naiop mid-year forecast panel
TRANSCRIPT
1
NAIOPMID-YEAR
FORECAST PANELJULY 18, 2019
2
PANELISTS
MODERATOR
1
JUNIUS TILLERY
Executive Managing Director
Newmark Knight Frank 1410 Spring Hill Road Suite 600 McLean, VA 22102 [email protected] T 703.918.0238 F 703.883.9036 C 703.593.7677 Years of Experience 30 Years Areas of Specialization
Portfolio Management Defense/Aerospace Industry Expert Northern VA Tenant Representation Lease Negotiations Disposition Services
Professional Background Junius Tillery joined Newmark Knight Frank in 2014 as an executive managing director in the company’s McLean, Virginia, office, where he focuses on representing tenants throughout the Washington metropolitan area. Mr. Tillery has played an integral role in thousands of transactions totaling more than 100 million square feet, with an aggregate value well into the billions of dollars.
A 30-year industry veteran, Mr. Tillery has earned a reputation as a tireless representative of occupiers of space. He has represented local one-off transactions as well as national portfolio accounts in the acquisition and disposition of space. Mr. Tillery helps his clients find creative real estate solutions that contribute to their competitive advantage.
Mr. Tillery has a vast array of tenant advisory experience, having previously worked nine years apiece with the Trammell Crow Company and DTZ, where he acted as lead negotiator on some of the largest transactions in the market and was a perennial top producer at both firms.
Mr. Tillery began his career in 1989 at CB Richard Ellis, formerly Coldwell Banker Commercial, where he gained critical experience in landlord representation and investment sales. Partial List of Lease Transactions: 1850 Towers Crescent Plaza Tysons, VA, MicroStrategy, 213,000 SF
1100 N Glebe Road, Arlington, VA, CACI HQ, 120,000 SF
1300 17th Street N, Arlington, VA Promontory Interfinancial Network, 37,000 SF
4805 Stonecroft Boulevard, Chantilly, VA, TASC, 300,000 SF
2355 Dulles Corner Boulevard, Herndon, VA, NS2 HQ, 52,000 SF
Select Client List Alpine Group MicroStrategy
American Express Nexus Systems
Arlington Asset NS2 SAP
Clifton Larson Allen Promontory Interfinancial Network
CSRA Sapient Corporation
CACI
GDIT
TMA
Tata Communications
Harris Corp Tenable Software
Professional Achievements Service Provider Leadership, CoreNet Global, 2017
Corporate Real Estate Partnership, CoreNet Global, 2016
Brokerage Excellence for Corporate Advisory Services, Trammell Crow
NKF Perennial Top Producer
Education Mr. Tillery graduated with a Bachelor of Arts degree from the University of North Carolina, Chapel Hill.
JIM BOGNETPresident & CEO
Bognet Construction
MICHAEL BURKEVice President of
Real Estate & Development Convene
JUNIUS TILLERYExecutive Managing Director
Newmark Knight Frank
MATT NICHOLSONSenior Director
HFF/JLL
SPENCER STOUFFERExecutive Vice President & Chief Leasing OfficerCarr Properties
PROFESSIONAL PROFILE
www.hfflp.com
Matthew T. Nicholson Senior Director
1775 Pennsylvania Ave, NW 5th Floor Washington, DC 20006 T: (202) 533-2502 C: (410) 353-3041 [email protected] Specialty
▪ Investment Advisory & Equity Placement
▪ Office Properties
Select Clients ▪ AEW Capital Management ▪ Beacon Capital Partners ▪ Blackstone Group ▪ Brandywine Realty Trust ▪ Carr Properties ▪ Goldman Sachs ▪ Hines ▪ Invesco ▪ JP Morgan ▪ MRP Realty ▪ Normandy ▪ PGIM ▪ Rockpoint Group ▪ The Carlyle Group ▪ JBG Smith ▪ TH Real Estate ▪ Tishman Speyer ▪ UBS Realty Advisors ▪ USAA ▪ Washington REIT
Career Summary
Mr. Nicholson is a Senior Director in the Washington, DC office of HFF and a member of its Office Investment Advisory Team. He joined the firm in 2007 and has more than 12 years of commercial real estate experience. Mr. Nicholson specializes in the sale, finance and recapitalization of office properties in the DC metro and Mid-Atlantic region and has executed more than $11 billion in investment activity throughout his career.
