- The Washington Times - Wednesday, January 5, 2005

The Washington area ranked as the top urban real estate market in the world in a survey released yesterday by a real estate investment association.

Washington bested London and Tokyo for the third year in a row largely because of the stability it offers for real estate investments, according to the Association of Foreign Investors in Real Estate (AFIRE).

“Of all the major urban real estate markets, Washington, D.C., has performed the best, had the lowest vacancy rates and held up better in the most recent downturn,” said Jim Fetgatter, the group’s chief executive officer. “The federal government spending on the war on terrorism has generated an increasing demand for office space not experienced in other markets.”

Office vacancy rates in the Washington area are running about 8 percent, compared with 15 percent nationally.

Washington also compares favorably for the investment it is attracting.

The investment group said most of its 160 firms plan to reduce the U.S. percentage of their total global real estate acquisitions from 71 percent in 2004 to 55 percent in 2005.

The member firms also plan to invest more heavily in Japan, Eastern Europe and Australia, where prices are cheaper.

Values for all real estate have risen about 11 percent per year nationally for each of the past four years as the economy rebounded from recession, said real estate officials.

“Now that real estate has appreciated so much in the United States, the yields have gone down,” Mr. Fetgatter said. “It makes it tougher for [foreign investors] to do their deals.”

AFIRE’s survey is based on member responses from its 160 investment firms in 17 countries.

Foreign investors say buying in much of the U.S. market is ill-advised.

“We are currently selling,” said Daniel Borger, president of the Toronto-based Daniel T. Borger Asset Management Ltd., a foreign-investment consulting firm whose clients own properties in the United States. “The prices in today’s seller’s market are so attractive that our clients want to realize the profits.”

However, steady returns on investment make investors more reluctant to sell their assets in the Washington area.

Major foreign-owned properties include the Warner Theatre in downtown Washington, Dulles Corner Gateway in Herndon, Westfield Shoppingtown Montgomery in Bethesda and Chevy Chase Plaza.

Officials from Grosvenor USA, a British firm with $750 million invested in the Washington area, say most other cities lack the stability of a large federal government presence and a diversified economy.

The Washington area “has all the attractions of a 24/7 city,” said Mark Preston, president of Grosvenor USA, referring to the mix of commercial, residential and cultural real estate.

In addition, restrictions on the height and kind of property that can be built in various parts of Washington ensure the downtown area will always have a “sweet spot” of strong demand for real estate, said Tom McWhirter, a representative of Prudential Real Estate Investors, which owns more than $12 billion in U.S. real estate.

Fully leased downtown office complexes can return a steady 8 percent annual yield on investments, Mr. Preston said. Suburban offices, such as the Baltimore-Washington corridor, can return yields in the mid-teens.

Returns in other U.S. cities, such as Los Angeles, where Grosvenor USA is heavily invested, are similar but more volatile, he said.

“Unlike Washington, D.C., [Los Angeles] doesn’t have the government to support it,” Mr. Preston said.

Grosvenor USA owns commercial properties such as restaurants in Dupont Circle and stores on Wisconsin Avenue.

The Dutch firm Urban Investment Partners, which focuses on multifamily properties, said it makes about a 14 percent average yield on its investments in the Washington area.

“Returns in other cities on the East Coast could show a slightly higher return, but on a risk-adjusted basis are not comparable in our mind,” said Kees Bruggen, principal in Urban Investment Partners. The company’s holdings include condominiums in Prince George’s County and Anacostia.

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