16C — June 24 - July 14, 2016 — Mid-Year Review — M id A tlantic

Real Estate Journal

M id -Y ear R eview

Washington, DC area: Marcus & Millichap’s Retail Research Market Report Q2 Well-heeled clientele drives retail demand; Investors get creative to boost yields

R ising employment growth bolsters builder ambitions;

between the District and Suburban Maryland. • Builders will shift their focus to Suburban Mary- land in 2016, with nearly 1 million s/f of deliveries expected. The largest proj- ect underway is mixed-use Cabin Branch, with plans for nearly 450,000 s/f of retail space leased to more than 90 upscale retailers. • In addition to the plethora of construction this year, de- velopers are also increasing the pipeline of retail spaces for next year. More than 2.6 million s/f has been proposed for de- livery in 2017, the highest amount of the current cycle. Outlook: Builders will complete 2 million s/f of re- tail space in 2016, with proj- ects evenly split between multi-tenant and net-leased offerings. In the previous 12 months, 1.59 million s/f was delivered. VACANCY • During the last four quar- ters, the average vacancy rate in the metro ticked down 30 basis points to 4.7%, exceeding the 10-ba- sis-point decline recorded in the prior year. Improve- ment in Suburban Virginia and Suburban Maryland outweighed a rise in vacancy inside the District. • The Downtown D.C. sub- market outperformed the broader D.C. area, with the average vacancy rate declining 50 basis points to 2.9%. The District posted a vacancy increase of 40 basis points to 5.0% during this time period. The George- town-Uptown submarket also struggled, with vacancy rising 50 basis points to 4.7%. • The Greater Fairfax Coun- ty submarket registered tremendous strength over the past year as vacancy fell 50 basis points to 2.1%, the lowest level in the entire metro. During this period, net absorption near- ly doubled deliveries. Outlook: A higher pace of construction in 2016 will foster a more measured rate of improvement in the mar- ket as new space is delivered and absorbed by local retail tenants. As a result, the average vacancy rate will decline 10 basis points to 4.6% as development shifts to the outer suburbs.

counts. Meanwhile, many buyers are undertaking strategies to boost the fu- ture value of their proper- ties through re-tenanting of existing spaces. However, the rarity of these deals has motivated more investors to consider repurposing old in- dustrial and office space into mixed-use and retail space in search of greater values and cash flow. Overall, cap rates will begin in the mid-5 to low- 6% range for the best lo- cations and tenants, while mid-tier and suburban as- sets can price up to 150 basis points above the av- erage. Deal flow will likely stay compressed in the year ahead, fostering higher pric- es on closed transactions. ECONOMY • Over the past year, Wash- ington, DC organizations created 68,500 new jobs, expanding total employ- ment in the metro by 2.2%. In the prior year, 45,500 workers were hired, a 1.5% growth rate. • Employment gains were driven by robust expansion in the professional and busi- ness and leisure and hospi- tality sectors, where pay- rolls swelled by 17,400 and 14,100 positions, respective- ly. Information technology and resources were the only contracting sectors, with headcounts dropping 1,000 positions each. • Another year of strong job growth contracted the unemployment rate in the metro 50 basis points to 4.1%. After peaking at 6.5% in the fourth quarter of 2009, the unemployment rate has fallen 140 basis points. During this time, more than 230,000 positions have been created. Outlook: The vigorous pace of employment growth will continue in 2016 as 65,000 new workers are hired, a 2.0% advancement. In the previous four quarters, organizations add- ed 68,500 positions, a 2.2% climb. CONSTRUCTION • Dur ing the pas t 12 months, developers com- pleted 1.52 million s/f of new retail space, a 0.7% supply injection. More than two- thirds of the new inventory was completed in Suburban Virginia, with the rest split

