WASHINGTON, DC–Foreign investors have traditionally liked Washington DC's fundamentals and thus have been regular buyers of its trophy office product. Not so for 2017 however: Year to date, 81% of Class B investment sales volume has been driven by foreign buyers YTD, according to a JLL data point.

Indeed, investors of all types have noticed the B market's performance, JLL said. Combined 2016-2017 Class B asset sales have accounted for 50% of overall downtown activity, up from less than 30% in 2010.

Not surprisingly, competition for B product is becoming increasingly fierce.

According to JLL:

Cap rates for B buildings in the core have steadily compressed, dropping from 10.9% in 2000 to sub-5.5% today. Pricing doubled between 2000 and 2010 and has more than tripled since 2000 to $551 per square foot in 2017 with some long-term stabilized leased assets that have been repositioned trading for +/-$800 per square foot.

This increased investment activity does not bode well for tenants seeking Class B space.

The high bases at which investors are acquiring Class B assets indicate that buyers are underwriting additional rent increases, at the very least, and possibly even redevelopment plays that will further shrink the city's Class B offerings.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.