DC Office Doldrums, EQR's Big SoCal Sale
MSA EDGE
DC's Office Doldrums
According to CoStar, mortgage giant Fannie Mae is walking away from its lease at 1100 15th Street NW five years early. It is a sign of the times for the Washington D.C. office market. While larger metros like San Francisco and New York have gotten more airtime for their struggling office markets, the nation's capital has suffered uniquely as a result of the Federal Government's failure mandate a widespread return to office policy. According to CoStar:
“Only a quarter of its federal headquarters space in the Washington, D.C., and Baltimore area was being used on a regular basis, according to a recent report from the Government Accountability Office. The report also found the federal government spends $5 billion a year to lease office buildings, and that half of its leases were due to expire between 2023 and 2027.”
While DC obviously has other office-based employers, the city's struggle highlights the impact work-from-home can have on central business districts that rely on a critical mass of employees.
MSA Edge
We have been developing a proprietary data set of private market CRE data linked to REIT portfolios. Using data back to 2014, we developed a sub-asset class specific scoring system that looks at relative MSA strength. Those scores then roll-up to a weighted score for each REIT based on the geographic weighting of their underlying portfolios.
DC's office market was not a high-flyer pre-COVID and other cities have had more dramatic rebounds, but our system shows that even today DC is weak compared to other large office markets.
The largest listed owners of DC office property are JBG Smith Properties (JBGS), BXP (BXP), and RMR Group (RMR). Collectively, these firms own over 25 million square feet of Washington DC office property. Since the beginning of 2020, all except RMR have underperformed the MSCI US Office REIT Index.
At Armada, we are building real estate-specific factor models using AI and ML technology to uncover the factors that truly drive REIT returns. Timely, robust private market CRE data sets continue to proliferate. We are excited about the potential to quantitatively incorporate this data into our research and strategies.
SoCal Selling
Equity Residential (EQR) Sells Long-Time Asset
Per The Real Deal, Equity Residential has sold a 310-unit Huntington Beach community for $127 million that they originally purchased in 1996 for $4.25 million. The sale to a local buyer equates to a price of $410,000 per unit. We found the sale interesting as a notably large disposition from a listed REIT. As representing broker Bryan LaBar of The Mogharebi Group told TRD,
“Transactions such as these can be the early signs of a stabilizing market, and an indication of the long-term demand for Southern California assets,”
The transaction also speaks to EQR's public market valuation. The $410,000 per unit sales price is a slight premium to the REIT's enterprise value per unit of $388,000. Equity Residential has 79,600 units largely in dense urban metros such as Los Angeles, Chicago and New York.
