Foreign investment bolsters ailing Washington D.C. office sector

The office sector is seeing high levels of interest from foreign investors looking for stable assets.

After many commercial real estate management companies saw a decrease in office activity in the surrounding D.C. area originating from sequestration cuts, growing interest from foreign investors is giving the commercial market a boost.

The Washington Post reported nearly $1.9 billion in office property deals currently under contract by foreign investors, particularly Middle Eastern sovereign wealth funds, according to Jones Lang LaSalle. During 2012, the Washington D.C. market experienced $1 billion in foreign investment. In 2011, just $807 million. At a time when many European markets are suffering from austerity measures, the U.S. stimulus-backed market behaves as an attractive class of stable assets for such investors. 

"[When a building went  up for sale in years past] the investor used to be the local family or the domestic pension fund," said Bill Prutting, managing director at Jones Lang LaSalle. "Now, we have a lot more exotic investors from overseas who are coming into especially our market and other markets as well."

Today, foreign transactions accounted for nearly 75 percent of all commercial real estate activity in Washington in 2013. That is a significant increase, as foreign investment has not exceeded 30 percent during the previous three years. In 2006, it only accounted for just 1 percent of commercial real estate sales activity, according to The Washington Post.

"The average deal in Washington 10 years ago was probably $75 million," Prutting said. "Today, the average transaction is probably more like $275 million. That's an incredible shift."

Leasing activity
The Virginia Business Journal reported that the second quarter experienced flat leasing activity – one of the flattest ever on record. The statistical data indicating this trend is most likely a result of sequestration cuts, draining leasing activity in D.C. and the surrounding areas. 

"Although tenant demand across much of the region has slowed due to sequestration and rightsizing, core properties remain resilient," Scott Homa, vice president of research at Jones Lang LaSalle, told the Virginia Business Journal. "An approaching surge in lease expirations and concurrent slowdown in speculative construction will ensure balanced market conditions in 2014, and market fundamentals are expected to tighten in the years ahead as supply constraints create limited large-block space options for tenants."

The hope is that the increase in foreign investment will trickle into surrounding markets, such as the suburban office sector in neighboring Virginia. According to data from the CBRE Group, the office-vacancy rate in nearby Northern Virginia has surged to 16.2 percent. The office vacancy rate hasn't been that high since 2002, as reported by The Washington Post.

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