Washington, D.C., is not only the capital of the United States, but also the darling of the capital markets, with real estate that is “close to fully priced,” said Greg Vorwaller, head of global capital markets for Cushman & Wakefield, at ULI Washington’s annual Real Estate Trends Conference. Cap rate compression has been greatest in D.C., New York, London, and Paris, he added, with one prime central business district asset in D.C.—Market Square on Pennsylvania Avenue—trading at a 4.5 cap rate (over $900 per square foot [$9,677 per sq m]).

But how long will the good times roll? The theme of this year’s Trends Conference—“A Region Strong. . . for How Long?”—incorporated the industry’s uneasiness about rapidly accelerating prices for institutional-quality real estate, particularly in Washington, and fears of a double-dip recession.

Vorwaller, a member of ULI’s Urban Development/Mixed-Use Council (Blue Flight), agreed that there are valid reasons for concern. Trends that could derail the national economic recovery include rising oil prices, the Japan effect, strangled state government budgets, sovereign debt, and rising interest rates. In addition, the value of real estate in Washington may erode against values in recovering secondary markets. The national budget deficit has potential for long-term federal cutbacks, and more law firms may follow Howrey & Simon into default, leading to significant amounts of office space being vacated.

On the whole, however, Vorwaller remains bullish on the national economic recovery and the continued strength of the Washington, D.C., market, for a number of reasons, including:

  • The U.S. real estate market has recovered, but lags behind recovery of other asset sectors; for example, the stock market is now within 15 percent of its 2007 peak, but real estate values are within about 30 percent of their peak.
  • Washington is the nation’s fourth-largest job market and has the nation’s lowest unemployment rate—just 6 percent.
  • Washington is the world’s top market for global investors.
  • Washington rents and vacancy rates have improved dramatically on a year-on-year basis relative to those of other top markets.
  • Despite looming federal government cutbacks, implementation of the new Dodd-Frank legislation will increase the federal government’s demand for office space, while also filling the coffers of the city’s law firms.

History is also on Washington’s side, Vorwaller noted. During the last down cycle (in the early 1990s), Washington real estate prices fell the least and recovered the most quickly, in comparison to those of other leading markets.

One week after the Trends Conference, Standard & Poor’s (S&P) announced that it had downgraded the U.S. credit outlook to negative. Stock prices immediately tumbled—but then quickly rallied to the Dow’s highest level since June 2008—and the dollar strengthened. Most economists are not changing their views on the immediate and near-term prospects for economic recovery. 

“Hopefully, S & P’s action will provide a ‘shake-up’ call to everyone—[I] repeat, everyone—in government,” commented Stephen R. Blank, ULI’s senior resident fellow, finance. “It appears pretty clear that we need to finally stop kicking the can down the road, bury the polarizing rhetoric, and take serious and constructive action regarding the budget, the deficits, the debt ceiling, allocation of resources, etc. Just growing our way out of the problem does not seem to be a realistic strategy.”