CRE Trends in the Washington D.C. Area: Office and Multifamily on the Rise

Karl Utermohlen

The Washington, D.C. metropolitan area — including Maryland and Virginia — has seen its commercial real estate market thrive in recent quarters. The region has quickly become one of the booming markets in the country, rivaling West Coast CRE powerhouses such as San Francisco, Los Angeles and Seattle.

In fact, some investors believe that downtown Washington, D.C. is the top commercial real estate market in the country, due in part to retail occupancy in the greater metropolitan area increasing to over 90%. Lease rates are also on the rise due to an increase in demand, while a volatile stock market has seen investors place bets on real estate, lower capitalization rates.

Some of the areas in the larger D.C. region that are experiencing the most CRE development include suburban Virginia, including the counties of Loudoun, Fauquier and Prince William. This is due in part to how densely some of these areas are, encouraging retailers to add more stores, including new Home Depot and Kmart locations.

The office market is also slated to recovery in the D.C. area following a decline in lease rates in northern Virginia of roughly 30% since peaking back in 2000. Office lease rates have also taken a hit in Washington, D.C. and suburban Maryland. Nevertheless, a number of office space developments are on the pipeline, which should help stop the bleeding and usher the region into a new era of prosperity.

Such developments include Titan Corp. and Unisys Corp. signing roughly 280,000 square feet each in Reston, Virginia, as well as the U.S. Office of Army Administration recently leasing 525,000 square feet in Crystal City, Virginia. Expect areas outside the Beltway in suburban Maryland and northern Virginia to take a little longer to fully recover.

Investors are most excited about the area’s waterfront neighborhoods, which have become office markets in recent years. Tenants from the Central Business District have been moving to these areas thanks to deals such as the Chemonics International agreement with Forest City to lease up to 290,000 square feet for an office building in Southeast D.C.’s Capitol Riverfront neighborhood.

The company will consolidate its two downtown D.C. offices and Crystal City office into the new building. Plus, the D.C. Council approved a $5.2 million property tax break for Chemonics, which should encourage other businesses to move their offices to the area.

Naturally, the D.C. area will be disrupted by the creation of Amazon’s new headquarters in Northern Virginia. The building will bring with it 25,000 highly-technical workers in the tech industry, as well as millions of dollars that will be injected into nearby regions, leading to a more highly gentrified Arlington.

The creation of Amazon HQ2 will likely increase the prices of residential and multifamily homes for both investors and those seeking to rent. On average, these Amazon workers will be earning $150,000, which is close to 50% above the median household income for Arlington ($108,706 in 2016) and close to double the D.C. one ($75,506 in 2016), likely resulting in poorer families being pushed out.

However, the Amazon project will also bring with it billions in taxpayer-funded subsidies. This means that Virginia officials have said that they will shell out $819 million to help create tens of thousands of jobs in the Arlington area. Nevertheless, part of these taxes will be paid by Virginia’s Coal Country, which has families that are struggling economically.

In addition to office spaces, it is also an exciting time for the space of multifamily properties, due in large part to how the employment picture is looking in the greater D.C. area. The region is experiencing an increase in job creation in a number of high-wage industries such as government, engineering and defense contractors.

Late last year, Cushman & Wakefield named metro D.C. as one of the top 25 tech markets in the country, as it has the second-most workers in the tech space with 312,430 workers. This is due in part to the growing number of tech policymakers gaining employment in the area, as well as the increase in cybersecurity investing taking place.

These factors have propelled the multifamily space in the area as more well-educated and technically proficient workers with stable jobs are moving to D.C. This led to unit prices growing from $42,600 during the second quarter of 2017 to $76,500 by the second quarter of 2018. Transactions such as the $130 million sales of the 1,119-unit Berkshire Towers in Silver Spring helped to propel the CRE market forward last year.

The number of new apartment homes that were to be constructed in 2018 also increased by about 2,000 when compared to 2017, although vacancy rates did increase slightly last year. Nevertheless, this figure is still lower than in most major CRE markets. Plus, Marcus & Millichap saw rent increasing by 4% last year, making the multifamily space a coveted one for owners and investors.

However, these increases in rent prices and construction for new multifamily properties have displaced previous tenants with older buildings being torn down. Middle-class families have had a hard time finding affordable housing over the last year.

While there is no easy solution at the moment, JBG Smith and the Federal City Council rolled out the Washington Housing Initiative to preserve and build roughly 2,000 workforce-level housing units in the D.C. area. Investors from PGIM Real Estate, Starwood Capital and others have also been investing in the development of Class-B and workforce-level apartments.

The CRE space in the metro D.C. area is especially exciting for investors and owners seeking to capitalize on the explosion of multifamily spaces for highly-trained professionals, as well as office spaces for these same workers. However, the area’s government will have to figure out a way to make life affordable for existing residents without displacing them moving forward.

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