Commercial Real Estate | The Squeeze Continues
Monday, December 31, 2007
Six days before Christmas, the Commercial Real Estate Women of Washington, D.C., gathered for its last monthly luncheon of the year in the ballroom of the Capital Hilton. Hundreds of architects, commercial real estate brokers, developers and bankers ended the year with a panel on the defining event of 2007 -- the credit crunch.
"Where we used to have 20 bidders on every asset, now we have six," John E. Duffy, senior managing director of the commercial brokerage firm Holliday Fenoglio Fowler, told his audience. "The pretenders are gone."
If the commercial real estate boom of recent years was a grand opus, with millions of square feet of new office buildings being built, bought and leased. Then 2007 was the year the tempo slowed. In 2008, both the ongoing tightness in the debt markets and an expected economic slowdown is likely to result in more of the same, brokers and analysts said.
The large, debt-fueled buyouts of whole portfolios of buildings by private-equity firms are probably over, analysts and brokers said. That buying spree reached a crescendo in 2007 with New York private-equity firm Blackstone Group acquiring the national portfolio of Equity Office Properties Trust for $39 billion, the biggest leveraged buyout ever, in February, then quickly selling the buildings for a profit.
Developers are hoping that institutional investors such as life insurance companies and pension funds, as well as publicly traded real estate investment trusts, return to the table. But while those groups have large amounts of capital to invest, a tension between buyers and sellers exists over what the price of buildings should be, said Sigrid Zialcita, director of research for Cushman & Wakefield, a commercial real estate firm.
"There is a lot of liquidity, but I think that a lot of buyers are expecting a certain price and sellers are expecting another," she said. "This is creating a sort of impasse."
In terms of leasing, the new year is likely to usher in a market that places greater emphasis on location, brokers said.
Office markets inside the Beltway are expected to hold their own.
Meanwhile, more suburban markets such as sites surrounding Dulles International Airport or along Interstate 270 in northern Montgomery County, could have vacancy rates rise and asking rents flatten, brokers said.
Many expect the District to see action in the new year, as big tenants look to make deals for prime space in new buildings years in advance, said Thomas M. Fulcher Jr., an executive vice president at Studley, a tenant-representation firm.
The Department of Justice's planned consolidation of its criminal division is being watched closely because it will be the biggest government lease of the year. National Public Radio is expected to sell its headquarters building and move, possibly to Silver Spring; the NoMa (North of Massachusetts Avenue) neighborhood; or the burgeoning Southeast Washington office market near the new Nationals stadium.
Many eyes are on the development team of Hines and Archstone-Smith after it closed a deal with the District to build on the site of the city's former convention center downtown, Fulcher said. Kingdon Gould III, another developer, may also be an important player in 2008, as he controls part of the old convention center site and another potentially attractive location on the 600 block of Massachusetts Avenue NW, Fulcher said.