not seasonally adjusted) during the 12 months ending December 2014, with the private sector accounting for the majority of net additions (the public sector added 97,000 positions). Recent month-to-month gains (seasonally adjusted) have been robust: • A ugust 2014: 203,000 • S eptember 2014: 271,000 • O ctober 2014: 261,000 • N ovember 2014: 353,000 (Preliminary) • D ecember 2014: 252,000 (Preliminary) As of the 12 months ending December 2014, the top four sectors in job gains were Professional/Business Services, Education/Health Services, Leisure/Hospitality, and Construction/Mining – adding a total of 2.0 million new jobs and accounting for 66% of net new employment. Some sectors have experienced weaker recoveries than others. Specifically, the financial services and information industries have lagged, though manufacturing activity is now picking up. Job losses were confined to the Federal Government sector over the past year, with a total net loss of 10,000. Of note, while the Federal Government sector is shedding jobs, the rate of loss is slowing.
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ECONOMY The unemployment rate (seasonally adjusted) declined to 5.6% as of December 2014 from 6.7% one year earlier. Earlier in the year, the unemployment rate was declining in part because of workers dropping out of the labor force, but more recently the rate has been driven more by new jobs being created. In general, we anticipate that the unemployment rate will edge down over the next year as the economic expansion continues, hiring accelerates, and uncertainty dissipates. In the short term unemployment may tick up slightly as the current increase in hiring might encourage even more people to rejoin the labor force. After real GDP contracted by a 2.1% annualized rate during the 1st quarter of 2014, it bounced back strongly in the two succeeding quarters. Real GDP increased by a revised annualized rate of 4.6% during the 2nd quarter of 2014 and an annualized rate of 5.0% (the government’s third and final estimate) during the 3rd quarter of 2014. Looking ahead, real GDP growth is predicted to average 3.1% in 2015, 2.9% in 2016, and 2.8% in 2017.
In the short term unemployment may tick up slightly as the current increase in hiring might encourage even more people to rejoin the labor force. The housing market is slowing nationally on a year-over-year basis as inventory, which had been very low in some metro areas, is gradually normalizing and easing pricing pressure. In the 20 major metro areas home prices increased 4.5% during the 12 months ending October 2014, the most recent data available from S&P/Case-Shiller. Through most of 2014, the national economy expanded. We expect to see ongoing improvement in 2015. Encouragingly, job growth levels were consistently strong throughout 2014, GDP growth has been above expectations, the S&P 500 reached a record high, and the unemployment rate continues to decline.
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ECONOMY Looking forward, we expect most if not all of these trends to continue. In 2015 we expect to see more growth in the Professional/Businesses Services sector, which should help increase wages. The national economic expansion likely will move forward through approximately 2018, barring a damaging geopolitical event. Specifically, we believe the economic outlook is as follows: • R eal GDP growth: 2.5% in 2014 when data is finalized; 3.1% in 2015. • P ayroll jobs: 2.8 million added in 2014 when data is finalized; modestly stronger growth in 2015. • H ousing: Price appreciation around 3% to 5% in 2015. • U nemployment rate: Hovering around 5.6% in 2015.
REGIONAL ECONOMY After a slow start in 2014, the Washington metro area
PAYROLL JOB GROWTH
economy improved slightly. Albeit below historical
Select Metro Areas | 12 Months Ending November 2014 Figure 1
averages, job growth has been stronger on an annual basis in recent months and we expect it to continue
THOUSANDS OF NEW PAYROLL JOBS
140
gaining strength in 2015. Growth in the private sector combined with pent-up demand for goods and services will help to spur job growth for the balance of this cycle, 70
likely through 2018. 18.9
0
The metro area economy added 18,900 new payroll positions during the 12 months ending November 2014.
Hou
LA Basin
DFW
NY
SF Bay South Fl
Atl
Phx
Source: Bureau of Labor Statistics, Delta Associates; January 2015.
Bos
Den
Chi
Was
Growth is below the 20-year annual average of 42,600 and less than in past recovery cycles, which averaged 60,000 to 100,000. As a result, this expansion, while strengthening, feels weak by comparison. See Figure 1.
The top four sectors for job growth in the Washington metro area are State/Local Government, Professional/Business Services, Construction/Mining, and Financial Services as of the 12 months ending November 2014. In these four sectors alone, a total of 21,100 new jobs were added to the regional economy.
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ECONOMY Continued growth in these industries is being partially offset by other industries that are experiencing losses. Notably, the Federal Government sector lost 3,600 jobs while the Information and Manufacturing sectors lost 2,800 and 2,500 jobs respectively. Of note, Education and Health Services has also experienced a loss of 1,800 jobs during the past 12 months. See Figure 2.
PAYROLL JOB GROWTH
Washington Metro Area | 12 Months Ending November 2014 Figure 2 State and Local Government Professional/Business Services Construction/Mining Financial Services
+29,800
Leisure/Hospitality Retail Trade Wholesale Trade
Despite weak job growth in 2014, the Washington area unemployment rate consistently performed better than the national rate. The unemployment rate in Washington in
Other Services Transportation/Utilities Education/Health Manufacturing
November 2014 was at 4.5%, compared to the seasonally
-8,000
-4,000
0
4,000
8,000
12,000
JOB CHANGE
adjusted national rate of 5.8% during the same time period. The metro area’s unemployment rate is expected to stabilize
-10,900
Information Federal Government
Source: Bureau of Labor Statistics, Delta Associates; January 2015.
in the 5% range during 2015, as new jobs are created while the labor force also continues to grow. The Gross Regional Product (GRP) for Washington was expected to grow to $475.5 billion in 2014 – a 3.8% increase from $458.1 billion in 2013 – once the data is finalized. The Federal government is the largest component of the Washington area economy, as its spending touches every job sector. However, this share of spending is shrinking. During 2013, Federal government spending accounted for 35% of GRP. By 2018, we expect this share to shrink to 29%, as the Federal government continues to control spending and the private sector picks up the slack.