50-100bps over the first half of the year. With rates at all-time lows, it is often asked if rising rates will impact transaction vol- ume. At the peak of the last cycle in 2007, the 10-year treasury averaged 4.6% and the industry enjoyed $510 billion in loan activity. This past year, the 10-year trea- sury averaged 2.14% and the industry produced $504 billion in loans. Theoretically, rates don’t necessarily correlate to volume - it’s all about liquid- ity and price discovery. While government oversight has impacted the lending environ- ment, the capital markets are healthy and anxious to deploy. The equity market is poised to invest and the CMBS maturi- ties over the next 18 months will give rise to refinance or sale opportunities. Jon Mikula is a senior managing director at HFF . n buying public. At Denholtz we’re always looking for creative ways to meet the needs of today’s in- dustrial users. We’re in the process of remediating and renovating the former 74,325 s/f Acme Tube manufacturing facility at 655 Howard Ave. in Franklin Township, NJ. The property is being marketed for sale or lease with an August occupancy date. We’ve already seen a lot of interest, which supports the demand trend for upgraded, well located in- dustrial space and are always evaluating new opportunities. Steven Denholtz is CEO of Denholtz Associates. market. • The Southeast Fair- fax County submarket also thrived, with the average asking rent surging 7.6% to $30.74 psf as absorption far exceed supply additions. The Bethesda/Chevy Chase submarket underperformed, with the average asking rent falling 5.7% to $39.44 psf. Outlook: The average asking rent will climb 2.2% to $26.11 psf this year as new spaces are absorbed and vacancy remains sufficiently tight to breed competition for existing spaces. In 2015, the average asking rent rose 1.5%. n

Life Insurance Companies Insurance companies did a record $65 billion in loan originations in 2015 and are looking to have another record year in 2016. In comparison, $44 billion was done in 2007. They have their own set of regulations but none as oner- ous as the banks and CMBS. They continue to chase op- portunities up and down the risk spectrum - predominantly first mortgages but selectively construction, bridge, and mez- zanine loans. Bridge Lenders Historically reserved for transactions in transition or with higher leverage, during the first half of 2016 these lenders filled a void for higher leverage and non-recourse construction opportunities as well as CMBS fall-out. Pric- ing for traditional bridge op- portunities has increased by The market continues to evolve, both for New Jersey and nationally. E-commerce is on a roll and is expected to continue to grow at its current pace, particularly as products and technology continue to evolve and the buying public increasingly adapts to the genre. In addition to its impact on the larger retail picture, e-commerce will continue to be a driver for industrial real estate, which provides the very foundation supporting the delivery demands of the RENTS • The average asking rent for marketed spaces in- creased 3.2% to $25.69 psf during the last four quar- ters. While the District was unchanged, Suburban Vir- ginia and Suburban Mary- land assets each tacked on 3.6% to average $25.88 psf and $21.81 psf, respectively. • The I-270 Corridor posted a dramatic upswing in the average asking rent, vault- ing 10.4% to $26.18 psf. In addition, the SE Fairfax County submarket advanced 11.6% to $31.18 psf. The two submar- kets recorded the strongest rent growth in the investment side, 2015 saw 6.8 million s/f sold with san aver- age cap rate of 5.85%.

d e l i v e r - ies set to reach cy- cle peak. The Wash- ington, DC, metro has moved past t h e s l ug - glish pace o f h i r i n g in previous years to re-

Bryn Merrey First VP, District Mgr, Washington, DC office

cord meaningful expansion over the past year. Em- ployment growth recently topped 2% for the first time since 2005, indicating that recent gains in retail opera- tions are founded on stable improvement. Builders re- sponded with another year of construction in excess of 1.5 million s/f, providing new opportunities for retail- ers seeking space. However, this space was readily ab- sorbed, leading vacancy to contract for a fourth straight year. In 2016, completions will reach the highest point of the current cycle, yet are more than two-thirds pre- leased, reducing the pres- sure on existing operations as the new space is absorbed into the market. In addi- tion, deliveries will favor the Suburban Maryland submarkets, a pivot away from the Suburban Virginia and District offerings in past years. Holistically, the market will record a small tick down in vacancy, while tacking on a low-single-digit asking rent gain. Abundance of capital drives cap rate com- pression; rare value-add deals highly sought after. Investor appetite for D.C. metro retail establishments remains robust as investors of all sizes seek to place capital in the market. As the buyer pool continues to widen, a lack of listings has become apparent as current owners enjoy price apprecia- tion, limiting their desire to sell. As a result, more buy- ers have shifted their strate- gies to the suburbs in search of higher initial yields. The surrounding counties in Virginia and Maryland make up the bulk of deal flow, particularly in the sub- markets with favorable de- mographics and foot-traffic

continued from page 15C Opportunities in industrial real estate — and the impact of e-commerce. . .

continued from page 14C Debt Markets. . . By Jon Mikula, HFF

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