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1 REGIONAL FORECAST January 29, 2015. 2 OVERALL ECONOMIC FORECAST 2 Scott Homa Director, Research.

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Presentation on theme: "1 REGIONAL FORECAST January 29, 2015. 2 OVERALL ECONOMIC FORECAST 2 Scott Homa Director, Research."— Presentation transcript:

1 1 REGIONAL FORECAST January 29, 2015

2 2 OVERALL ECONOMIC FORECAST 2 Scott Homa Director, Research

3 Washington, DC economic forecast January 29, 2015

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14 14 COMMERCIAL FORECAST John Germano, Executive Managing Director

15 15 WASHINGTON, D.C. METRO STATE OF THE MARKET JANUARY 2015

16 2014 IN REVIEW

17 vacancy remains elevated; the gap between downtown and suburban markets widens Downtown 11% Downtown 11% Suburban 18% Suburban 18% VACANCY

18 CONSTRUCTION development pipeline tightens; deliveries at one third of pre-recession levels 9.3 MSF 3.1 MSF

19 NET ABSORPTION consolidation and densification efforts continue to dampen net market demand 8 MSF of occupancy loss between 2011 and 2014

20 RENTAL RATES rental rates remain stagnant; concession packages at all-time highs Gross Asking Rent (PSF)

21 FOREIGN CAPITAL INVESTMENT cross-border investment activity in CRE trends up; cap rates remain compressed

22 2011 - $20B 2013 - $2B *aggregate lease value FEDERAL GOVERNMENT LEASING D.C.’s largest tenant continues to reduce both its workforce and footprint

23 WORKPLACE, FOR NOW AND FUTURE today’s workspace is built with a greater emphasis on collaboration and efficiency 2/3 of the office inventory in D.C. metro are 20 years or older

24 WORKPLACE, FOR NOW AND FUTURE workspace design is used strategically for talent acquisition and corporate branding productivity sustainability mobility wellness efficiency

25 WHAT’S NEXT? is D.C. making a comeback in 2015? WHAT’S NEXT? is D.C. making a comeback in 2015?

26 FEDERAL LEASE EXPIRATIONS the federal government is likely to shed two to three msf over the next three years more than one third of all federal leases in the NCR is expiring in the next three years

27 WHAT WILL DEMAND LOOK LIKE? Moody’s is projecting a spike in office-using employment growth – will it hold true? tenants continue to downsize and consolidate

28 MOVEMENTS TO KEEP AN EYE ON Densification and consolidation efforts will persist as tenants continue to seek efficiency. On the other hand, more firms may be poised for expansion and reinvest in growing their business. However, growth in the private sector will likely be offset by the shrinking federal footprint. Activity will concentrate in high-density urban cores that are walkable, transit-accessible, and amenity-rich. Trophy/Class A products will see higher demand. Commodity space is likely to continue to compete on pricing and concession offering. Spec development will remain limited until market fundamentals strengthen. Landlords will invest more in building upgrades and repositioning.

29 29 RESIDENTIAL FORECAST Tracie Leonard Vice President of Operations

30 Multifamily: Washington D.C. MSA About 2014: There were 14,493 apartment units in planning, under construction or lease-up! The absorption rate per property per month averaged 18 units. Asking rents averaged $2,309 (2.73 psf) Effective rents averaged $2,204 ($2.61 psf) Concessions ranged from $88 per unit per month, peaking at $140 per unit in December. Average for year $105 30 WHAT THEY SAY…. Axiometrics Inc. Washington Lease-Up Performance Trend 1.26.15

31 Multifamily: Washington D.C. MSA 31 WHAT THEY SAY….

32 Is going to happen in 2015: 14,186 units with a start date in 2015. The majority are in the planning stages. (Axiometrics Pipeline Property List 1.26.2015) Washington, DC ranks fourth in New Construction Markets by Volume according to Pierce Eislen’s 2015 Multifamily Rent Forecast International Investors are targeting gateway cities such as those in the Boston-Washington corridor. (ULI Emerging Trends in Real Estate) 32 Multifamily: Washington D.C. MSA WHAT THEY SAY….

