3 Reasons Why D.C. Commercial Real Estate Property Prices Are on the Rise

Last month, the Wall Street Journal published an article about the commercial real estate market in Washington, D.C., “Commercial-Property Prices in D.C. Go Their Own Way: Up,” that provides some insights into what would look like a counterintuitive trend to anyone outside the commercial real estate industry.

In brief, the article states that, despite D.C.’s high vacancy rates and plateaued rents, investment in Class A and trophy properties is hot, with prices on the upswing. A chart that accompanies the article tells the story succinctly: Prices paid by square foot for Class A commercial properties in D.C. have risen year over year since 2009. In fact, prices have now exceeded what they were before the real estate shake-up of 2008. Other major metropolitan business hubs have not fared as consistently well as D.C., with Boston, San Francisco and New York all experiencing erratic growth and loss over the past few years. 

As an attorney who is deeply involved with the D.C. commercial real estate market, I can attest that what the Wall Street Journal article identifies as a trend is true. Anecdotally, I have helped facilitate six recent building purchases and sales, and all have been record prices for the types of properties they are. Mind you, these weren’t all Class A and trophy properties, but there is a definite demand for quality product in the D.C. commercial real estate space. 

So why is D.C. such a hot market right now? The article outlines a few reasons for the trend, which I think are true. Here are my own thoughts below: 

• Competitive pricing: For the level of quality the market has to offer, D.C. commercial real estate prices per square foot are still generally lower than a similar product in other gateway cities. As the chart in the Wall Street Journal article shows, the D.C. average is $611.39 per square foot for Class A property while Boston is at $641.79, San Francisco is at $652.29 and New York is at $701.42.
• Supply and demand: There are a lot of institutional investment dollars out there right now that fund managers are looking to invest. Fund managers have identified that high-quality properties are a smart investment, but D.C. only has a limited number of such properties at the moment. When you have a lot of capital but limited supply, you see prices go up.
• Debt is cheap: Not only do you have capital that needs to be deployed, but financing also is currently relatively inexpensive, creating a perfect real estate storm. With interest rates as low as they are, it’s affordable and more profitable for investors to take on debt at today’s low rates to finance these commercial real estate purchases.

I believe these three factors are the driving force behind the D.C. real estate upswing, but other factors also are influencing the market. For one, the city’s tech community has grown rapidly over the past few years, creating a market for such high-end real estate. In any case, until the factors that have contributed to this rise in real estate prices subside – e.g., investment funds are no longer flush with cash, supply catches up to demand, interest rates increase, etc. – this is a trend that likely won’t be going away anytime soon.