Despite weak job growth in 2014, the Washington area unemployment rate consistently performed better than the national rate. The Washington metro area should have a slightly stronger year in 2015 compared to 2014 and an even stronger year in 2016. However, absolute employment growth will be modest relative to the size of the regional economy. The Federal government will continue to face austerity measures during this period – albeit reduced from 2013 levels – and we expect growth to be concentrated in the private sector. As economic growth in Washington depends more on its private sector than the Federal government, upside resides in the highly-skilled and well-educated labor force. Creating a supportive environment for new companies, especially tech firms, will be critical in order to spur future growth. With data for 2014 not yet finalized, we estimate that an annual average of 40,700 payroll jobs will be added to the Washington metro area economy during the five-year period from 2014 to 2018. This is sufficient to support a healthy commercial real estate industry, but below the levels experienced in most recent expansion cycles.
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ECONOMY HIGHLIGHTS GDP PERCENT CHANGE
FEDERAL CONTRIBUTION TO GRP
United States
Washington Metro Area
FEDERAL CONTRIBUTION TO GRP Washington Metro Area
6%
5.0%
4%
2% 0% -2% -4% -6% -8% -10%
Q1 07
Q3 07
Q1 08
Q3 08
Q1 09
Q3 09
Q1 10
Q3 10
Q1 11
Q3 11
Q1 12
Q3 12
Q1 13
Q3 13
Q1 14
Q3 14
Note: Annualized.
GRP IN BILLIONS OF CURRENT YEAR DOLLARS
ANNUAL GDP CHANGE IN 2009 CONSTANT DOLLARS
GDP PERCENT CHANGE United States
2017 Projection for Federal = 28.8%
$500
$250
39.8% 30.5%
$0
2000 Federal Procurement
2010 Balance of Federal
STRUCTURE OF TOTAL EMPLOYMENT
PAYROLL JOB GROWTH
Washington Metro Area
Washington Metro Area
Washington Area EMPLOYMENT STRUCTUREMetro OF TOTAL
Washington MetroGROWTH Area PAYROLL JOB
Other
% OF TOTAL
Retail Trade Services
40%
State and Local
20%
Federal
0%
1970
2013
Note: 1970 figures use SIC codes; 2013 figures use NAICS codes. Source: Dr. Stephen Fuller, Delta Associates; January 2015.
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THOUSANDS OF NEW PAYROLL JOBS
100%
60%
2014* Balance of GRP
*Estimated. Note: % = Total Federal share of GRP. Source: Dr. Fuller, Delta Associates; JanuaryJanuary 2015. 2015. Source: Dr.Stephen Stephen Fuller, Delta Associates;
Source: Bureau of Economic Analysis, Delta Associates; January 2015.
80%
33.1%
150 5-Year Projected Average = 40,700/Year
100
50
0
-50
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
*Note: Annual average. Source: Bureau of Labor Statistics, Delta Associates; January 2015.
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OFFICE SUMMARY AND FORECAST The Washington metro area office market experienced sluggish growth as the effects of Federal austerity continued to hamper the market throughout 2014. Pressure from shorter lease terms, densification of space, and shadow space is keeping effective rents from rising more emphatically. Despite all of these challenges, net absorption finished 2014 in positive territory – though only marginally – and other office market indicators such as sales transaction volume show investors remain confident in the metro area’s future. We also expect to see leasing activity increase in 2015. In the intermediate and long run, the Washington metro area office market is projected to remain one of the top performing markets in the nation due to its strong tenant composition. As uncertainty in the private sector tapers, and more leasing decisions are made, growth in private sector demand over the next several years will overcome some of densification’s effects. We look for meaningful market momentum by 2016, with greater traction in 2017.
NET ABSORPTION OFFICE NET ABSORPTION
On the year, absorption was positive at 357,000 SF but
NET ABSORPTION (THOUSANDS OF SF)
Washington Metro Area | 2011 – 2014 Figure 1
below the positive 1.8 million SF of absorption experienced
2,000
in the Washington metro area in 2013. Net absorption in the
1,500
region totaled negative 292,000 SF in the 4th quarter of 2014 compared to positive 506,000 SF in the 3rd quarter of 2014.
1,000
Negative absorption in the 4th quarter was mostly driven by
500
vacated space in the Washington suburbs. Sluggish job growth, densification, and continued effects of Federal austerity made
0
for a challenging year for local commercial space. However,
-500 -1,000
it is important to note that despite all of these challenges, 2011
Source: Delta Associates; January 2015.
2012
2013
2014
absorption for the year in the Washington metro area remained positive, though pre-leased deliveries helped. We expect to see stronger office market performance in 2015 and especially in 2016 as economic conditions improve. See Figure 1.
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OFFICE VACANCY The Washington area’s direct vacancy rate is 11.1% at yearat year-end 2013. The metro area’s direct Class A vacancy rate at year-end 2014 was 13.2%. Lackluster demand has the region’s direct vacancy rate edging slightly upward. The recorded metro-wide direct vacancy rate for all classes of multi-tenant office space was 14.6% at year-end 2014. The multi-tenant vacancy rate is higher than our reported rate because the single-tenant market – included in our inventory – tends to be more stable and includes many fully occupied properties. Still, the Washington metro has one of the lowest vacancy rates among large markets in the United States. New York City has the lowest vacancy rate at 6.5% (exclusive
OFFICE VACANCY RATES Select Markets | Year-End 2014 Figure 2
DIRECT VACANCY RATE
end 2014, up slightly from 11.0% at 3rd quarter and from 10.8%
25% 20% 15%
11.1% 10% 5% 0%
NYC SF
Bos Hou Was LA Mia OC Den Chi
Atl
Dal Phx
Note: Includes owner-occupied and single-tenant space. Source: Delta Associates; January 2015.
of Northern New Jersey and Long Island). See Figure 2.
PIPELINE There was 4.1 million SF of office space under construction in the Washington metro area at year-end 2014. A significant portion of office space under construction is the result of Metrorail’s Silver Line. 2.3 million SF of space is currently under construction in Northern Virginia, which accounts for 56% of total construction (on a SF basis) throughout the metro area. Although the lending environment remains tight for speculative projects, we believe the risk is tolerable for wellcapitalized developers in select submarkets, particularly at sites adjacent to rail service. Overall, we believe there will be few groundbreakings during most of 2015 that have little or no pre-leasing in place – unless the developer starts the work using internal resources. Tenants in the market continue to seek “green” and more modern office space, so we expect renovations of vacated Class B/C buildings to become more common. There was 32.3 million SF of office space planned in the Washington metro area and 66.3 million SF proposed as of December 2014. Given current market conditions, we do not expect many, if any, of the planned projects to deliver within the next two years.
