D.C. Investment Sales Brokers On Why 2018 Deal Volume Is Down From Last Year

The volume of office building sales in the D.C. region is set to finish 2018 down from last year by roughly 20%, a trend brokers attribute to rising interest rates, a shrinking foreign buyer pool and sellers waiting for the Amazon HQ2 announcement. But investment sales brokers maintain a positive outlook for the D.C. office sales market next year, especially the suburbs. 

D.C.-area sales volume year-to-date totaled $6.3B, according to Newmark Knight Frank data provided to Bisnow, a figure that includes Wednesday morning's $385M sale of a K Street office building. Even with more deals expected to close before year-end, the region will likely not reach the $8B in office sales recorded in 2017.

The annual totals are often skewed by whether or not a deal closes before or after New Year's Day, NKF Executive Managing Director James Cassidy said, and the pace of deals this year felt roughly the same as years past. But he said rising interest rates made deals harder to close in 2018, and foreign buyers were not as active as last year. 

"We see a lot of the foreign money on the sidelines right now," Cassidy said. "Not all of it, but last year was as hot as it's ever been as it relates to foreign capital ... Today, some of the buyer pool has thinned." 

Cushman & Wakefield Executive Vice Chairman Bill Collins said the slowdown in foreign investment came primarily from Asian countries, including China, Japan and Korea. Investment remained strong from Canada, the Middle East and Europe, he said. The year's largest deal, Georgetown's Washington Harbour, sold to an Israeli investor for $415M, and Wednesday's sale of 1501 K St. NW went to a Spanish billionaire for $385M. 

Collins, whose team brokered the 1501 K deal, said he has other deals in negotiations that could close before Dec. 31 or run into the first weeks of 2019. Still, he said Cushman & Wakefield's research shows the region will finish 2018 down from last year. 

"If you look at it on a historic average basis, it feels and looks pretty good," Collins said of the D.C.-area investment sales volume. "It just didn't perform at the same level of 2017, but that's OK." 

While the nine-figure downtown deals draw more attention, Transwestern's Gerry Trainor said D.C. suburbs have shown more strength this year.

His team this week brokered the sale of an 86K SF office condo in Fairfax for $10.2M. Last week, it represented Twenty Lakes Holdings in its $32M sale of the WillowWood III and IV office buildings in Fairfax. It also represented the seller last week in the $10M sale of a 67K SF Tysons office building.

Trainor said the demand picture for suburban versus downtown assets flipped this year. As recently as two years ago, a suburban office building would attract just one or two bidders, while downtown properties would have five to 10 bids. But this year, he said investors vying for downtown deals dropped, while the suburban properties he has brought to market have attracted large buyer pools and the negotiations often included three rounds of bidding. 

While downtown demand is dominated by foreign and institutional buyers, the spike in suburban demand has come from private capital, family offices, hedge funds and smaller investors looking to scoop up value-add assets. 

"The pricing on suburban office was falling for 10 years and finally people are coming to the conclusion that pricing is so low it's time to step in and start buying it," Trainor said. "That's a major change I saw in 2018 was the depth of the buyer pool for suburban office." 

He expects the growing demand for office in the D.C. suburbs to continue, especially with Amazon beginning to move employees to its HQ2 campus in Northern Virginia. Trainor expects the Amazon move will tighten market conditions in many Northern Virginia submarkets beyond Crystal City. 

D.C.'s core submarkets of the East End, CBD and West End recorded 2018 office sales totals of $1.5B, $1.2B and $435M, respectively, according to NKF. The Northern Virginia submarkets of Reston/Herndon, Arlington and Alexandria recorded $689M, $505M and $395M, respectively. 

The wait to see if Amazon would pick Northern Virginia kept many potential sellers on the sidelines this year, Cassidy said, partially contributing to the region's lower investment sales total this year. Now that the announcement has been made, he expects the Northern Virginia market to heat up next year. 

"People were holding off selling and not wanting to sell before that was announced," Cassidy said of Amazon HQ2. "Now all of the sudden, there's people willing to place dollars into suburban markets."

Brokers are confident the D.C. region will continue to have a strong investment sales market next year and going forward. If a recession begins in the next two years, as many economists predict, the D.C. region would remain a safe investment opportunity and would not suffer as much as other cities might, Collins said. 

"D.C. is viewed as an attractive investment area," Collins said. "If an investor says there could be a cooling of the economy in the U.S., D.C. is still a great safe haven. That continues to be the case. We've got a very stable economy."