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Appraisal Institute: Real Estate Market Update-Economic Outlook for Metro DC Real Estate 2017

The Appraisal Institute hosted their annual real estate market update highlighting current trends nationally and within the National Capital Region. The presenters shared their research in the retail, office, and multifamily markets; and discussed what they expect in 2017 and beyond.

R. William Kent, Executive Vice President at CB Richard Ellis, discussed current trends in the dynamic retail market. Nationally, the volume of trades (by total dollar amount) was down about 17% in 2016 versus 2015. Property types thriving in the current environment include grocery-anchored centers (“necessity centers”), urban retail, and pretty much any high-end retail space in a in a core market. The property types that aren’t faring quite as well include big box retail, and non-core properties in secondary markets. The latter group of properties “have become increasingly difficult to finance; post-election, we saw 75 to 100 basis point change in cap rates.” In addition, “Power centers have really fallen out of favor” The private equity firms who are good at adaptive reuse and re-lease for big box vacancies will have some good opportunities in 2017. Class B malls continue their downward spiral, with cap rates hovering between 14 and 15.6%. With regard to where we are in the growth cycle, Mr. Kent feels that “the economy and real estate in the US is late cycle, we’ve been on a plateau for a while.” However, he has seen positive trends in employment and income, and mentioned that economists with Goldman Sachs are bullish on the economy in 2017.

Trevor Campbell with Jones Lang LaSalle spoke about the regional office market. The local economy is growing which bodes well for office space. In 2016, there were 75,700 jobs created in the DC Metro area. Growth sectors include law firms (Downtown DC), the defense industry (Northern Virginia), life sciences (Suburban Maryland), and the tech sector (throughout the region). Despite the job creation, there is not a massive amount of absorption largely because “tenants are getting more efficient with their use of space…corner offices are shrinking.” In addition, transit-oriented properties are increasing in importance in office leasing; according to Mr. Campbell, “Metro-centric buildings are getting 90% of leasing activity”.

William Rich, Senior Vice President at Delta Associates, spoke about the multifamily and condominium markets. Vacancy in the Metro area is currently 3.8% across all product classes which is the 4th lowest among major metro areas in the US, and below the national rate of 4.2%. However, in recent quarters, deliveries have exceeded absorption. Specifically, in the District there are 5,500 Class A units delivering in DC in 2017 and 4,500 units anticipated for 2018, which exceeds demand. This is expected to depress rent growth and increase vacancy rates. The delivery rate in both Northern Virginia and Suburban Maryland are much closer to demand; so rents are expected to continue steady growth, and vacancy rates are expected to remain steady. Regarding rents, Mr. Rich mentioned that “Rent growth has been belowaverage since 2010.” This is relative to the region’s historical growth rate near 4%. This trend is expected to continue through the near future with anticipated rent growth below 3%.

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