EFFECTIVE RENTS The average effective office rent increased to $29.11 at year-end 2014, up 1.3% from year-end 2013. We expect concession packages to remain elevated in 2015, as many tenants remain hesitant to lease additional space, and the battle to secure large tenants is likely to be very competitive. With little organic growth likely in 2015, owners will need to poach tenants from other buildings as their leases expire, and concessions are a way to do that while keeping face rents intact. We expect it will not be until 2016 when the Washington metro area experiences material gains in rent. However, we expect newly-constructed office buildings to continue experiencing rent gains in the near-term as the availability of such space dwindles. Well-renovated space also may support rent increases.
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OFFICE INVESTMENT SALES VOLUME Despite its short-term hurdles, investment sales totaled $7.5 billion in the Washington metro area during 2014, compared to $5.1 billion in the Washington metro area during 2013. Sales prices averaged $369/SF in the Washington metro area during the past 12 months. This compares to $352/SF during 2013.
We believe the 12-month trailing average cap rate will remain in the mid-6% range in early 2015. CAP RATES The average cap rate for core office assets in the Washington metro area, on a 12-month trailing basis, was 6.5% at the end of the 3rd quarter of 2014, according to Real Capital Analytics. The average cap rate is up 10 basis points from one year earlier. We believe the 12-month trailing average cap rate will remain in the mid-6% range in early 2015. However, trophy assets will likely continue to trade at lower cap rates. Cap rates for recent Class A/Trophy trades have been in the high-4% to mid-5% range.
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OFFICE HIGHLIGHTS SUMMARY OF OFFICE MARKET INDICATORS
OFFICE PROJECTS IN THE PIPELINE OFFICE PROJECTS IN THE PIPELINE Washington Metro Area | Year-End 2014 Washington Metro Area | Year-End 2014
Washington Metro Area | Year-End 2014 ALL CLASSES
CLASS A 1
Rentable Building Area (SF)2
405,744,526
174,481,187
Vacant Available (SF)
45,238,202
23,083,850
Direct Vacancy Rate
11.1%
13.2%
292,000
397,000
2014
357,000
3,204,000
2013
1,831,000
822,000
1.3%
--
Net Absorption (SF) - Q4 2014
% Rent Change 2013 - 2014
INVESTMENT SALES YTD
ALL CLASSES $7,467,000,000
Total Sales
$369
Average Price per SF
Under Construction (SF)3
ALL CLASSES
CLASS A 1
4,123,200
4,073,440
PROJECTIONS FOR DEC 2016 Direct Available Space (SF) After Proj. Demand Direct Vacancy Rate
ALL CLASSES 43,051,222 10.5%
Class A is defined as properties that tend to be the best in the market, have above-average design, construction and finish, minimal or no deferred maintenance, superior locations, achieve the highest rents, and have tenants of strong credit quality. Class A RBA per REIS. 2 Does not include buildings under construction or buildings owned by the government. 3 Source: REIS. Source: Delta Associates; January 2015. 1
Proposed
30,000
No VA
Sub MD
The District
Source: REIS, Delta Associates; January 2015.
158
Number of Transactions
DEVELOPMENT PIPELINE
Planned
60,000
0
OFFICE DEMAND AND DELIVERIES IN NEXT TWO YEARS
OFFICE DEMAND AND DELIVERIES IN NEXT TWO YEARS Washington Metro Area | Year-End 2014
Washington Metro Area | Year-End 2014 8.0
IN MILLIONS OF SF
CURRENT INDICATORS
IN THOUSANDS OF SF
Under Construction 90,000
Demand
Under Construction
Planned
7.1 6.0
0.7 4.1
4.0
2.0
0.0
Source: Delta Associates; January 2015.
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APARTMENTS SUMMARY AND FORECAST Washington metro area apartment market metrics held up better in 2014 than expected. There is a flight to both quality (high-end Class A units) and value (Class B product or shared Class A units) as the region broke another annual absorption record in 2014 despite increasing competition. The stabilized vacancy rate for all classes of apartments declined over the past year; however, Class A vacancy increased due to so many deliveries competing for market share. Metro area rents rose in 2014, but we project a decline in rents given a robust delivery schedule of new product and projected absorption below the recent recordsetting pace (but still elevated). This decline in rents will be short-lived, as we expect rents to rebound in 2016 and rent growth to recover to the 3.0% range by 2017, with stronger growth in 2018.
ANNUAL CLASS A APARTMENT NET ABSORPTION Washington Metro Area | Year-End 2014 Figure 1
NET ABSORPTION OF UNITS
12,000
11,237
ABSORPTION The Washington area annual net absorption of Class A apartments was 11,237 units in 2014 — an 83% increase over
10,000
the 10-year average. This record-setting absorption was not
8,000
at the expense of the Class B market, which also experienced
6,000
positive absorption of 4,888 units. An increase in Millennial
4,000
households and lower-wage job occupiers that tend to/
2,000
prefer to rent rather than own has influenced the multifamily markets in the region and explains the record level of
0
apartment absorption in recent quarters. See Figure 1. Source: Delta Associates; January 2015.
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APARTMENTS VACANCY
APARTMENT VACANCY RATES
The region placed fourth in lowest stabilized vacancy rate
Major Apartment Markets | All Classes of Apartments Figure 2 6.0%
The robust pipeline, however, continues to affect the
5.0%
vacancy rate for Washington area Class A apartments, which increased to 5.6% at December 2014 from 4.7% a year earlier. Low-rise vacancy increased at a lesser pace than mid-rise and high-rise product, reflecting the region’s flight to value since low-rise product is not as expensive. Given
VACANCY RATE
for all classes of apartments in the U.S at year-end 2014.
the projected delivery schedule of projects currently under construction, we expect the region-wide vacancy rate for stabilized Class A apartment properties to edge upward from
4.6%
4.0% 3.0%
2.0% 1.0% 0.0%
NY
LA
Chi Wash* DFW
Phx
Phi
Atl
Balt
Hou
3rd
* quarter 2014 data except for Washington, which is as of Year-End 2014. Source: REIS, Delta Associates; January 2015.
5.6% today to near 6.0% before declining to approximately 4.6% by 2017. See Figure 2.
