WASHINGTON, DC—Almost all sectors of the commercial real estate market in Washington, DC were watching events unfold with equal parts dread and resignation in February. Would Congress really hack away $85 billion in indiscriminate budget cuts? The answer, as we all know now, is yes, and probably more trimming is to be expected.
While a muted impact on the overall economy is expected, the DC area will clearly suffer a setback—and that includes almost every real estate asset class. Companies, especially those reliant on government contracts, are holding back on hiring and scaling back their space needs. Federal employees—otherwise known as consumers—will be scaling back their purchases and spending to accommodate furloughs. Industrial will see some fallout as retail supply chains readjust to the lower spending, as will such niche categories as self-storage and possibly even data centers. Perhaps the only sector that will remain unscathed, relatively speaking, is multifamily.
Or so the conventional story line goes. Some experts are cautiously hopeful that DC—a company town if there ever was one—can weather this storm and even ride out a reduced federal presence in the local economy over the long run. Submarkets such as Crystal City, for instance, learned, and quickly, how to reposition their areas after the government pulled out in the case of BRAC.
Perhaps more fundamentally, DC's unemployment figures are actually quite low compared with other markets, says Scott Homa, Jones Lang LaSalle research director: 5.2% versus the 7.7% national unemployment rate and, for example, 6% for Houston and 6.2% for San Francisco. “Although continued uncertainty and higher levels of anxiety among government contractors and federal agencies in Metro DC has depressed leasing activity and occupancy growth,” he says, “Washington, DC remains a prime investment market.”
Greater Boston continues to experience absorption and growth, with the hot areas decidedly being the Back Bay, Cambridge and Seaport—or Innovation—District. At least, that's what Glenn Verrette, senior managing director and principal at Cassidy Turley, and Bob Richards, president at Richards, Barry, Joyce & Partners, report. The data supports their views: According to Cassidy Turley's figures from 4th quarter 2012, Seaport vacancy rates fell to 14.9%, a drop of 3.7 percentage points over the year. “We think that fundamentals are good for another good year of absorption,” Verrette says, “Companies want to be in the Innovation District.”
Companies like Google and Microsoft have attracted a slew of startups to the area, “physically showing they want to be close to each other and close to the talent,” says Richards. Additionally, tenants absorbed 331,000 square feet of Back Bay class B space in 2012, according to RBJ data.
It is evident that the Seaport area will continue to grow, not only for office and tech but for entertainment too. After all, employees at younger companies want somewhere to live and something to do after hours. “What's happening in the seaport is not only the office product,” says Brendan Carroll, RBJ head of research. “It's also residential units.”
In Philadelphia, by contrast, younger companies and technology are not such a big part of the story. There is decent leasing activity in Center City, but quite a bit of it involves companies moving from one location to another. In one recent example, PernaFrederick represented three tenants, each moving from a building on Walnut Street to another one on the same street, either to expand or contract, or to obtain more efficient use of space.
“We wish we had more inbound business, corporate headquarters moving in,” says CBRE's Robert Walters. “Here in Philly it's a little bit more of musical chairs.”
On the plus side, the city has not seen the “wild cyclical swings” that occurred in other, more trendy downtowns, noted Chris Terlizzi, regional manager at First Niagara Bank.
Education-related and medical/health development and leasing are what sustained the Philadelphia market throughout the recession. “Eds and meds really buoyed us, and we are seeing continuing growth in those communities,” says Wallace. Timothy Proctor of TD Bank says his institution is doing more business in the city proper than ever before on strength of those sectors.
Lastly, it must be noted that there is hot competition—and six bidders—to establish Philadelphia's first casino. As Atlantic City's 12 casinos continue to show dwindling revenues, with only two in the black according to the most recent reports, the gaming industry in Pennsylvania is thriving—and will soon bring some of that energy to the city.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
