There Is Uncertainty for the Future of Commercial Real Estate

July 12, 2012 / Elizabeth Buckley, Commercial Property Analyst

The issues in question in Washington D.C. are keeping Realtors guessing about where the commercial real estate segment of leasing and sales is going. Most affected currently is the office segment. Vacant commercial real estate in the area, at least industrial and retail properties have been as active as in other parts of the country. But, when it comes to office space, it is quite slow. It has been taking a dive in small increments over the past eight quarters.

There Is Uncertainty for the Future of Commercial Real Estate

Contractors are shrinking their work force to reduce costs as the market is insecure. Government workers are hit heavily in Northern Virginia and the I-395 corridors. Tenants discontinued leasing almost three million square feet of space in the past year alone. Conversely, in the D.C. district, vacancy rates have made small improvements. Tenants have rented 8.8 million square feet. This gives landlords there a bit of power when setting rates for the rentals.

However, investors are still apprehensive. That is due to sales volume decreases. Pricing is down to an average rate of $305 per square foot, which is an 11 percent drop. The hesitancy is spreading to hotel and apartment rentals. Investments are down by 34 percent this year. But, the facts are that due to risks on the Eurozone and distress in China, investors are finding the metropolitan area a safe place to put their money.

They are seeing the investment in commercial real estate relatively danger free in D.C. as compared to other international cities. For example, a week ago, Brookfield Office Properties paid $506 per square foot for an almost fully occupied office building at 799 9th Street NW for a total of $106 million. Trump Organization has committed to an investment of $200 million. They will convert an existing Post Office, turning it into a luxury hotel, with 250 rooms and conference facilities.

Apparently an upturn is expected since those rooms will have to be filled and conferences have to be held somewhere. A new facility with The Donald’s stamp of approval will become very popular very quickly. Also, as more travelers and more business people come to town for conferences and sales opportunities, more office space will be needed. As usually happens, one segment of commercial real estate expansion will feed into the office segment and the retail segment.

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