RENTS Metro area effective rents for all classes of investment grade apartments rose by 1.2% in 2014. Class A rents increased by 1.0% while Class B rents rose by 1.6%. Low-rise Class A rents increased by 2.2% while mid-rise and high-rise rents decreased by 0.6%, suggesting an affordability issue is beginning to affect this market segment. At the regional level, Class A rents will likely decline over the next 12 months due to the large slate of scheduled deliveries compared to projected demand levels.
PIPELINE The pipeline of likely deliveries over the next 36 months 2014, at 39,254 units. As pro formas become more difficult to pencil in light of rising construction costs and relatively flat rents, we expect the pipeline to shrink to a more healthy level over the next 12 to 24 months. Most of the decline will come from projects that delay starting construction, since there are currently 22,925 units under construction metro-wide that have not yet begun leasing and only 8% of these units are suitably sized to switch to a condominium regime before delivery. Notably, construction starts in 2014 decreased 11% from 2013 to 10,605 units. Approximately 2,370 units at 12
APARTMENT DEVELOPMENT PIPELINE Washington Metro Area | Year-End 2014 Figure 3 45,000
MARKET RATE UNITS PLANNED AND U/C
remained relatively unchanged during the fourth quarter of
39,254
30,000
15,000
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
projects started construction in the fourth quarter of 2014. This slowdown in starts could cue the end of the supply problem.
Source: Delta Associates; January 2015.
However, deliveries in 2015 are projected to outpace the 2014 total. See Figure 3.
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APARTMENTS INVESTMENT SALES building transaction volume stood at $1.81 billion in 16 trades – compared to $1.7 billion in all of 2013. Class B apartment property sales also remain strong, with 39 transactions and an annualized transaction volume of $2.08 billion. Meanwhile, a total of 14 multifamily land sales closed through November 2014, annualized at $257 million, with the capacity for more than 3,600 multifamily units. More than $282 million in multifamily land sales was completed in 2013, with the capacity for more than 4,200 units. The metro area has been able to maintain a similar level of investment activity despite an oversized pipeline and sluggish job growth as the Federal government continues to act as a stabilizing force for the
TOTAL SALES VOLUME
Washington Metro Area | Year-End 2014 Figure 4
IN BILLIONS OF DOLLARS
Through November 2014, annualized Class A multifamily
Class A
$3.0
Class B
$2.1
$2.0
$1.8
$1.0
$0.0
2010
2011
2012
2013
2014*
*Sales through November, annualized. Source: Delta Associates; January 2015.
regional economy even though it has not grown in recent years. See Figure 4.
Given the projected delivery schedule of projects currently under construction, we expect the region-wide vacancy rate for stabilized Class A apartment properties to edge upward from 5.6% today to near 6.0% before declining to approximately 4.6% by 2017. CAP RATES Apartment cap rates held steady at cyclical lows in 2014 due to record absorption counterbalancing a near-record level of pipeline. The annual year-end Market Maker Survey from Delta Associates indicated that apartments have been and will remain in favor as an asset class, but Delta expects that cap rates may edge up in the future due to macro-economic conditions and a crowded pipeline set to deliver in early 2015, increasing competition among property owners.
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APARTMENTS HIGHLIGHTS SUMMARY OF APARTMENT MARKET INDICATORS
CLASS A APARTMENT DEMAND AND DELIVERIES IN NEXT 3 YEARS
CLASS A APARTMENT DEMAND DELIVERIES 2014 IN NEXT THREE YEARS Washington Metro Area AND | Year-End
Washington Metro Area | Year-End 2014 CLASS A
CLASS B
$1,894
$1,565
$1,834
$1,543
Effective Rents Comparison at 12/13
1.0%
Rent Increase/Annum Since Sept 2013¹ Vacancy Rate Comparison at 12/13
1.6%
5.6%
3.1%
4.7%
5.3%
Net Absorption 2014
16,125
2013
6,185
DEVELOPMENT PIPELINE
CLASS A
Demand
Under Construction
Planned
7,123 30
32,131 9,167 / year
15
0
Source: Delta Associates; January 2015.
14,286
2014
Projected Deliveries 2015
16,416
2016
11,434
2017
3,610
Starts
2,370
Q4 2014
10,605
2014
36-Month Pipeline At 12/2014
39,254
At 12/2013
39,122
PROJECTIONS FOR DEC 2017
ALL CLASSES
ANNUAL CLASS A APARTMENT RENT GROWTH
ANNUAL CLASS APARTMENT RENT CHANGE Washington MetroAArea Washington Metro Area 10%
PERCENT EFFECTIVE RENT CHANGE
Deliveries
8%
6% 4% 2% 0% -2% -4%
45,338
Available Units
4.6%
Stabilized Vacancy 1
45
MARKET RATE UNITS IN THOUSANDS
CURRENT INDICATORS
Washington Metro Area | Year-End 2014
Source: Delta Associates; January 2015.
“Same-store” (comparable unit) rent comparison.
Source: Delta Associates; January 2015.
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CONDOMINIUMS SUMMARY AND FORECAST The Washington metro area is into its third year of price appreciation and it appears that market conditions will continue to improve into 2015. Sales volume of new units remains supply constrained, helping push prices higher. Prices in the metro area rose by 8.8% metro-wide in 2014. Current micro- and macroeconomic factors – such as a projected improvement in regional job growth and an easing of lending standards by Fannie/Freddie – will bring more buyers into the market, further underscoring the need for more product. But despite this recent activity, conversions are not likely to play a significant role in this cycle as they did in the last, especially in suburban jurisdictions. The eventual ramp-up of new condo supply will be largely built from scratch, taking a longer period of time, supplemented with smaller conversions of older apartment buildings, mostly inside the Beltway.
SALES VOLUME
NEW CONDOMINIUM SALES ACTIVITY Washington Metro Area | Year-End 2014 Figure 1
New condominium sales activity during the fourth quarter
NET SALES
800
of 2014 dropped back below 400 sales after a relatively strong third quarter. Metro-wide, there were 312 net sales
600
in the fourth quarter, down 30% from the same period
400
312
in 2013. Over the past 12 months sales are down 23% from 2013. It should be noted, however, that some of the
200
declines are a result of product shortage and not demand 0 Q1 Q2 Q3 Q4
2010
Q1 Q2 Q3 Q4
2011
Source: Delta Associates; January 2015.
