Foreign Buyers Flock to D.C. Office Market
Monday, April 21, 2008
Last year, foreign investors bought nearly 10 times as much commercial office space in the District as they did in 2006. This year, they're buying at a similar clip, paying top dollar for properties with prestigious addresses and blue-chip amenities.
Last week, a wealthy Irish investor broke D.C. real estate records when he bought the glass-clad, I.M. Pei-designed trophy property at 2099 Pennsylvania Ave. NW for a hefty $867 a square foot. Jones Lang LaSalle, which brokered the deal, had pitched the property to potential buyers in Europe, Australia, Asia Pacific and Latin America. Vico Capital outbid a group from Dubai, sealing the deal at $172.5 million. It bested by nearly $40 per square foot the city's last high-water mark: the sale of 1801 Pennsylvania Ave. NW in 2006 for $826 per square foot.
"We will see more funds and investors looking globally as a way to diversify against risk," said John Kevill of Jones Lang LaSalle, who with fellow managing director Collins Ege pitched 2099 Pennsylvania Ave. to potential buyers on a global sales tour last year.
International investors rank the United States as the most attractive market in the world, according to a first-quarter survey of members by the Association of Foreign Investors in Real Estate (AFIRE), a trade group whose members own about $230 billion of real estate in this country and $700 billion worldwide.
Increasingly, with private U.S. buyers hard-pressed to find money because of the credit crunch and more conservative investors waiting for prices to continue falling, offshore buyers are finding less competition for opportunities in the District's commercial real estate market. International buyers like the market because employment and job growth are relatively steady, and lobbying and law firms represent stable, high-rent tenants, according to the National Association of Realtors.
The Pennsylvania Avenue building is occupied by Holland and Knight law firm, investor Perseus and manufacturer Danaher. With a glass facade, multiple terraces, marbled lobby and premier view of the White House, it is among the most expensively appointed properties in the city. The inventory of such buildings is relatively small -- less than 1 percent of the upper echelon of the Class A commercial market is currently available, according to Cushman & Wakefield, a real estate firm in Virginia -- and they don't come on the market that often. There is only one new property under construction in the District upscale enough to be considered a trophy property: 1000 Connecticut Ave. NW.
Two weeks ago, Alexandria investor Ralph Dweck bought Class A buildings at 300 New Jersey Ave. NW and 51 Louisiana Ave. NW, according to industry newsletter Real Estate Alert. They were under contract for $378 million, or $824 per square foot.
Only a half-dozen large commercial properties in the District sold in the first quarter of this year, but the trophy deals have kept Class A values high, said Sigrid G. Zialcita, director of research for Cushman & Wakefield.
"I wouldn't say they are bargains. . . . They are paying top dollars," she said. "But what people are really paying a premium price for is a solid tenant base. These buildings are pretty much all leased up, with long-term and credit-worthy tenants. That's a great hedge now against the very volatile market we're in."
Generally considered the top U.S. cities to invest in, New York and Washington have moved to the top of the global market in terms of attractiveness, according to an AFIRE survey of foreign investors in the first quarter of this year.
In 2007, offshore commercial real estate purchases in the District totaled more than $1.25 billion -- $561.7 million of which came from investors in Germany and $231.1 million from the Middle East, according to data from Real Capital Analytics, a New York real estate research firm. In 2006, foreign buyers spent $153.5 million on commercial real estate in the District.
Vico, whose founder and principal, Dublin attorney Brian O'Donnell, had been looking at U.S. investment properties for several years, finally pulled the trigger on 2099 Pennsylvania Ave. because many of the domestic investors who might have been interested a year ago were no longer in play, Kevill said.
Until recently, many international buyers were reluctant "to enter a competition that included domestic buyers that were buying in large scale and had well-developed track records in those markets," Kevill said. With loans scarce, domestic investors cannot do deals with the speed they once had, when they could pre-fund their debt and perform little or no due diligence on target acquisitions. That gives foreign investors more time to familiarize themselves with the market.
Last month, while visiting Washington, a Dutch investment adviser struck up a conversation with real estate attorney Thomas Hart at the Four Seasons and asked about commercial real estate opportunities.
Hart pointed him to Penn Quarter, the Southeast Waterfront and the area north of Massachusetts Avenue known as NoMa as developing areas where property values are likely to rise.
"With the market down and the dollar down, they could get a double discount" on U.S. real estate, Hart said of foreign investors. "It just makes sense."