Representative Assignments PROPERTY LOCATION TYPE VALUE
1800 M Street Washington, DC Investment Advisory $435,500,000 Washington Harbour (2018) Washington, DC Investment Advisory $415,000,000 PNC Place Washington, DC Investment Advisory $392,000,000 Washington Harbour (2013) Washington, DC Investment Advisory $373,000,000 9911 Belward Campus Drive Rockville, MD Investment Advisory $322,500,000 7373 Wisconsin Avenue Bethesda, MD Equity Placement $300,000,000 1200 Nineteenth Street Washington, DC Investment Advisory $296,000,000 800 K & 801 Eye Streets Washington, DC Investment Advisory $275,000,000 Columbia Center (2015) Washington, DC Investment Advisory $258,000,000 Washington Harbour (2010) Washington, DC Investment Advisory $244,500,000 700 6th Street Washington, DC Investment Advisory $205,250,000 1350 Eye Street, NW Washington, DC Investment Advisory $200,000,000 1101 K Street, NW Washington, DC Investment Advisory $199,000,000 Potomac Center South (2011) Washington, DC Investment Advisory $199,000,000 2000 L Street Washington, DC Investment Advisory $192,000,000 NRC Headquarters North Bethesda, MD Investment Advisory $192,000,000 The Executive Building Washington, DC Investment Advisory $181,200,000 2550 M Street, NW (2018) Washington, DC Investment Advisory $167,000,000 1333 H Street (2015) Washington, DC Investment Advisory $162,500,000 425 I Street, NW Washington DC Investment Advisory $157,000,000 2550 M Street, NW (2014) Washington, DC Investment Advisory $156,000,000 Potomac Center North (2009) Washington, DC Investment Advisory $153,650,000 3 Bethesda Metro Center (2011) Bethesda, MD Investment Advisory $150,100,000 U.S. Mint Headquarters (2012) Washington, DC Investment Advisory $147,500,000 MeadWestvaco Headquarters Richmond, VA Investment Advisory $143,600,000
Professional Affiliations/Accreditations ▪ Steers Center for Global Real Estate at Georgetown University, Board Member ▪ DC Real Estate Group, Board Member ▪ Urban Land Institute (ULI)
Professional Designations
▪ Licensed Real Estate Salesperson – DC, MD & VA Education
▪ MBA, Georgetown University ▪ BA, Dartmouth College
James R. Bognet President & Chief Executive Officer, Bognet Construction President, JB Properties & Bognet Capital Partners
Jim founded Bognet Construction Associates in March 1998 and has grown the firm into a general contracting powerhouse in the Washington metropolitan region. With annual revenues of $158M, Bognet is ranked as the 7th Largest Interior Construction firm by the Washington Business Journal. The firm specializes in large commercial tenant interior and building repositioning projects up to 300,000 SF, and features a portfolio that spans some of Washington D.C.’s most visible organizations across every industry sector. As CEO, his responsibilities encompass the full breadth of the firm’s external and internal strategic planning and operations. In addition to Bognet Construction, Jim founded JB Properties and Bognet Capital Partners to manage a growing commercial real estate development portfolio. JB Properties and Bognet Capital Funds actively acquire, manage and re-develop commercial properties in the Washington metropolitan region.
Jim has been in the construction industry since childhood where he learned all aspects of construction from the field to the office while working in his family’s plumbing and general contracting business in Hazleton, Pennsylvania. He expanded his experience in the Washington region working for various firms in construction and development.
Jim has served on the Board of Directors for the Jubilee Housing Support Alliance, Ronald McDonald House Charities and as a member of the 2030 Group. He is currently a member of the National Association of Industrial and Office Properties Northern Virginia (NAIOP VA) and the Greater Washington Board of Trade.
Jim earned his Bachelor of Science degree in Mechanical Engineering at the Pennsylvania State University. He resides in Vienna, VA with his wife Jennifer and his children Rocco and Gianna.
