cant federal space contraction due to sequestration in addition to
current mandated contraction initiatives.”
While there certainly has been progress toward leaner federal
portfolios, federal holdovers and short-term extensions have
become more commonplace as GSA prioritizes near-term leasing
decisions, Brennan says. This leasing triage allows landlords to
take advantage of premium holdover and short-term extension
rents and protects them from the immediate political threats of
deficit reduction.
A federal leaseholder with a lease that is in the middle of its term
has little reason to worry about sequestration or federal footprint
reduction as well. More than likely, Brennan speculates, stringent
federal real estate scrutiny will have passed by the time the lease
rolls. A federal leaseholder with a short-term lease expiration might
find the lease is scrutinized more than it has been in the past, “but
budget uncertainty might force your tenant agency to seek a short-
term extension at a premium.”
IS DC’S SHORT SUPPLY A SAVING GRACE?
Another saving grace may be DC’s short supply. Investors are
likely to continue flocking to the local market, even if—and per-
haps especially if—a cut in federal construction dollars impedes
new development there.
The $175.6-million trade of the 12-story
333,948-square-foot Arlington Gateway
showed that class A product in the DC market still has its chops with investors, despite
the uncertainty emanating from official
Washington. Although that object lesson
didn’t really require any illustration. Indeed,
a dearth of class A offerings on the market is
causing some angst on the part of buyers—
and is certainly driving pricing, says Bill
Prutting Jr., Jones Lang LaSalle’s managing
director for capital markets.
“Based on the number of offerings on the
market now, we expect pricing to continue to
increase from a yield standpoint,” he says.
“Yields could go even lower based on the
capital that is currently chasing very few
offerings.”
This is especially true for product of the
highest quality, he says. It is also true of B
product that is in a great location. One of the
main drivers of this trend is the lack of quality
offerings in the market or, as Prutting says,
“an elasticity of demand that is transcending
quality. Every buyer we speak with has the
same angst about how few properties there
are on the market and that there is no way
the lack of supply can have a price impact.”
Currently, top quality buildings with long-
term leases are trading in the low- to mid-4%
cap rate range, Prutting says. Pricing for
good quality B buildings is ranging in the
plus-or-minus 5% to 5.5% cap rate.
THIS NEEDS TO HAPPEN
Whether you think it’s good or bad for
Washington, DC, many commercial real
estate players think the sequestration-in-duced spending cuts are a necessary evil. In a
