An Interview With: Warren Dahlstrom

Warren Dahlstrom is one of the “capital markets” stars in Washington commercial real estate, in his particular case one of three partners in Cushman & Wakefield’s capital markets team in Washington. He grew up in Fairfax, went to UVA, then out to Colorado for an MBA, after which he stayed in Boulder for seven years working for what became a large apartment building owner. After that, he returned to DC, where Joe Moravec hired him to start a sales group at Leggett McCall [later acquired by Grubb & Ellis], after which he went to Cary Winston for five years to work with Steve Conley and John Duffy. In 1997, he went to Cushman & Wakefield on the invitation of Jim Luck. “We had competed together for a long time and it seemed like a good idea, plus I was looking for a national platform,” Dahlstrom says.

Bisnow on Business: You do what Bill Collins does at Cassidy? Oh, sorry, Collins does what you do at Cushman?
[Laughs.] Yeah, I wanted to be polite, but sure. Bill, and my two partners, Jim Luck and Chip Ryan, and Steve Conley — we’re all kind of the same pledge class. We’ve chased each other in the market, or been partners with each other for the last 20 years. It’s really kind of silly.

What does “capital markets” mean in commercial real estate?
The equity in real estate sales, which in this market means selling office buildings. In other markets sometimes you sell apartments or other things. But Washington is such an office centric market that the way that I fill it out on my kid’s school application is that I say: “I sell office space.”

All right, getting down to brass tacks, what are interest rates doing to your sales?
Clearly at some point an increase in interest rates is going to trickle into real estate and cause prices to either stabilize or drop, depending upon how far up the rates go. Since we’ve had 17 consecutive months of interest rate increases, I would say we are certainly starting to see some impact. But so far it has not kept us from achieving record pricing. Why? I would say that the dominant influence on real estate prices in Washington is the wealth and strength of this market as opposed to the rest of the world. And the demand push of dollars into real estate generally. I still believe that until we have 18 months of solid and reliable gains in the stock market, we’re not going to see any lack of interest in commercial real estate as an asset class. And that has been driving both private equity and also pension fund dollars domestically and off shore money as well. There’s no better office market in the country than Washington DC. We are hearing rumors from our colleagues in our New York office that there’re a couple of deals that are going to break there with Dubai and Kuwaiti money that are probably going to reach the $1,000 a foot hallmark in New York. I think it’s indicative of the fact that there’s still a ton of capital out there. It doesn’t see a whole lot of sense in sending all of its assets to the stock market or the bond market. A portion of it still needs to get placed in real estate even though it’s a smaller portion. Pension fund assets are still sort of 7% or 8% committed to real estate as opposed to maybe a minimum target of 10% that they’d love to reach. We’re just not able to accommodate the flow of dollars into real estate, which is causing prices to go up.

So if we’re still in record territory, what is the impact you were referring to of the higher interest rates?
We’re starting to see some of the high net worth individuals back away from pricing because they can’t get the kind of leverage that they need to use to make them competitive. Typically you’d see two or three local high net worth individuals bidding in the best and final round on a deal, but now we’re down to one group that’s staying in to the bitter end against institutional and offshore money. I’m positive that this is the negative impact of interest rates. But it’s also driven in part by the fact that the pricing is probably 10% richer than six months ago. So, prices have continued to creep up, even though interest rates have been moving up and causing certain buying classes to drop out.

What’s the bottom line--that it’s increasing but at a decreasing rate?
Yeah, I think that’s probably a decent summary. Cleary I think everyone acknowledges in their heart of hearts, you wake up at 3:00 in the morning and you’re wondering what you should do with you portfolio. Everybody realizes that this is sort of the top of the cycle. It may not be the absolute peak, and it may plateau here for a quarter or five quarters. I mean, there’s no way of knowing how wide this plateau is. But there’s no reason to think that prices are going to continue to go up as long as we still see interest rate pressure. And the Fed looks like it’s going to fight inflation first and worry about recession second, and so we’re going to see continued increases, I think, in interest rates.

How are your specific sales at the moment?
Current activity is still brisk. We closed 1250 I Street three weeks ago. That was a sale where we represented the seller T.A. Associates out of Boston. We sold it to RREEF, which is a division of Deutsche Bank. It sold for $435 a square foot, which was a 4.7% cap rate on stabilized income. And the income wasn’t quite stabilized. We had some vacancies that needed to be filled. So, it assumes that that vacancy gets filled and then you achieve a 4.7% cap rate. That is, in my experience, a breathtakingly low cap rate for what is arguably a very nice B building. It’s certainly not a trophy class asset. But there’s some things that can be done. RREEF loves the location and they found the price to be very attractive. What this demonstrates to me is continued increases in pricing.

Gotcha.
Now, it’s a downtown building. It’s not in Herndon. I mean, there’s all kinds of things that you can’t generalize about, but in terms of Washington, D.C. office buildings, it signifies to me that this market is still moving up. And that wasn’t a fluke. We got a very competitive offering and there were three investors who were fighting tooth and nail right up to the end. We had all the silliness that we have come to expect. We had groups that were willing to go and risk immediately without a study period. They had basically done their inspections and their due diligence during the bidding process and were, in order to be competitive, willing to go and risk immediately with a price that was extremely competitive.

What can go wrong down the road?
You know what happens, Mark. Every broker’s nightmare is that interest rates creep up, and buyers’ expectations for yield move up accordingly, and prices therefore drop and sellers don’t sell. They basically say, you know, “I’m going to think about it.” But there will be transactions because there will be a need to sell, and the prices will be lower. People meet the market, and they clear the market. But it’s that very nerve-racking time when nothing is happening. People are trying to decide every day which way the wind is blowing. It’s crazy. :)