Foreign Capital Continues To Drive D.C.'s Office Sales Market
Nearly two-thirds of the money spent on D.C. office buildings this year has come from overseas as foreign investors from Norway to Japan to Qatar continue to drive activity at all levels of the investment sales market.
The District's 2017 office sales market, with just over $2B in deals as of June 30, is on pace to surpass 2016's total of $3.5B, thanks in large part to a surge in foreign capital.
The market had a slow start to 2017 as uncertainty around the new administration had potential sellers in wait-and-see mode, Newmark Knight Frank Executive Managing Director Jud Ryan said. Once March rolled around, sellers had become more comfortable and began marketing properties they had been waiting to put on the market, Ryan said, leading to a flurry of summer deals.
"Over the last two months you’ve seen a number of those assets closing or going under contract that had hit the market in March or April," Ryan said. "The is investor community is really digesting what was out there."
Ryan said his NKF team has deals for six properties under contract right now that would add another $330M to D.C.'s 2017 investment sales total. He could not give more information on the deals as they have not closed.
Those deals have been largely driven by money coming in from overseas. The share of the District's investment sales market coming from foreign buyers is nearly double what it was five years ago and is now the largest of any major U.S. city.
During the first half of 2017, an estimated 57% of the money invested in D.C. offices came from foreign buyers, according to NKF. CBRE pegs that number at 65% and JLL puts it at 70%.
For the 12 months ending June 30, foreign capital made up 60% of the District's total office sales volume, according to NKF. Over that same period, foreign investment made up 45% of New York City's total volume, 37% of San Francisco's, 24% of Seattle's and less than 20% in Chicago, Los Angeles and Boston.
At the top segment of the office market, a JV between Norges Bank, the Norwegian government's global pension fund, and Toronto-based Oxford Properties has dominated the market in recent months with major purchases of new trophy buildings.
In June, the JV set a record with the acquisition of JBG's newly delivered 900 16th St. NW. The building sold for $160M, or $1,250/SF, the highest price per SF ever in D.C.'s office market.
It did not stop there. Later that month, the Norges-Oxford JV spent $418M on 1101 New York Ave., a building that was the first in D.C. to receive LEED Gold status after it delivered in 2006. That property sold for $1,069/SF, another notably high price tag that would have set a record had it closed before 2014, when D.C.'s market first hit the $1K/SF milestone.
“Core buying is a vote of confidence in Washinton,” Transwestern Executive Vice President Gerry Trainor said. “When people pay record prices for core product, it means they believe in it long term.”
While it has not been setting any price-per-SF records, Japanese investor Unizo has been the driving force behind the District's mid-tier office sales market.
The Tokyo-based investor just spent $203M on 1111 19th St. NW, a building constructed in 1979 that recently underwent a major renovation and has signed Blackboard and the country's largest Wawa as tenants. That deal came to roughly $752/SF.
In March, Unizo bought adjacent buildings at 1325 and 1341 G St. NW for $259M. Those buildings were constructed in 1903 and 1969, respectively, and the deal penciled out to roughly $600/SF. Over the last 18 months, Unizo has bought a total of nine D.C. office buildings for roughly $1.4B and top brokers have credited the investor with single-handedly keeping D.C.'s office sales market alive.
"A lot of that Japanese capital is coming from a deflationary environment and is investing in the U.S. as a flight to safety," Ryan said. "They also have the ability to borrow at a very cheap rate."
A Middle Eastern investor has also begun pouring money into D.C.'s mid-tier office market. Qatar-backed Alduwaliya Asset Management in June acquired the office building at 1155 Connecticut Ave. NW for $64M. That building, constructed in 1984, went for roughly $677/SF.
It was the third D.C. acquisition for Alduwaliya in the last year after it bought a Georgetown office building from JBG for $142M in November and a Mount Vernon Triangle hotel in February for $50.4M.
A growing gap in rent prices between new trophy office buildings and older Class-B and Class-C properties has drawn investors to these aging buildings as they see opportunities to add value and drive up rents, JLL Senior Research Analyst Carl Caputo said.
“Over the past six months, some investors have begun to pivot and look to the B and C market,” Caputo said. “You’re seeing more of the B and C product come to the market and trade, which is not typical.”