C O H NR EZNICK
Q1
Q2
Q3
2012
Q4 Q1 Q2 Q3 Q4
2013
Q1 Q2 Q3 Q4
2014
trends. We estimate new unit sales for 2015 to be in the 1,600 to 2,000-unit range and higher in 2016 as more product is brought to market. See Figure 1.
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CONDOMINIUMS PRICES The average effective price per square foot for “same-store” new condominium sales in the metro area rose by 8.8% in
EFFECTIVE NEW CONDOMINIUM SALES PRICE CHANGE Washington Metro Area | Year-End 2014 Figure 2
2014. The fraction of available inventory that is “fresh” (built
12%
within the past two years) has stabilized. Over three-fourths years or less. Since 2012, as fresh product made up more than 60% of the selling inventory, we have seen new condominium prices rise after more than half a decade of decline when
% CHANGE
of all units currently selling have been on the market for two
4% 0% -4%
markets were in turmoil or a high fraction of stale product was on the market. We anticipate percentage price increases to
-8%
be in the mid-single digits over the next 24 to 36 months. See Figure 2.
8.8%
8%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Delta Associates; January 2015.
CONCESSIONS Concession rates have decreased by 80 basis points metro-wide since the fourth quarter of 2013 with declines in all three substate areas in the Washington region. Concessions now average approximately 1.6% of asking price.
PIPELINE
CONDOMINIUMS ACTIVELY MARKETING OR UNDER CONSTRUCTION
Washington Metro Area | Year-End 2014 Figure 3
The actively marketing condominium pipeline has steadily increased over the past three quarters after eight years
MARKET RATE UNITS
10,000
of decline, with some help from condominium switches.
8,000
In addition, more than 2,000 condominium units may start
6,000
construction next year – the highest total in a decade – but
4,000
3,281
2,000 0
a shortage will still exist in the market. The number of unsold units in projects currently marketing or under construction (and not yet marketing) was 3,281 units as of year-end, up
12/08
12/09
Source: Delta Associates; January 2015.
12/10
12/11
12/12
12/13
12/14
5% since the third quarter of 2014. We expect this number to rise further over the next six months, as switches and conversions reappear in the market. See Figure 3.
The supply-demand balance in the metro area will continue to favor the developer, with too little new condominium unit supply and rising prices. At the same time, there is a dearth of resale listings. As a result, new unit prices are likely to rise and development opportunities are likely to persist throughout the Washington metro area through 2017.
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CONDOMINIUMS HIGHLIGHTS SUMMARY OF CONDOMINIUM MARKET INDICATORS Washington Metro Area | Year-End 2014
CONDOMINIUM DEMAND AND DELIVERIES IN NEXT YEARS IN CONDOMINIUM DEMAND AND3DELIVERIES Washington Metro Area | Year-End 2014 NEXT THREE YEARS Washington Metro Area | Year-End 2014
312
2014
1,476
2013
1,907
New Unit Average Price per SF
$360
% Change in Avg. Effective PSF since Dec 2013
8.8%
Concessions as % of Asking Price at Dec 2014
1.6%
DEVELOPMENT PIPELINE Unsold Units in Projects Currently Marketing or Under Construction Planned to Deliver within 36 Months
NUMBER OF UNITS
Under Construction
Planned*
6,600 / year 2,409
3,500
3,281
*Accounts for attrition. Source: Delta Associates; January 2015.
3,281 3,212
Total 36 Month Pipeline
6,493
Planned/Rumored Long Term
7,401
Planned Condominium or Rental
51,176
1 “Sold” units defined as a binding contract of sale with deposit. Includes multifamily rental conversions, but excludes age-restricted and townhouse properties. These sales are net of contract fall-outs.
Source: Delta Associates; January 2015.
Demand
7,000
0
CONDOMINIUM UNIT DELIVERIES CONDOMINIUM UNIT DELIVERIES
Washington Metro Area | Year-End 2014 Washington Metro Area | Year-End 2014 Column1
12,000
MARKET RATE UNITS
New Unit Sales1 - Q4 2014
MARKET RATE UNITS
CURRENT INDICATORS
8,000
4,000 Normalized Demand Range
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Delta Associates; January 2015.
C O H NR EZNICK
WA SH I N G T O N A R EA C O MMER C I A L R E A L E S T A T E M A R K E T U P D A T E
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RETAIL SUMMARY AND FORECAST The retail real estate market in the Washington metro area showed consistent, if modest, improvement throughout 2014. The decline in vacancy rates continues, while shopping center rents have been rising steadily since 2010. These trends are expected to gather momentum in 2015 and 2016, especially as retail spending gets a boost from rising consumer sentiment, strong national employment reports, and falling gas prices while the rise of Washington as a destination for living, working, and shopping will continue to present unique opportunities for retailers in the region.
VACANCY GROCERY-ANCHORED SHOPPING CENTER VACANCY RATES
Washington Metro Area | Year-End 2014 Figure 1
VACANCY RATE
grocery-anchored shopping centers, the metro-wide vacancy rate for grocery-anchored shopping centers
5.0%
edged down to 4.6% at year-end 2014, from 4.7% one year
4.9%
4.8%
Based on our annual year-end survey of 300 Washington
ago. See Figure 1. Meanwhile, vacancy rates in neighborhood and
4.7% 4.6%
community shopping centers remain elevated relative to their pre-recession averages across the metro area, though
4.5%
2012
2013
2014
Source: Delta Associates’ Market Maker Survey, Delta Associates; January 2015.
they have been declining steadily since 2012. The average vacancy rate for shopping centers in the suburbs of Washington at 4th quarter 2014 was 6.9%, unchanged since the 3rd quarter 2014.
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RETAIL PIPELINE At year-end 2014, there was 2.9 million SF of shopping center space under construction across all shopping center types in the Washington metro area suburbs. As of November 2014, there were 13 notable grocery-anchored shopping centers, totaling 2.6 million SF, under construction in the metro area. Planned shopping centers – defined as space for which permitting is completed and ground break is all that remains to take place – total 6.4 million SF. The total of proposed shopping centers – for which no permits or financing have been applied – is 7.4 million SF.
