REGIONAL FORECAST
January 29, 2015
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OVERALL ECONOMIC FORECAST
Scott Homa
Director, Research
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Washington, DC economic forecast
January 29, 2015
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COMMERCIAL FORECAST
John Germano,
Executive Managing Director
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WASHINGTON, D.C. METRO
STATE OF THE MARKET
JANUARY 2015
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2014 IN REVIEW
VACANCY
•
vacancy remains elevated; the gap between downtown and suburban markets widens
D.C.
20%
Northern VA
18%
Suburban
18%
Suburban MD
16%
14%
12%
Downtown
11%
10%
8%
6%
4%
2%
0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
CONSTRUCTION
•
development pipeline tightens; deliveries at one third of pre-recession levels
MSF
D.C.
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Northern VA
Suburban MD
9.3 MSF
9
6
3.1 MSF
3
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
NET ABSORPTION
•
consolidation and densification efforts continue to dampen net market demand
MSF
D.C.
Northern VA
Suburban MD
Metro
9
8 MSF of
occupancy
loss between
2011 and 2014
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3
0
2005
-3
2006
2007
2008
2009
2010
2011
2012
2013
2014
RENTAL RATES
• rental rates remain stagnant; concession packages at all-time highs
Gross Asking Rent (PSF)
D.C.
Northern VA
Suburban MD
$60
$50
$40
$30
$20
$10
$0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
FOREIGN CAPITAL INVESTMENT
•
cross-border investment activity in CRE trends up; cap rates remain compressed
Billions
$4
D.C.
7,6%
7,4%
7,2%
7,0%
6,8%
6,6%
6,4%
6,2%
6,0%
5,8%
5,6%
$3.9B in
foreign
Northern VA
Suburban MD
Cap Rates
$3
$2
$1
$0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
FEDERAL GOVERNMENT LEASING
D.C.’s largest tenant continues to reduce
both its workforce and footprint
*aggregate lease value
2/3
of the office
inventory in D.C.
metro are 20
years or older
WORKPLACE, FOR NOW AND FUTURE
today’s workspace is built with a greater
emphasis on collaboration and efficiency
WORKPLACE, FOR NOW AND FUTURE
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workspace design is used strategically for talent acquisition and corporate branding
productivity
efficiency
mobility
wellness
sustainability
WHAT’S NEXT?
is D.C. making a comeback in 2015?
FEDERAL LEASE EXPIRATIONS
•
the federal government is likely to shed two to three msf over the next three years
MSF
D.C.
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Northern VA
more than one third of
all federal leases in
the NCR is expiring in
the next three years
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Suburban MD
6
4
2
0
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
WHAT WILL DEMAND LOOK LIKE?
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Moody’s is projecting a spike in office-using employment growth – will it hold true?
tenants continue to downsize and consolidate
MSF
accelerated job growth and corporate expansions
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18%
16%
9
14%
12%
6
10%
8%
3
6%
4%
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2%
0%
-3
Deliveries
Net Absorption
Vacancy
MOVEMENTS TO KEEP AN EYE ON
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Densification and consolidation efforts will persist as tenants continue to seek efficiency.
On the other hand, more firms may be poised for expansion and reinvest in growing
their business.
•
However, growth in the private sector will likely be offset by the shrinking federal
footprint.
•
Activity will concentrate in high-density urban cores that are walkable, transit-accessible,
and amenity-rich.
•
Trophy/Class A products will see higher demand. Commodity space is likely to continue
to compete on pricing and concession offering.
•
Spec development will remain limited until market fundamentals strengthen. Landlords
will invest more in building upgrades and repositioning.
RESIDENTIAL FORECAST
Tracie Leonard
Vice President of Operations
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Multifamily: Washington D.C. MSA
WHAT THEY SAY….
About 2014:
•There were 14,493 apartment units in planning, under
construction or lease-up!
•The absorption rate per property per month averaged 18 units.
•Asking rents averaged $2,309 (2.73 psf)
•Effective rents averaged $2,204 ($2.61 psf)
•Concessions ranged from $88 per unit per month, peaking at
$140 per unit in December. Average for year $105
Axiometrics Inc. Washington Lease-Up Performance Trend 1.26.15
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Multifamily: Washington D.C. MSA
WHAT THEY SAY….
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Multifamily: Washington D.C. MSA
WHAT THEY SAY….
