"Irresponsible lenders" looking for places to put their money are moving in on the Washington commercial real estate market, threatening to push the already high office vacancy rates through the roof, according to a leading real estate finance executive.
Commercial banks and savings and loans with hundreds of billions of dollars to spend "have irresponsibly lent too much money to developers" to build unneeded projects in major metropolitan areas throughout the country, creating gluts of office space in most of those areas, said Howard L. Flax, senior vice president and manager of the Washington regional office for Abacus Real Estate Finance Group.
With most other commercial markets overbuilt, major lending institutions "are looking at Washington," Flax said. "Over the last 12 months there has been much more interest [in the Washington area] from elsewhere in the country."
Vacancy rates in the metropolitan area range from about 10 percent in the District to as much as 13 percent in Fairfax County, 15 percent in Montgomery and a range of 15 to 18 percent in Prince George's County, Flax estimated. These rates, all high by Washington standards until the recession of the early 1980s left many developers with near-empty office buildings, are nonetheless lower than the rates in many major metropolitan areas.
Flax said the national average for commercial vacancies is about 20 percent. Coldwell Banker, which also monitors vacancy rates throughout the country, reported a 16.1 percent vacancy average for downtown business districts and 19.7 percent for suburban areas at the end of June.
Sun Belt cities have the most serious gluts, reporting office vacancy percentages in the high teens and 20s. The Houston area, with vacancy rates of 20.2 percent downtown and 30 percent in the suburbs, is in the lead. Outside the Sun Belt, Denver's vacancies were 23.6 percent downtown and 24.5 percent in the suburbs at the end of the second quarter.
Commercial projects now scheduled for completion in the Washington metropolitan area through mid-1986 can be absorbed without serious problems, Flax said. But if the current pace of lending continues through the end of next year and in 1987, "a real estate recession could result," he said.
Abacus, one of the country's largest commercial mortgage lending companies, is "very, very cautious" in projects it underwrites in the Washington area, he said. The company confines its projects to the Golden Triangle -- the downtown office district bounded by Connecticut Avenue and 20th Street, Pennsylvania and Massachusetts avenues NW.
"We like certain areas in the East End but we wouldn't go much further east than 14th Street," he said.
Since deregulation of the lending industry in 1983, banks and savings and loans have amassed more than $150 billion from money market deposits, retirement accounts and other types of deposits, Flax said.
Tax breaks make commercial real estate more profitable than many other types of investments.
Lenders pouring their money into real estate have one thing in common, according to Lewis Bolan, head of commercial leasing consulting services for Leggat McCall & Werner Co. "They have ample resources and long-term staying power," he said. "If the short-term market is slow, or the initial rents below their expectations, they have both the commitment and the resources to wait it out until conditions improve."
Lenders are attracted to Washington because it has the country's third-largest office market, the country's highest income levels and "the stability seemingly offered by the federal presence," Bolan said.