Commercial Broker Quarterly: Spring 2002 - GWCAR, Greater Washington Commercial Association of REALTORS(R)

CBQ >> Spring 2003 Issue

Remarks from the President

When it comes to working in the commercial real estate industry in the Washington metropolitan area over the past few years, it is important to remain optimistic. I've always subscribed to the adage that "the glass is half full," yet there are those who contend that the worst is yet to come.

I have worked in the commercial real estate industry for the past 17 years, have experienced both good and bad markets and have learned how to contend with each. No, this is not a message intended to provide sage advice on how to handle a down market. I leave that to professionals like Mary Petersen. What I do want to point out is the dichotomy of "then vs. now" and share with you some realities from the late '80s and early '90s to help us appreciate how good the '00s really are.

Let's briefly look at the last down market. In the late '80s, the Washington regional market quickly took a turn for the worse as the recession started to build a head of steam. There was a steady stream of speculative product financed by high loan-to-value non-recourse debt from local banks. Concession packages offered extraordinary amounts of free rent and cash for tenant improvements, resulting in effective rental discounts of 25% to 40% below asking rents.

The result was a severely overbuilt and over-leveraged market. As we slid into the early '90s, the recession was in full bloom like "the perfect storm" resulting in a precipitous drop in tenant demand, vacant buildings, foreclosures, the RTC debacle and vacancy rates ranging from 13% in the District to 20% and higher in Northern Virginia. It gives me a headache just thinking about it. OK, let's fast-forward 15 years to compare these two periods of time.

Today, we are in the midst of what the economists affectionately refer to as the "diet recession" or "recession lite," which started with the tech bust only three years ago and is anticipated to last another year or two. With the stock market returning record low yields, investors (both foreign and domestic) have focused on Washington real estate in droves hoping to shore up their portfolios. Can you blame them? The Washington metropolitan area has become the hottest investment sales market in the country. If I had a cool $5 million in my back pocket, I too would be investing in DC real estate. The steady stream of development we experienced in the '80s has become a trickle of new buildings being driven primarily by law firms in the District, and the ownership profile has changed as local developers have taken a back seat to the institutional players, whose return criteria is more flexible.

So, if I understand my logic correctly, which I sometimes can't, things really aren't so bad. It looks as if this recession will last half as long as the last one. Cap rates are low creating a feeding frenzy for buildings. We are not experiencing the overbuilding of the go-go '80s. And owners, buyers and lenders are wiser and more sophisticated. Yes, things are very different from our last "down" market cycle.

Overall, it seems the DC region made out OK in this "recession lite" period. Perhaps our glass isn't half full after all, rather, it runneth over. Years from now let us remember the '00s and be mindful of how bad it could have been, thankful for the outcome and successful for having navigated through it.

W. David Bevirt
2003 President