RAY RITCHEY'S 7 PREDICTIONS FOR '07

We figured we'd start out 2007 right by getting some issue analysis and predictions–and from who else but the guy we named Numero Uno in our Power 50 list last September. Ray doesn't much like the limelight, but the prospect of waffles at the McLean Family Restaurant was evidently sufficient to overcome his shyness. When he’s not dining as a down home regular there, he is, of course, national head of acquisitions and development for powerhouse Boston Properties [market cap: $17 billion, 10 million SF existing space in DC region and several million SF of new projects in the pipeline]. Herewith, what Ray sees as the key questions, issues, and answers facing the commercial real estate industry in the coming year–in his own words.

1. Will BRAC Stay on Track?
With a changing Congress, and Rumsfeld no longer making the calls, will DoD’s desire to consolidate major space users to more remote government facilities stay the course? These decisions will have profound impact on Arlington and Reston, and most directly could make Ft. Belvoir [the Springfield submarket] and Ft. Meade [Columbia submarket] major space beneficiaries. We at Boston Properties are making big bets that while this relocation program may be delayed or reduced in scope, both of these key submarkets will be major long term winners.


BP's Ray Ritchey may have been #1 in our Power 50 list, but he's only #3 in line waiting to pay for breakfast last week at McLean Family Restaurant.

2. Will the Life Sciences Breathe New Life into the I-270 Market?
Since 2001, heath-related agencies like NIH, HHS, and the National Cancer Institute have had limited funding due to Congress’ focus on the war on terrorism. As a result, their home base in Montgomery County has seen tepid space demand from these historically strong “space stalwarts,” particularly in comparison to the white-hot Dulles Corridor. Would a dramatic shift in funding from a Democratic Congress benefit these agencies and the landlords who hope to meet their future space needs? We at BP certainly hope so–we're starting two new projects in this submarket, one in Chevy Chase [mixed use Wisconsin Place at the old Hecht’s site] and another at Tower Oaks in Rockville [180,000 SF office building at One Preserve Parkway].

3. How High Can They Go?
With several major office projects slated to start in DC, all seeking rents in excess of $65 a square foot, will those users who make our Class A market possible–the Washington-based law firms–continue to pay these ever-increasing rental rates? Our bet is an emphatic “yes,” especially in light of fact that DC rents look like absolute bargains in comparison to triple digit rents now being achieved in mid-town Manhattan, and the importance of a well-positioned DC platform for both national and international law practices.

4. Are the “Fringe” Markets Ready for Prime Time?
Given the scarcity of available sites in the accepted DC office market areas, and with the seemingly unlimited sources of capital available for investment in our city, many developers are pioneering projects in the NoMa and Southeast markets, which are clearly edgy locations for traditional space users. We view these moves as aggressive but believe that these markets will mature into established business centers in relatively short order. We are also pursuing similar projects in these locations, but we will not commence construction without a lead tenant until these markets become a little more mature.

5. Westward Ho?
With limited new construction starts in Tysons and corresponding rapidly increasing rental rates, will the Tysons-centric space user look to Reston and Herndon where recently increased speculative development has generated great “value plays" for growth-minded tenants? We at BP believe that will be the case, as we are on the way with a 650,000 SF multi-building speculative project that is receiving tremendous pre-leasing interest both from core Reston tenants and users from other submarkets in the region seeking the benefit of the 24/7 amenity-rich environment we have in the Town Center. The jury is still out on the other Toll Road markets, and clearly the timely leasing of this new space is heavily dependent on the continued strong job growth in the Corridor. We wish our friendly competitors in this market (Tishman, Vardell, JBG, Monument, Brandywine, Brookfield, WRIT, Crimson, to name a few) all the success possible in this endeavor.

6. Has Merger Mania Played Out?
In the past year we've seen many of our region's household names in real estate—Trizec, Prentiss, CarrAmerica, and Equity Office—change hands in blockbuster transactions. Similarly we are seeing the demise on the service side of icons like Trammel Crow now joining forces with previous arch-rival CBRE. Is there more to come in 2007? Our view is that, with so few of us "independents" left standing, the acquirors will be focusing more on digesting what they have they just consumed rather than gobbling up more new entities.

7. Will the Big Bets Made in ‘06 Pay Off in ‘07?
With rapidly increasing acquisition costs driving yields to sub-6 cap rates and lower, will there be corresponding increases in rents to validate these aggressive assumptions? Our take is that it's too early to tell, but that as long as the office acquisitions are made in established solid markets like DC’s East End or CBD, combined with limited new space options and rising development costs, these strategic “buys” should pay long term dividends to those with the foresight and patient capital to make these moves possible. Candidly, we at BP may have been too conservative in underwriting some of these recent deals, and may have missed some opportunities on the acquisition side. We do feel, however, that our diverse and deep development pipeline will prove to be a solid alternative strategy for the investment of our 2007 capital.

Parting thoughts?
I'd like to congratulate all our industry friends on a highly successful 2006, and wish everyone a professionally fulfilling, and personally healthy and happy 2007. And everyone should try the waffles at McLean Family Restaurant…at least once!