Office prices in Washington DC may have “overcorrected” with actual cap rates trading above the historical norm for the capital.
President and chief executive officer of developer Monday Properties, Anthony Westreich, told PERE that actual cap rates in the city were now higher than the historical trend, even given the lack of transactions in the area.
There have been just 12 office deals in the metro DC area this year to date, including the purchase of the 228,000-square-feet office complex One Market Square, in Rockville, Maryland, by The JBG Companies. JBG bought the property in April from Morgan Stanley Real Estate for approximately $43.5 million. JBG had originally sold the property to MRSREF for $55 million in October 2005, according to data provider Real Capital Analytics.
Westreich cited research by RCA and Bloomberg that showed Washington DC cap rates were now around 7.5 percent – above the 7.1 percent historical implied cap rate for the region. The implied cap rate is equal to the historical risk premium and the 10-year US Treasury.
Westreich stressed there was little transparency over valuations owing to the lack of property transactions since the credit markets seized last year.
However, he added that Washington DC was the “best” real estate market in the US today, not least because a third of all office space in the metro area was leased to US government departments. “Demand for offices in Washington DC is driven by the government and it is and will continue to be a direct beneficiary of the US government’s expansion,” he said.
In March, Monday signed a 10-year lease with aerospace engineer BAE Systems Land & Armaments for an additional 18,000-square-foot of space at one of its Rosslyn, Virginia, office properties, as well as renewing a lease with the US Post Office for an extra five years in the same building.
Monday Properties works with private equity real estate firms investing in and developing properties in New York and Washington DC. Founded by Westreich in 1998, the New York-based firm has invested more than $8 billion to date in the two cities.