3
CARR PROPERTIESSNAPSHOT
4
CARR PROPERTIESCOMPANY SNAPSHOT
• 17 operating properties• 4.0 million square feet• 95% leased• Four development projects • 82% Midatlantic/18% Boston
5
NOVA OFFICEMARKET DISCUSSION
6Source: BLS
-52
-9
36 3826
46
6474
94
118
41
9
55
7064
52
2413
-51
11
4337
2616
55 5950
36
21
-70
-50
-30
-10
10
30
50
70
90
110
130
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
YTD
Thou
sand
s
DC Metro Annualized Job Growth Historical Average: 38,000 Jobs
-4,450
-3,330
-1,650
-220
880
8,360
12,540
12,560
-10,000 0 10,000 20,000
Retail (288k)
Financial (156k)
Information (75k)
Federal Government (370k)
Manufacturing & Construction(210k)
Education & Healthcare (431k)
Leisure & Hospitality (321k)
Professional & Business Services(742k)
# of Jobs
Job Growth by Sector (YOY)
Historical Net New Nonfarm Jobs and Industry Breakout
DC METRO JOB GROWTH
354,000 Jobs Created
7
Office Leasing Fundamentals
Q2 2019YTD Deliveries: 450k SF YTD Net Absorption: 591k SFVacancy: 20.3%
4%
6%
8%
10%
12%
14%
16%
18%
20%
22%
24%
-3
-2
-1
0
1
2
3
4
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Vaca
ncy
Rat
e
Squa
re F
eet (
Milli
ons)
New Deliveries Net Absorption Average Deliveries: 1.5 msfAverage Absorption 175k SF Vacancy Rate Average Vacancy: 17%
* Source: Cushman & Wakefield
NORTHERNVIRGINIA
8
11
24 Months AgoRate $42.00 Vacancy 14.2%
TodayRate $45.00 FSVacancy 1.8%
Greensboro Station
*Buildings less than .25mi from metro and recently renovated
Takeaways
Metro located buildings gaining the most leasing activity
Vacancy tied to Metro focused buildings on “The Hill” is approx. 6.0%
Buildings not on Metro are being forced to reestablish themselves
New Development has been successful, and has created an opportunity for thenext generation of trophy quality product
24 Months AgoRate $35.00 - $36.00Vacancy 13.4%
TodayRate $39.00 FSVacancy 3.4%
Eastboro
24 Months AgoRate $32.00 - $34.00 Vacancy 18%
June 2018 (Purchase Date)Rate $35.00 - $36.00Vacancy 15.7%
TodayRate $40.00 - $43.00 Vacancy 9.5%
Greensboro Park8280 Greensboro Drive
24 Months AgoRate $36.00 - $37.00Vacancy 30.1%
TodayRate $39.00 FSVacancy 20.8%
Asking Rate Analysis – Market is TighteningASKING RATE ANALYSISMARKET IS TIGHTENING
9
NOVA DEMAND
HEAD WINDS• Efficiency • Government not growing• Flight to quality impact on commodity
TAIL WINDS• Amazon• Best region within the DMV• Silver line – phase 2
10
COWORKINGDISCUSSION
11Cushman & Wakefield | JP Morgan
Total and as a Percent of Inventory by Market
2.4
1.3
0.2
3.9
2.1%
1.0%
0.4%
1.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
DC NoVA SMD TotalMetro
% o
f Tot
al In
vent
ory
Squa
re F
eet
Mill
ions
Total CoWorking SF % of Inventory
2,378,350 61.4%
1,270,774 32.8%
221,950 5.7%
DC NoVA SMD
3.9 MSF Total1.3% of Inventory
* Source: Cushman & Wakefield
COWORKINGFOOTPRINT
12Cushman & Wakefield | JP Morgan
• Vs. Market
2,110,681
992,784
1,481,771 1,482,504
741,374
208,704
604,230
393,126
957,267
747,714
2,319,385
1,597,014
1,874,897
2,439,771
1,489,088
9.0%
37.8%
21.0%
39.2%
50.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2015 2016 2017 2018 YTD 2019
CoW
orki
ng%
of T
otal
Lea
sing
Rest of Market Absorption Coworking Total Absorption Total Absorption % Coworking
DC METRO COWORKING ABSORPTION
13Cushman & Wakefield | JP Morgan
• By CoWorking SF
954,108762,704
349,304320,005
259,349229,645
181,311166,321
108,29897,44093,412
86,61983,586
46,05643,88037,726
East EndCBD
RB CorridorTysons
Uptown DCReston/Herndon
Capitol Hill/NoMAOld Town
Bethesda/CCGreater MoCo
RiverfrontI-395/Springfield
West End/GeorgetownCrystal
SouthwestFairfax/Merrifield
0 200,000 400,000 600,000 800,000 1,000,000 1,200,000
* Source: Cushman & Wakefield
TOPSUBMARKETS
14
COWORKING
HEAD WINDS• Stats related to shorter term leases• Capital markets issues re financing or sale• What happens in a downturn
