The Washington Post

Gulf widens between downtown and the suburbs for office building prices

As Washington’s economy and office occupancy rate have sputtered, and the market fundamentals in other metropolitan areas have strengthened, many investors have shifted their attention to other markets. Despite this shift in investment activity, this region remains one of the most highly sought after in the country.

The average quarterly sales volume in the Washington area since the beginning of 2010 is about $1.7 billion. This includes the $1.8 billion quarterly average for the first two quarters of 2014, which ranks the Washington region third among the largest 54 metros in the country in 2014.

Furthermore, Washington-area office buildings continue to command top prices. The average price of $278 per square foot paid for office buildings in the region this year is 92 percent above the national average, surpassed only by New York, San Francisco, Los Angeles, San Jose and Boston.

When investors looking for core-quality office buildings place money in the Washington area, they typically favor the District’s central business district and shy away from the higher-vacancy suburban markets.

One function of this investor focus on the District is the widening spread between the prices paid for office buildings located in the CBD and premier suburban areas (shown in the graph). In 2000, there was no difference in the average price per square foot between the CBD and premier suburban areas (such as Clarendon/Courthouse and Bethesda/Chevy Chase) at about $130 per square foot.

However, as time passed, the spread in pricing has diverged. The average pricing spread between premier suburban areas and the central business district was about $90 or 43 percent from 2000-2006, and has widened to an average spread of $189 or 81 percent from 2010 to mid-2014.This indicates that investors will pay up for product in downtown D.C., but do not value the suburbs as much.

For now at least, investors, especially overseas buyers, view the District as a very stable core-like submarket. However, they are placing their bets more and more on other markets.

Maeve Gallagher is a real estate economist with CoStar Group in the District.

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