Is going to happen in 2015:
•14,186 units with a start date in 2015. The majority are in
the planning stages. (Axiometrics Pipeline Property List 1.26.2015)
•Washington, DC ranks fourth in New Construction Markets
by Volume according to Pierce Eislen’s 2015 Multifamily
Rent Forecast
•International Investors are targeting gateway cities such
as those in the Boston-Washington corridor.
(ULI Emerging Trends in Real Estate)
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Multifamily: Washington D.C. MSA
WHAT THEY SAY….
Is going to happen in 2015:
•Washington, DC is in the Top 20 Markets for job growth (ULI
Emerging Trends in Real Estate)
•Employment growth has primarily been in the service
industries creating a gap between low and high income
earners. (Multifamily Housing News quote Jake Kern, Pierce Eislen12.24.2014)
•Washington, D.C. and Northern Virginia are not expected to
experience rent growth (Jack Kern, Pierce Eislen, Multifamily Housing News 12.24.2014)
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Multifamily: Washington D.C. MSA
WHAT WE SAY….
Is going to happen in 2015 (based on our experience):
•DC, Alexandria, Vienna, Fairfax, Laurel: under construction
with stiff competition in each submarket
•New product crisscrosses submarkets: Example: Alexandria
prospect considers Old Town and Landmark
•Touring and informing international investors of multifamily
investment opportunities around the country including
Washington, DC. Note: Very interested in political relationships
and real estate development.
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Multifamily: Washington D.C. MSA
WHAT WE SAY….
Is going to happen in 2015 (based on our experience):
•Demographics: Income in DC 47% earn $36K to 76K; 22%
earn $77K to $106K; 28% earn over $107K
•Demographics: Age in DC 83% under 35; 12% are 36 to 45;
5% are over 46
•Asking rents range from $2.65 to $2.94 psf
•Effective rents range from $2.49 to $2.76 psf
•Concessions offered primarily up front with some fees
waived.
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Multifamily: Washington D.C. MSA
WHAT WE SAY….
Is going to happen in 2015 (based on our experience):
•Prospects relocating to Metro DC for employment, in
including contracted positions. However, many prospects
need roommates to afford new apartment.
•2015 Budgets anticipate flat rent growth.
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Multifamily: Washington D.C. MSA
They were right…now what?
Manage by the basics and beyond!
•Know your market
•Know your prospects: Millennials and Boomers
•Know your residents’ employers and where they work (at
home or office)
•Know how your residents’ commute style (walk, metro,
bike, car share, personal car)
•Exploit technology
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TAX FORECAST
Ross Litkenhous
Senior Director
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The Welfare State(s)
Local Rankings
VA #48
MD #33
DC N/A
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The Welfare State(s)
States are still trying to
manage their budget
deficits:
Maryland’s new governor
issued his first proposed
budget last week with
attempts to close a projected
$1 billion deficit for his first
two years of office.
Virginia is projecting a $2
billion deficit this year. How
will these deficits be closed,
what cost cuts and/or tax
increases will we be dealing
with when the legislatures
are finished with the year?
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The Good, The Bad and The Government
• FY 2015 IRS budget cuts: The cut will be about $346M, resulting in a hiring
freeze.
• The hiring freeze will result in the loss of 1,800 enforcement personnel
through attrition.
• The lost personnel will cost the government $2B in revenue that would have
otherwise been collected.
• There will be 46,000 fewer audits.
• In addition to fewer audits, which taxpayers may applaud, there will also be
fewer IRS people available to provide answers to taxpayers’ questions.
Source: Taxbooks
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GSA Footprint Freeze
Courtesy Kurt Stout, Colliers Govt Solutions
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GSA Footprint Freeze
• GSA leasing less space
• Rising % of GSA owned vs leased
assets
• Potential for fewer taxable properties
Less leased space = more office vacancy = lower valued properties = less tax revenue
Great for the US tax payer, bad for local governments, and property tax revenue.
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Local Impact
• New, more aggressive, and less tax payer friendly
assessment methodologies (e.g. DC Office of Tax and
Revenue)
• Complicated Tax Assessment Appeal Procedures-(e.g.
Loudoun County-Cost, Sales Comparison, Income
approaches).
• Shorter timeframe to appeal.
• More focus on administrative levels of appeal. Avoid
litigation!
• Rise in Non Ad-Valorem Taxes (e.g. Rain Tax)
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DISCUSSION
QUESTIONS