We expect Class A urban space to generate the strongest rent growth as income and employment increasingly become concentrated near mixed-use projects in core areas of the Washington region. RENTS Effective rents at neighborhood and community centers continue to climb slowly, with average effective rents rising 1.8% in Washington suburban centers at year-end 2014. The average effective rent per square foot in the metro area was $24.07, compared to $23.65 at year-end 2013. Meanwhile, rental rates at grocery-anchored centers in Washington rose 2.3% in 2014, after rising 2.2% in 2013. Metro-wide average in-line tenant rents were $33.52 per SF at year-end 2014, compared to $32.76 per SF at year-end 2013. We expect Class A urban space to generate the strongest rent growth as income and employment increasingly become concentrated near mixed-use projects in core areas of the Washington region.
INVESTMENT SALES Grocery-anchored shopping center investment sales volume in 2014 reached $309.2 million ($370/SF) after totaling $643.9 million ($201/SF) in all of 2013. Investors remain most interested in grocery-anchored centers because of their high level of foot traffic and steady performance throughout the various stages of the economic cycle.
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RETAIL HIGHLIGHTS GROCERY-ANCHORED SHOPPING CENTER SCALECENTER SCALE GROCERY-ANCHORED SHOPPING Washington MetroArea Area | Year-End 2014 Washington Metro | Year-End 2014
PIPELINE OF ALL SHOPPING CENTER TYPES PIPELINE OF ALL SHOPPING CENTER TYPES
Washington MetroArea Area Suburbs | Year-End Washington Metro Suburbs | Year-End 20142014 8000
7,418
2.1
6,391 Total = 57.3 MSF in 320 Centers
Northern VA Suburban MD The District
THOUSANDS OF SQUARE FEET
23.7
4000
2,857
31.5 0 Note: Estimate; in millions of SF. Source: Delta Associates; January 2015.
SHOPPING CENTER EFFECTIVE RENT PER SQUARE FOOT
Washington Metro Area Suburbs | Year-End 2014 Washington Metro Area | Year-End 2014 Neighborhood/Community
Grocery-Anchored
GROCERY-ANCHORED SHOPPING CENTER INVESTMENT SALES
Washington Metro Area Suburbs | Year-End 2014 Washington Metro Area | Year-End 2014 $800
$30
$23.66
$24.07
$20
$15 $10
$5 $0
$400
$0
2012
2013
2014
Source: Delta Associates’ Market Maker Survey, REIS, Delta Associates; January 2015.
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SALES IN MILLIONS
EFFECTIVE RENT PER SF
$33.52
$32.76
$32.04
$23.49
Proposed
GROCERY-ANCHORED SHOPPING CENTER INVESTMENT SALES
$40
$25
Planned
Source: REIS, Delta Associates; January 2015.
SHOPPING CENTER EFFECTIVE RENT PER SQUARE FOOT
$35
Under Construction
$309
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
*January through November 2014. Note: Excludes properties under contract. Source: Real Capital Analytics, graphic by Delta Associates; January 2015.
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HOUSING SUMMARY AND FORECAST Housing market conditions during the 4th quarter of 2014 breathed some life into the slowing Washington area housing market recovery. Home prices increased 4.0% compared with the 4th quarter of 2014 while sales volume rose 1.9% over the year. However, these rates are slower when compared to the price and sales volume growth in 2013. The days-on-market average stood at 58 days during the 4th quarter of 2014, up 9 days from a year earlier but still below the long-term average of 63 days. Steady price gains in recent years plus improving economic growth helped increase months of available inventory in the Washington area, a trend that was seen throughout 2014. As supply constraints in the market continue to ease, local price growth likely will remain in the modest range of 2% to 4% per annum in the intermediate term. Over the long term, however, owning a home in the Washington area has been a solid investment, with price growth of 161% over the past 20 years.
PRICES
HOME SALES AVERAGE PRICE CHANGE Washington Metro Area Figure 1
The average price of a Washington-area home sold in the
12%
4th quarter of 2014 was $466,216 — an increase of 4.0% from
PRICE CHANGE
8%
3.1%
4%
one year earlier. There was a noticeable slowdown from last year’s overall increase of 8.0% as home prices in Washington increased only 3.1% for all of 2014. Price gains are likely to
0% -4%
decelerate as the number of active listings in the region
-8%
increases. This slowdown in price growth could, however, ease the affordability obstacle for potential Washington
-12%
area homebuyers, helping boost the demand for housing
Source: MRIS, Delta Associates; January 2015.
in the near term. Washington area price growth trails the average growth rate of other major U.S. metros. See Figure 1.
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HOUSING UNIT VOLUME Unit volume sold in the 4th quarter of 2014 increased 1.9% from a year earlier. Though sales bounced back at yearend, overall sales volume in 2014 slowed, slipping 4.8% compared to the sales volume increase of 10.8% in 2013. Easing supply constraints and declining investor demand may have contributed to this slowdown. Interest rates have remained low, which could motivate some would-be homebuyers for a last round of purchases before the expected modest increases in mortgage rates in the second half of 2015.
the slowdown in price gains, positive momentum in the national economy and reduction of regional economic uncertainty have encouraged Washington area residents to bring more inventory onto the market. The metro area averaged 2.4 months of for-sale inventory during the 4th quarter of 2014, with active listings up 24.4% from year-end 2013. See Figure 2.
DAYS ON MARKET Homes in the Washington area averaged 58 days on the
Washington Metro Area | Year-End 2014 Figure 2 30%
15 12
15%
9 0% 6 -15%
-30%
3
04
05
06
07
08
09
10
11
12
13
14
0
MONTHS OF INVENTORY*
Despite the recent lackluster regional job growth and
HOME PRICE CHANGE AND INVENTORY
12-MONTH PRICE CHANGE
MONTHS OF INVENTORY
*Months of inventory at current sales pace for last month in each quarter. Source: MRIS, Delta Associates; January 2015.
ANNUAL AVERAGE DAYS ON MARKET
Existing Houses | Washington Metro Area | Year-End 2014 Figure 3 120
market, up 9 days from one year earlier but still below the
105
10-year average of 63 days. The rise in days on market area. Potential homebuyers are now deciding among a greater array of listings at more moderate prices, which
80
DAYS
over the year is driven by a rising number of listings in the
58 40
27
may partly explain the longer time to closing. See Figure 3. 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: MRIS, Delta Associates; January 2015.
