Washington DC May 2023 Key Take Aways
FOOD AND RETAIL:
LEASING:
• Tishman Speyer has stopped leasing 5 of their fully owned spaces. The economics of leasing is not justifying deals that only yield profits in years 5-7.
• Business tenants looking for smaller spaces are active in the market. 163 tenants have signed leases around the DMV, but have not opened.
• Neighborhoods and suburban sub-markets are desirable, with Bethesda row at 2.2% vacancy with the CBD at +19% vacancy. The Mosaic District has seen high demand.
RATES:
• Most people think that the ideal mortgage rate should be in the 5.5% range. There will be an opportunity to refi.
• In this market, the rate is quasi-irrelevant as there is no inventory with tertiary markets. Trinidad and H Street remain undesirable.
• Large publicly traded builders are buying down interest rates to bridge interest rate stress and filling in with cash buyers as well. Prohibitive rent prices are pushing some to buy houses.
CREDIT AND BUYING:
• The slowdown in development nationwide is compounded by reservations about the allocation of capital. This is attributed mostly to a combination of interest rates and construction costs. People are holding on and waiting for price discovery and price fall.
• SLOOS supervisory report survey hasn’t shown excessive credit tightening, and rates haven’t had a strong bite overall. Perhaps this is because there is still demand in disrupted supply chains with the backlog of required vehicle/fleet and hardware purchases. There are, however, still synthetic fiscal pressures.
• There isn’t much mention of price softening with some softness in the orders and shipments returning back to 2019.
RISKS:
• Fraud in multi-family is creeping to 7-10/100 being flagged as sublease fraud. This results in a +3-6 month delay on evictions, collection of rent, and thousands in court fees per case. There is also synthetic fraud.
• Housing voucher maladministration and eviction freezes are creating rental loss and degrading the rating of rental products.
• A wall of debt (1-2B) on the real estate side still needs refinancing, while the corporate side has about 1TR. This is on top of the debt of the consumer. This challenge is slow-moving, but certainly approaching.
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