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Current Staff Report
The upcoming completion of 8.1 million square feet of new commercial space downtown will create pressure for lower rents and reduced building valuations until the economy recovers in 2010 or 2011, according to panelists at a forum sponsored by the Downtown DC Business Improvement District.
Panelist Robert Pinkard, chair of development firm Cassidy & Pinkard Colliers, said commercial property valuations downtown are likely to drop by 30 to 50 percent because rents are decreasing and the price that investors will pay based on a building’s profits has sharply declined.
Lower valuations could put heavy pressure on the city’s budget, as the downtown commercial area contributes $1.2 billion to the city’s tax coffers while absorbing only $441 million in services, according to the business group.
“That has huge repercussions,” Pinkard said of the expected drop in valuations. “Tax rates will have to go up if the city will keep the same revenue.”
Before the panel discussion, the business improvement district’s chair, Matt Klein, told the 175 attendees at the Newseum that while much of the news about the District’s economy is relatively positive, stepped-up competition from the suburbs and the increased costs of doing business in the city are risks to Washington’s financial health.
On the positive side, Klein spoke proudly of Washington’s 2008 rating as the No. 1 city in the world for global real estate investment. The Association of Foreign Investors in Foreign Real Estate rated London as second, New York third and Tokyo fourth.
Klein attributed much of Washington’s success as it competes with the suburbs to its position as the area’s transportation hub. Further advantages are its first-class hotels and restaurants, as well as its cultural and entertainment venues.
A major negative, he said, is the inability of many District residents to offer employers the skills they are looking for. “This will not be a quick fix,” he said.
Klein said another negative is that downtown rents are roughly twice as high as the cost of comparable space in the suburbs. By and large, he said, there is a $6 annual differential in downtown taxes per square foot compared with the amount charged on comparable space in the suburbs.
After Klein’s remarks, panelists Deborah Ratner Salzberg, president of development company Forest City Washington, and Neil Irwin, a Washington Post business and economics reporter, told the group that the city has faced similar problems before.
“Development will [temporarily] stop,” said
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Salzberg. “We will ultimately fill up what we have.”
Irwin opined that Washington is on “a much stronger footing as a city” than it was during previous recessions due to the city government’s relatively strong financial status.
Developer Pinkard said he agrees that over the long term, Washington will be in a strong position, but added, “I think it’s going to get worse before it gets better. ... Rents are falling.”
However, he said, there is a “tremendous amount of pent-up demand from the federal government,” which needs space in which to locate workers temporarily as it makes its permanent buildings green.
Ultimately, said Pinkard, Washington will replay the booms that came after World War II and Sept. 11, 2001. From 2010 to 2012, the city will probably grow at a 12 percent rate, he said, pointing out that federal stimulus money will probably not have any major effect until then. “When it does, it’s going to be big.”
Already there are some major positives, he added, noting that the Federal Deposit Insurance Corp. “is hiring like crazy. So are the Treasury and the Federal Reserve.”
The city’s transportation network, with the subway system centered here, is a major advantage over the suburbs, Pinkard said. “We are surprised to see how many people are interested in buying in downtown Washington. They don’t want to be in Tysons [Corner].”
Talk to any college graduate,” added Salzberg, “and [they’ll tell you] this is the place to be.”
Irwin agreed with Salzberg and Pinkard that the District is not really threatened by the outer suburbs, instead calling the inner suburbs “the real immediate competition.”
Salzberg urged the city to consider countering the competition with tax breaks for certain kinds of industries.
When it comes to retail, Salzberg said her “sense is that retail is something we will get. ... They are looking at 2011 and beyond. ... We have tenants interested in two years from now.”
Irwin and Pinkard said future growth will be in the areas north of Union Station nicknamed “NoMa” near Nationals Park.
Pinkard attributed much of downtown’s growth to former Mayor Anthony Williams’ emphasis on locating cultural and residential activities there.
When asked what would happen after the stimulus money runs out in 2011, Pinkard urged the questioner to look at the Obama budget. “When government starts something, it often continues,” he said.
An economic boost will come from the greening movement, he added. “I don’t think anyone would start a building without some sort of certification. ... The debate over
green is over.” |