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HOUSING HIGHLIGHTS SUMMARY OF HOUSING MARKET INDICATORS
PRICE CHANGES IN PRICE CHANGES IN PURCHASE-ONLY INDEXES PURCHASE-ONLY INDEXES Select Large | 1994 – 3–rd 3rd Quarter 2014 2014 Select LargeMetro MetroAreas Areas | 1994 Quarter
Washington Metro Area | Year-End 2014
$466,216
Comparison at Q4 2013
Comparison at Q4 2013 Average Days on Market Comparison at Q4 2013
Comparison at Q4 2013
1.9%
14,139 58
9
161%
49 2.4
Sales Pace (Months)
1
For-Sale Listings
$448,089 14,409
Sales (Units)
4.0%
PRICE CHANGES
CURRENT INDICATORS Average Sales Price
200%
CHANGE YEAR-OVER-YEAR
150%
100%
50%
0%
0.3
2.1
Note: Price change at 3rd quarter of respective year; seasonally adjusted. Source: FHFA, Delta Associates; January 2015.
12,782
1 Sales pace at December 2014. Pace is ratio of total for-sale inventory to current month’s sales.
Source: MRIS, Delta Associates; January 2015.
PERCENT CHANGE IN HOME PRICES
Washington Metro vs. United States PERCENT CHANGE IN HOME PRICES Year-End 2014 Washington Metro vs. United States | Year-End 2014 Washington Metro Area
Existing Houses | Washington Metro Area FOR-SALE LISTINGS Year-End 2014 | Washington Metro Area | Year-End 2014 Existing Houses
U.S. 20 MSA Composite
40,000
15%
LISTINGS
% CHANGE
30%
FOR-SALE LISTINGS
0%
20,000
12,782
-15%
-30%
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
*12 months ending October 2014. Note: Seasonally adjusted purchase-only index Source: S&P/Case-Shiller, Delta Associates; January 2015.
C O H NR EZNICK
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: MRIS, Delta Associates; January 2015.
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FLEX/INDUSTRIAL SUMMARY AND FORECAST Washington metro area flex/industrial market conditions accelerated during the fourth quarter of 2014. The rise of e-commerce continues to fuel growth in the market, particularly near transportation nodes suitable for distribution facilities. As a result, rents and occupancy climbed. Net absorption also remained positive while the direct vacancy rate declined as interest from single-user tenants, in part, fueled warehouse/ distribution demand. Further driving prices and transaction activity near all-time highs during 2014 was investor sentiment that continued to climb for industrial product. We expect these investors to continue extending their capital into less traditional submarkets and value-add opportunities in 2015 and 2016. Of note, our flex/industrial classification consists of Warehouse/Distribution facilities and Flex/R&D buildings. Warehouse/ Distribution includes facilities primarily used for storage and/or distribution of goods. Flex/R&D are buildings containing a minimum total office percentage of 25% and consisting of either Warehouse/Distribution and/or specialty industrial spaces such as Research & Development and High-Tech space.
NET ABSORPTION Flex/industrial net absorption was positive during 2014, totaling 905,000 SF for the whole region. This compares to 1.0 million SF of absorption during 2013. The majority of the positive absorption during the past 12 months was mostly driven by Warehouse/Distribution product. Retail, especially online sales, is driving demand for distribution space in this region. With a higher than average median household income and a large population of tech-hungry Millennials, the Washington region is a top target for online retailing in addition to brick-and-mortar stores. We believe flex/industrial product will continue to outperform other property types in 2015 in the Washington region and at the national level, as property fundamentals continue to improve.
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FLEX/INDUSTRIAL VACANCY The direct flex/industrial vacancy rate declined to 9.4% at year-end 2014, from 10.2% at mid-year 2014 and from 9.9% a year ago. The regional flex/industrial direct vacancy rate likely will tick down to 9.0% by year-end 2015, from 9.4% today as we project demand to outpace new supply by approximately 300,000 SF over the next year.
PIPELINE in the region was 1.6 million SF at year-end 2014, with an additional 1.6 million SF planned and 3.7 million SF proposed. A dwindling supply of developable land and large blocks of vacant space led to a revival in build-to-suits for large users seeking customizable space. With the flight to quality still a major driver of new lease activity, we foresee that more projects will get the green light even with no space commitments in place, though construction financing can remain a hurdle for projects at more challenging locations. We expect more groundbreakings throughout the region in the coming year, particularly for those developers armed
FLEX/INDUSTRIAL PROJECTS IN THE PIPELINE Washington Metro Area Suburbs | Year-End 2014 Figure 1 Under Construction
IN THOUSANDS OF SF
The amount of flex/industrial space under construction
Planned
Proposed
5,000
2,500
0
No VA
Sub MD
Source: Delta Associates; January 2015.
with capital. See Figure 1.
With the flight to quality still a major driver of new lease activity, we foresee that more projects will get the green light even with no space commitments in place, though construction financing can remain a hurdle for projects at more challenging locations. RENTS Flex/industrial effective rents in the Washington suburbs increased 1.2% during 2014, compared to a 1.6% increase during 2013. Effective rent growth will be gradual as tenants remain cautious regarding future economic growth as we move into 2015. Tenants are also ever more cognizant of real estate costs, and we anticipate that some large users may opt to downsize or seek more efficient space as leases near expiration. Despite these concerns, we expect the average effective rent will rise 1.0% to 2.0% during 2015, similar to the pace of rent growth observed in the market over the last few years.
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WA SH I N G T O N A R EA C O MMER C I A L R E A L E S T A T E M A R K E T U P D A T E
JANUARY 2015
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FLEX/INDUSTRIAL INVESTMENT SALES Flex/industrial investment sales volume totaled $608 million in the Washington region during 2014, which compares with $405 million in sales during 2013. Sales prices averaged $114/ SF in 2014 compared with $82/SF in 2013. Investors with cash likely will continue taking advantage of purchasing flex/ industrial assets in the Washington market, given its long-term growth prospects and stable nature. Due to improving market conditions and firm pricing, we also anticipate that investors will move down the risk spectrum at a measured pace, snapping up older and lower-tier product if good buying opportunities present themselves.
We suspect that the average cap rate will hold in the low-7% range even if there is a modest increase in interest rates. CAP RATES Capital is fluid for the metro area flex/industrial market and investors are paying top-dollar for stable properties. The average cap rates for Warehouse/Distribution product fell to the high-6% to low-7% range in 2014 (with some product trading in the mid-5% range) as prices continue to bid higher. Average cap rates for Flex/R&D properties fell to the low-tomid-7% range over the year. We suspect that the average cap rate will hold in the low-7% range even if there is a modest increase in interest rates, as cap rates generally lag changes in overall interest rates.
