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NAIOP Northern Virginia Breakfast ‐ Capital Markets and Trends in the National Capital Region

On September 15, NAIOP Northern Virginia hosted a breakfast seminar highlighting capital markets and current trends in the National Capital Region. Speakers included Barbara Gertzog, Senior Vice President of Commercial Real Estate at United Bank; and Nathan Edwards, Vice President at Cushman & Wakefield.

Mr. Edwards is often asked, “Will foreign investment leave the National Capital Region?” from market participants citing concerns over potentially rising interest rates and extreme uncertainty in the current political climate. He remains very bullish on the region, arguing that employment continues increasing, as the region rapidly diversifies industries towards professional services. This diversification is vital to the long‐term economic health of the region, decreasing its reliance on federal employment, mitigating potential future impact from policies like BRAC and sequestration.

His employment projections indicate that federal employment has “stopped its bleeding” and is poised to grow again. He expects the next US president, no matter who it is, to increase federal spending. National health threats like Zika and national security threats like Syria and ISIS necessitate the growth of governmental agencies and contractors in both Suburban Maryland and Northern Virginia. Companies like CSC, General Dynamics, and Booz Allen Hamilton have recently abated their downsizing measures, and he contends “they are not getting any smaller”.

Barbara Gertzog provided an underwriter’s perspective, citing three conflicting variables that contribute to an unsteady lending climate. A regulatory environment in which agencies closely monitor banks’ real estate exposure, combined with the threat of rising interest rates, are juxtaposed against tremendous competition among capital market sources vying to fund each deal. She stressed the need “to do your homework” and “be very submarket‐specific and property‐specific”.

Regarding the overall impact of foreign investment in the NCR. Ms. Gertzog mentioned the divide between core assets and value‐add, mentioning that it is a “have and have‐not market”. Many foreign investors have little tolerance for risk, but will pay high prices for safer core assets driving up their value. Regarding the regional office market, sales volume is strong (still 5th in the country) but has slowed. Mr. Edwards does not attribute this decrease to market weakness, rather primarily because recent purchases were made by long‐term‐hold investors. Since available core assets have diminished, many regional investors have turned to the suburbs. Suburban cap rates are very high right now, enticing investors seeking yield. Approximately 60% of recent deals are suburban; a much higher rate than in the past.

Regarding the regional multifamily market, the recent boom in construction is expected to abate soon. In 2014 and 2015, about 14,000 units per year were delivered, which greatly exceeds the typical level of about 8,000 units per year. The market absorbed 10,000 to 12,000 of those units in each year. However, potential oversupply, rising construction costs, and tightening lending standards for this property type have driven projections for new supply for 2016 and 2017 closer to the more sustainable 8,000‐unit level.

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