Moderator: Alyson Bode, Senior Market Research Manager for AvalonBay
Speakers: John Sikaitis – Managing Director of Office Research and Local Markets Research for the Americas at JLLNathan Edwards – Director of Research for DTZ
Dr. Jed Smith – Managing Director Quantitative Research at National Association of Realtors
ULI Washington was fortunate to have three of the top minds in market economics address the pressing questions of today and provide an outlook on where we are going in the months and years to come. Each of the presenters were asked in advance a series of questions by our moderator – Alyson Bode, Senior Market Research Manager at AvalonBay who set the table for the presenters to explore where all three had “common ground” and where all three might have had different dueling perspectives.
Our panelists began by addressing “what stage of the economic cycle is the Washington DC region currently in?” All three were remarkably optimistic noting that we are in the early stages of recovery with job growth forecasted to return to the historical average of 40k-50k per year after anemic gains in 2014. Trends that will propel our region to continue to grow include diversification away from the federal government, explosive growth in technology lobbying practices in DC, and strong growth in defense spending. Dr. Smith was the most bullish on job forecasts noting that the Millennial generation are better educated and want to be in DC which will create greater job growth as companies relocate to tap this workforce. He noted that boomers will continue to play an important role even though it appears they have “ate everything, drank everything, and spent everything,” there’s still a lot of influence this generation has in consumption habits for the region’s economy.
We found more disagreement when considering vacancy rates for 2015. JLL and DTZ see multifamily vacancy rates continuing to increase while office vacancies will continue to be anemic. Mr. Edwards sees this multifamily vacancy peaking at 6-7% and office vacancy rates stay around 16%. Mr. Sikaitis was quick to point out that these figures remain misleading because of the bifurcation of the market between the haves and have nots. Office projects with amenities, retail, and metro access will continue to outperform while office submarkets which cannot deliver this mix will continue to suffer.
We ended the session exploring whether capital markets are in balance in the region. All three panelists felt that the market was out of balance for different reasons. Mr. Sikaitis suggested that the leasing demand in the technology sector had yet to be realized with 26% of all national lease transactions represented by Technology whereas only 6% of these deals were trophy quality buildings. The Washington region capital transactions are significantly overweighted in this trophy class suggesting that there is room to grow in the second tier markets and buildings that can accommodate technology companies requirements. Mr. Edwards noted that the majority of the deals in the Washington region are driven by foreign capital seeking unprecedented low yield rates compressing cap rates to historic lows. Dr. Smith is less concerned with where the capital markets are for multifamily apartments considering that the current “overbuilding” in this sector represents a micro sector of the highest price points and demand for housing across the price range remains tremendously strong to meet the forecasted job growth.
All the speakers were optimistic on where the market is going so long as you are metro accessible and have the right product. That’s common ground that we can all stand on.
Please click here for audio of this panel.