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WA SH I N G T O N A R EA C O MMER C I A L R E A L E S T A T E M A R K E T U P D A T E
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FLEX/INDUSTRIAL HIGHLIGHTS SUMMARY OF OFFICE MARKET INDICATORS
FLEX/INDUSTRIAL NET ABSORPTION FLEX/INDUSTRIAL NET ABSORPTION Washington Metro Area | Year-End 2014 Washington Metro Area | Year-End 2014
Washington Metro Area | Year-End 2014 CURRENT INDICATORS
ALL CLASSES
Rentable Building Area (SF)1
120,275,647
Vacant Available (SF)
11,338,209
Direct Vacancy Rate
9.4% 905,000
Net Absorption (SF) - 2014
1,011,000
2013 % Rent Change 2013 - 2014
1.2%
INVESTMENT SALES YTD
ALL CLASSES 52
Number of Transactions
IN THOUSANDS OF SF
1,800
1,600 1,400 1,200 1,000 800 600 400 200
0
2011
2012
2013
2014
Source: Delta Associates; January 2015.
$608,450,000 $114
Average Price per SF
DEVELOPMENT PIPELINE
ALL CLASSES 1,577,432
Under Construction (SF)
2
PROJECTIONS FOR DEC 2015 Pipeline and Direct Inventory (SF)
3
Direct Available Space (SF) After Proj. Demand
Source: Delta Associates; January 2015.
Washington Metro Area | Year-End 2014 3
122,301,579 13,364,141
Includes buildings 10,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government. 2 Source: REIS. 3 Pipeline equals buildings under construction and those planned that may deliver by year-end 2015. 1
FLEX/INDUSTRIAL DEMAND AND NEXT ONE YEAR Washington Metro Area | DELIVERIES Year-EndIN2014
ALL CLASSES
9.0%
Direct Vacancy Rate
FLEX/INDUSTRIAL DEMAND AND DELIVERIES IN NEXT ONE YEAR
IN MILLIONS OF SF
Total Sales
Demand
Under Construction
Planned
2.3
2
0.4 1.6
1
0
Source: Delta Associates; January 2015.
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MIXED-USE LEADERS KEEP THEIR EYES ON THE BIG PICTURE FURTHER INSIGHTS FROM COHNREZNICK
By David Kessler Commercial Real Estate Industry Practice – National Director
Mixed-use developments continue to command significant attention from real estate investors. Just before Thanksgiving, I had the privilege of moderating a panel discussion on current mixed-use trends at the Bisnow Multifamily Annual Conference in Washington, DC. While I put several different questions to the panel during our 40-minute discussion, most of the responses circled around a central theme: The interest in multifamily isn’t ultimately driven by economics—although those have to make sense—but rather by a renewed appreciation of what makes for a livable community and the power of urban planning in creating that community. Building a community where people want to live more than pays for itself in the premium that landlords can command for a place people enjoy calling home and in the higher rate of renewed leases.
Given the growth in the size of rental complexes and the importance of reinforcing a sense of community, it is not surprising that developers are looking at new ways of blurring the boundaries between the development and the surrounding neighborhood. Today, the opportunity to build livable communities has given rise to what the panelists frankly referred to as an “amenities arms race.” But like most arms races, this is seen to be a losing strategy. Instead, the consensus was that enduring design, tasteful aesthetics and quality service will trump having an extra dog run on the roof every time. Indeed, I think the rise of hotel-like service reflects more than the popularity of a new “feature.” Rather, it reflects an important step in the evolution of our understanding about the communities we build: ultimately, it’s not stuff but experiences that matter. Millennials (and their Boomer parents) have consciously embraced that mantra in how they spend their time and money, and the developments that are most successful reflect that. The challenge in providing hotel-level service is the increased staff needed to do so. This, in turn, requires not just more revenue but more occupants, which means larger developments. Given the growth in the size of rental complexes and the importance of reinforcing a sense of community, it is not surprising that developers are looking at new ways of blurring the boundaries between the development and the surrounding neighborhood. Whatever tactics developers choose, they continually return to the big picture: How do their projects, in terms of the design of the residences and the quality of the retail, affect the surrounding area? This holistic perspective may be one of the most powerful attributes of the current mixed-use resurgence, significantly increasing the chances that the projects being built today will not only be economically attractive, but also leave a positive legacy—and example—for the next generation.
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COHNREZNICK As one of the top 10 largest accounting firms in the nation, CohnReznick provides a full array of services to the commercial real estate industry. Our clients include such institutional investors as private equity funds and pension funds investing in real estate, as well as public and private real estate companies including commercial and residential property owners and operators, hotels and resorts, real estate developers, construction companies, homebuilders and land developers. CohnReznick’s National Commercial Real Estate Industry Practice manages complex, high profile engagements employing a broad range of sophisticated financial skill sets and precise, closely coordinated teamwork. We offer the technical knowledge, sizable resources and in-depth infrastructure of a national firm, but at reasonable and competitive fee levels, consistently utilizing senior-level engagement team members who provide clients with the personal service they deserve and have come to expect. Our real estate professionals are comprised of highly experienced thought leaders who understand the broadest range of accounting, tax and business issues across all sectors of the commercial real estate industry. From concept through development and implementation, we focus our energies into providing keen insights, proven, success-oriented strategies and close personal service. CohnReznick provides services to a broad cross-section of the real estate industry including: • • • • • • • • • • • • • • •
P ublic and Private Real Estate Companies P rivate Equity Funds P ension Funds Investing in Real Estate C ommercial and Residential Property Owners and Operators R EITs H otels and Resorts R eal Estate Developers C onstruction Companies L and Developers H omebuilders L enders N onprofits M unicipalities C ommunity Redevelopment Groups L ocal Governments
For more information on CohnReznick’s National Commercial Real Estate Industry Practice, please visit www.cohnreznick.com/commercialrealestate David Kessler, CPA Commercial Real Estate Industry Practice – National Director CohnReznick LLP 7501 Wisconsin Avenue, Suite 400E Bethesda, MD 20814-6583 301-652-9100 www.cohnreznick.com
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