Six things to watch in commercial real estate

In 2012, the Washington commercial real estate market became more competitive for investors. Our region faced the threat of sequestration — automatic federal budget cuts — only to see a decision on those cuts deferred until March. Uncertainty led to stasis: executives across the region paused their hiring and investment, waiting for the government to act. This led to the first year of negative net absorption — more space being vacated than leased — on record for the Washington area office market. At the same time, developers began building so many new apartments that supply now exceeds demand.

What will 2013 bring? We have identified six major trends influencing the local economy and commercial markets. These trends are creating both challenges and opportunities for Washington investors.

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Six major trends affecting Washington commercial real estate in 2013

1Washington realized its vulnerability in 2012. Thanks to the presence of the federal government, the Washington area economy has proven to be more resilient than the nation’s during downturns. The area has consistently enjoyed lower unemployment rates and higher job growth rates than the nation as a whole. During the past 20 years, the Washington area grew new payroll jobs at an annual average rate of 1.6 percent, compared to the national rate of 1 percent. The local unemployment rate during the past 20 years averaged 4 percent, below the national average of 6 percent.

However, with the federal government now in austerity mode, our recession-resistant nature has been compromised. Nowhere is that more evident than in local procurement spending. In 1980, when records were first kept, procurement spending was $4.2 billion. It grew every subsequent year to $82.5 billion in 2010. It declined for the first time in history to $80 billion in 2011, and then to $75.6 billion in 2012. This two-year decline alone accounts for the loss of nearly 50,000 jobs in the private sector. In addition, over the past 12 months, the federal government shed 4,200 payroll jobs.

2Despite vulnerability, the private sector continued to create jobs in the Washington area during 2012. During the 12 months ending November 2012, the local private sector added 27,600 jobs, with the education, health and professional services sectors leading the way. This growth is above the 10-year annual average of 17,000 new private sector jobs. Public sector job growth decelerated during the 12 months ending in November, with just 6,700 new jobs created.

Private sector growth should continue as the federal government recedes. It is supported by one of the most educated workforces in the nation, one that helps attract headquarters facilities from other parts of the country. According to the Greater Washington Board of Trade, the region has recently captured a third of all major corporate headquarters relocations in the United States.

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Demand for commercial real estate should remain at reduced levels in 2013, as economic uncertainty continues. However, demographic shifts and the rise in technology offer some long-term opportunities.