Rebuilding Place in the Urban Space

"A community’s physical form, rather than its land uses, is its most intrinsic and enduring characteristic." [Katz, EPA] This blog focuses on place and placemaking and all that makes it work--historic preservation, urban design, transportation, asset-based community development, arts & cultural development, commercial district revitalization, tourism & destination development, and quality of life advocacy--along with doses of civic engagement and good governance watchdogging.

Wednesday, July 03, 2013

Yes, much of DC's commercial real estate market is comprised of national and international actors

So the Washington Post reports, in "Foreign investors snap up Washington real estate at an accelerating clip." From the article:

Rather than waning as sequestration cuts began to hit Washington in March, interest from abroad appears to be strengthening. Foreign sales account for 75 percent of all investments in Washington commercial real estate this year, after not topping 30 percent in the previous three years and registering just 1 percent in 2006. On average, foreign firms accounted for 17 percent of all sales since 2001.

Companies from countries such as Korea, China, Germany and Saudi Arabia have been scouring the Washington market for fully leased downtown office buildings, said Bill Prutting, managing director at Jones Lang LaSalle.

In years past, when a building went up for sale, “the investor used to be the local family or the domestic pension fund,” Prutting said. “Now, we have a lot more exotic investors from overseas who are coming into especially our market and other markets as well.”

I have made this point for awhile, most recently here, "Revisiting the issue of neighborhood commercial district tax methodologies."

Like any city, DC is actually comprised of a variety of "submarkets" like Downtown or Takoma or Fort Totten or H Street NE, Capitol Hill, etc.

The reason the nature of the market is important is that the participation of global actors reshapes the market for commercial property across the city, even in submarkets that don't normally have international or national actors.

And if they buy in part on the basis of other criteria (such as a safe haven for investment vis-a-vis their home country), they bid higher and the prices rise beyond the normal vicissitudes of the market.  Which is why the "lede" of the story misses the point:

Foreign investors are pouring money into downtown D.C. office buildings even as many properties in the Washington suburbs struggle with stagnant leasing and growing vacancy.

Of course, foreign investors are buying properties in DC and not the suburbs, DC's central business district is recognized within the global market, while the suburban submarkets are not (Grosvenor, a British company, is active in the suburbs and likely Tysons will become a submarket with increasing global interest).

The submarkets comprising the Central Business District are decidedly global real estate markets, with nationally and internationally active developers, financing, and property owners.

Typically, the non-CBD markets in the city have been very much local, with small properties, local/regional owners with ties to the city, local developers, local tenants, and local patrons.

But because of the participation of global actors and how the city doesn't weight "global" vs. "local" property markets in terms of property tax assessment methods, prices in the non-global submarkets are higher than they would be on the basis of what the properties are worth as going businesses.

Left: a building up for lease on the main commercial street in Downtown Staunton, Virginia has an asking price of $10/s.f.  Not one building on this stretch of Beverley Street is substandard.  An equivalent price in a DC neighborhood commercial district would be $35 or more/s.f., for buildings that may in fact require many thousands of dollars for rehab, which the owner isn't usually willing to pay for.

This is why a lot of the property has been vacant or in sub-optimal use (storefront churches, office, etc.), because it is overvalued tax-wise compared to the revenue prospects for the space.

But now there is a second stage of development and change for submarkets in the city that hadn't before attracted global/national players.

As the Central Business District is built out, in order to stay active, some developers are taking on projects in secondary submarkets in the city, especially at sites near subway stations, mostly residential multiunit housing, often with retail on the ground floor, so it qualifies as mixed use.  Typically these locations aren't attractive for office use.

Typically the financing for these new projects in these districts is national.  For example, Pritzker family interests financed the construction of the Monroe and Market development in Brookland, adjacent to the subway station there as well as to the Catholic University of America campus.

And that will end up reshaping these secondary submarkets in other ways, because the retail space in these projects ends up getting plugged into national credit markets, likely this will lead to more chain and franchise outlets, and fewer independents.

So once your central business district is part of the global real estate market, expect other changes in other submarkets.  Better yet, anticipate the changes and take steps to ward off the negatives.

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At 11:28 AM, Anonymous Anonymous said...

the city should be listening to what you say about this issue- you have the best and clearest ideas on this problem and few grasp it and understand this dilemma which is suffocating many neighborhoods in DC and pricing the business out of the city which once had a livlier and stronger climate- especially for smaller independents.

At 8:05 PM, Anonymous Anonymous said...

Excellent post. Have you done a post on "warding off the negatives?"

At 7:55 AM, Blogger Richard Layman said...

well, not as one integrated post. There would be at least four things:

1. differential property tax methods;

2. Systematic commercial district planning and assistance programs, especially for the development and maintenance of independently owned businesses;

[It doesn't have to be "Main Street." But there has to be support for the creation and maintenance of marketing and development organizations for commercial districts. Other cities do this a lot better than does DC.]

3. More fine grained "zoning" requirements on the use of space (e.g., like how Laguna Beach has a "neighborhood serving business" category, formula retail guidelines, big box retail ordinances)

4. Requirements in the building agreements for new projects that are based on neighborhood and commercial district plans rather than "stuff" (e.g. the things that the Monroe and Market project in Brookland are doing wrt the arts are really cool, but would have been a lot better if had been coordinated through an overall arts and culture element of a neighborhood and city plan rather than stuff that the developer came up with working with an independent nonprofit--they are doing good stuff, but many other things that could have been done, possibly for greater "return" aren't being done).

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