TAIL WINDS• All the net positive absorption• Can help land bigger tenants• Less spec suites for landlords
15
CONSTRUCTIONPRICING
16
BASE
11
2016 PROJECT COSTSProject Uses Per RSF % of Total
Land Cost $ 81 14.5%
Government 18 3.3%
Hard Constructions Costs 295 52.5%
Soft Construction Costs 30 5.3%
Tenant Improvements 75 13.4%
Leasing Commissions 32 5.7%
Recordation Tax/Loan Fees 4 0.8%
Interest Expense 20 3.6%
Lease-Up NOI 5 0.9%
Net Project Costs $ 561 100.00%
2019 PROJECT COSTSProject Uses Per RSF % of Total
Land Cost $ 81 12.6%
Government 22 3.3%
Hard Constructions Costs 341 52.9%
Soft Construction Costs 31 4.7%
Tenant Improvements 103 15.9%
Leasing Commissions 34 5.3%
Recordation Tax/Loan Fees 3 0.5%
Interest Expense 15 2.3%
Lease-Up NOI 15 2.4%
Net Project Costs $ 645 100.00%
$14.9%3 YEAR INCREASE
$84 SF
17
CONSTRUCTION PRICING
HEAD WINDS• Net effective rent compression• Cost to build out
TAIL WINDS• Govern new development• High replacement cost - compared to existing• Current build out has value
18
CAPITALMARKETS
19
$1.49
$1.76
$0.15
$1.08
$0.93
$0.47
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
DC NOVA SMD
Billi
ons
Q1-Q2 2018 Q1-Q2 2019
CAPITAL MARKETSOFFICE VOLUME
20
URBAN VS. SUBURBAN CAP RATE SPREADS INCREASE 26 BPS YOY, HIGHEST JUMP SINCE 2010
| 8Real Capital Analytics, Q1 2019
0
50
100
150
200
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Urban v. Suburban Cap Rates & Spread Spread Urban Suburban
0
50
100
150
200
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Primary v. Secondary Cap Rates & Spread Spread Primary Secondary
-16 -81 102 12 14 0 11 -29 16 -15 26 -7 -84 97 -14 31 9 -25 0 0 -6 6
0
50
100
150
200
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
Q2 '18 Q3 '18 Q4 '18 Q1 '19
Trailing 4Q Urban v. Suburban Cap Rates & Spreads
0
50
100
150
200
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
Q2 '18 Q3 '18 Q4 '18 Q1 '19
Trailing 4Q Primary v. Secondary Cap Rates & Spreads
26 -29 -4 27 0 -12 42 -70
21
SINCE 2015, ANNUAL SUBURBAN VOLUME AVERAGED $25B MORE THAN URBAN VOLUME
HFF Research, Real Capital Analytics, Q1 2019
YoY Transaction Volume Change2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 2018 Q1 2019
Urban 280% 57% 12% 27% 23% 10% -8% -23% 8% -10% -20%Suburban 96% 25% 33% 31% 17% 27% -1% 3% -1% -3% -12%
| 6
$28$6
$23$36 $40 $51
$62 $69 $63$49 $52
$12 $10
$35
$13
$26
$32$42
$56
$65
$82$81
$84 $83
$18 $16
$63
$19
$48
$68
$82
$106
$127
$151$144
$132 $135
$30 $25
$0
$20
$40
$60
$80
$100
$120
$140
$160
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD1Q18
YTD1Q19
Billio
ns
Annual Transaction Volumes Urban Suburban
$9
$3 $1
$7
$23
$16
$7 $7 $7
$3
-$4
$3$5
$3
$14
$18
$35
$31
$5 $6
-5
0
5
10
15
20
25
30
35
40
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Q1'18
Q1'19
Billio
ns
Suburban / Urban Volume Spread Average 2015-2018
22
PANEL Q4. CAPITAL MARKETS
HEAD WINDS• Late cycle • Limited capital for core plus• Resi and industrial are favored
TAIL WINDS• Yield • Asset Allocation • Low interest rates
23
BIG BLOCK VACANCY
24
6248
37 36
52
29
68 74
48
-55
15253545556575
Reston/H
erndon 2013
Reston/H
erndon 2015
Reston/H
erndon 2018
Tysons 2
013
Tysons 2
015
Tysons 2
018
Arlington 2013
Arlington 2015
Arlington 2018
25 - 50k SF 50 - 100k SF 100 - 200k SF 200k SF+
Source: BLS
TYSONS, TOLL ROAD AND ARLINGTON LARGE BLOCKS
25
PANEL Q5. BIG BLOCK VACANCY
HEAD WINDS• Number of blocks across all of NOVA
TAIL WINDS• Number of blocks today vs 2017• Metro based blocks vs 2017• Tysons + Toll Road
26
Q&A
27
LIGHTNINGROUND
28
BIGGEST CHALLENGE FOR COMMERCIAL REAL ESTATE
• Coworking?• AI or automation? • Continued development leading to
oversupply?• Efficiency and work from home?
29
BIGGEST UPSIDE FOR INVESTORS IN COMMERCIAL REAL ESTATE
• If you amenitize it they will come• Development• Yield
www.carrprop.com