33 Is going to happen in 2015: Washington, DC is in the Top 20 Markets for job growth (ULI Emerging Trends in Real Estate) Employment growth has primarily been in the service industries creating a gap between low and high income earners. (Multifamily Housing News quote Jake Kern, Pierce Eislen12.24.2014) Washington, D.C. and Northern Virginia are not expected to experience rent growth (Jack Kern, Pierce Eislen, Multifamily Housing News 12.24.2014) 33 Multifamily: Washington D.C. MSA WHAT THEY SAY….

34 Is going to happen in 2015 (based on our experience): DC, Alexandria, Vienna, Fairfax, Laurel: under construction with stiff competition in each submarket New product crisscrosses submarkets: Example: Alexandria prospect considers Old Town and Landmark Touring and informing international investors of multifamily investment opportunities around the country including Washington, DC. Note: Very interested in political relationships and real estate development. 34 Multifamily: Washington D.C. MSA WHAT WE SAY….

35 Is going to happen in 2015 (based on our experience): Demographics: Income in DC 47% earn $36K to 76K; 22% earn $77K to $106K; 28% earn over $107K Demographics: Age in DC 83% under 35; 12% are 36 to 45; 5% are over 46 Asking rents range from $2.65 to $2.94 psf Effective rents range from $2.49 to $2.76 psf Concessions offered primarily up front with some fees waived. 35 Multifamily: Washington D.C. MSA WHAT WE SAY….

36 Is going to happen in 2015 (based on our experience): Prospects relocating to Metro DC for employment, in including contracted positions. However, many prospects need roommates to afford new apartment. 2015 Budgets anticipate flat rent growth. 36 Multifamily: Washington D.C. MSA WHAT WE SAY….

37 Manage by the basics and beyond! Know your market Know your prospects: Millennials and Boomers Know your residents’ employers and where they work (at home or office) Know how your residents’ commute style (walk, metro, bike, car share, personal car) Exploit technology 37 Multifamily: Washington D.C. MSA They were right…now what?

38 38 TAX FORECAST Ross Litkenhous Senior Director

39 The Welfare State(s) 39 Local Rankings VA #48 MD #33 DC N/A

40 The Welfare State(s) 40 States are still trying to manage their budget deficits: Maryland’s new governor issued his first proposed budget last week with attempts to close a projected $1 billion deficit for his first two years of office. Virginia is projecting a $2 billion deficit this year. How will these deficits be closed, what cost cuts and/or tax increases will we be dealing with when the legislatures are finished with the year?

41 The Good, The Bad and The Government 41 FY 2015 IRS budget cuts: The cut will be about $346M, resulting in a hiring freeze. The hiring freeze will result in the loss of 1,800 enforcement personnel through attrition. The lost personnel will cost the government $2B in revenue that would have otherwise been collected. There will be 46,000 fewer audits. In addition to fewer audits, which taxpayers may applaud, there will also be fewer IRS people available to provide answers to taxpayers’ questions. Source: Taxbooks

42 GSA Footprint Freeze 42 Courtesy Kurt Stout, Colliers Govt Solutions

43 GSA Footprint Freeze 43 GSA leasing less space Rising % of GSA owned vs leased assets Potential for fewer taxable properties Great for the US tax payer, bad for local governments, and property tax revenue. Less leased space = more office vacancy = lower valued properties = less tax revenue

44 Local Impact 44 New, more aggressive, and less tax payer friendly assessment methodologies (e.g. DC Office of Tax and Revenue) Complicated Tax Assessment Appeal Procedures-(e.g. Loudoun County-Cost, Sales Comparison, Income approaches). Shorter timeframe to appeal. More focus on administrative levels of appeal. Avoid litigation! Rise in Non Ad-Valorem Taxes (e.g. Rain Tax)

45 DISCUSSION QUESTIONS


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