D.C. Investors Say City has Advantages, but Not Immune to Economic Crisis

With its large governmental employment sector, Washington, D.C., is likely to fare better than many other cities as the U.S. fights the worst economic downturn in a decade, but the city is not impervious to the effects of the economic slowdown. That was the conclusion of investors who convened for the annual Transwestern-Commercial Property News Investor Roundtable, held last Thursday in Washington, D.C.Indeed, D.C. shines brightest when the U.S. enters crisis mode. “The Federal Government flips on a switch,” said Marc DeLuca, director at ING Clarion. In the last economic downturn in 2002, the city fared better than many other metros due to the formation of the Department of Homeland Security, said DeLuca. But while its large federal government presence should help insulate Washington from the wobbly economy, panelists said the scant availability of capital has made completing transactions difficult. Many banks are hobbled by the large number of toxic assets poisoning their balance sheets, said Jim Hedges, senior vice president of Brookfield Properties. Hedges sees the establishment of a “bad bank” as one way to break the credit logjam. “We need an RTC II,” Hedges said. He said how well special servicers respond to loan requests from borrowers who own troubled assets will be important to watch this year. One silver lining is that, compared to the major real estate downturns of the late 1980 and early 90’s, a subdued development pipeline in recent years may help buoy lease and vacancy rates. “The supply side situation is better,” said Scott Dalrymple, vice president of Prudential Real Estate Investors. Panelists agreed that falling real estate values has caused much hesitancy in the market. Investors are hesitant to buy because they fear that values could fall even further after they close a deal, DeLuca said. “A year ago, if you won the bid for a building, you would cheer,” said Robin Burke, senior vice president of KBS Realty Advisors. But, now, if a buyer wins the bid, the question arises: Did I pay too much, she said.Asked by David Popp, senior vice president of Transwestern and co-moderator of the panel, if there was good news to talk about, Dalrymple said sharply falling oil prices should benefit the economy. And Greg Blomstrand, managing director of American Realty Advisors, said long-term, institutional investors are likely to increase their allocations to real estate, as it may outperform the equities markets.