Top Investment Niches in D.C.’s Commercial Real Estate Market

August 6, 2014
In the D.C. area, many entrepreneurial investors are comfortable with retail leasing, so they often line up to purchase strip malls in the region.

By Ken Ulsaker, vice president of Long & Foster Real Estate’s Commercial Division

Over the last several years, the Washington, D.C., region has seen certain niches of the commercial real estate market garnering more investor interest than others. The attraction comes from expectations of high returns with the most popular investment properties being multifamily units, triple net (or NNN) retail properties and strip malls, as well as older properties that have an upside potential.

Multifamily properties: Multifamily properties of any and every size have been extremely popular in the D.C. area, where apartment buildings are often getting several offers before they even hit the multiple listing service (MLS). Cap rates, which are the ratio between a property’s net operating income and its cost, on multifamily units in popular neighborhoods tend to stay above 4 percent, but investors are considering more than just that figure. Condition assessment reports and proper rent analyses, for example, reveal potential downsides of a property, like whether an increase in vacancies could place an investor underwater. The saving grace here in D.C., though, has been a continuous strong demand from college graduates who flock to the area seeking jobs.

NNN Retail: Over the years, many investors have profited from buying NNN properties leased by fast food restaurants, drug stores and the like, and NNN properties have seen even higher demand since the recession began in 2008. Many institutional investors, as well as private parties, sought safe investment returns during this era of low interest rate yields. As a result, cap rates for this type of purchase were driven down to between 5 to 7.5 percent. Regardless, as long as the federal lending rates stay low, NNN properties will remain popular.

Strip Malls: In the D.C. area, many entrepreneurial investors are comfortable with retail leasing, so they often line up to purchase strip malls in the region. Vacancy rates are very low and retail leasing remains in high demand. Making a healthy return, however, often depends on the quality of the tenant mix, as well as their credit strength. If landlords know what they are doing, they can benefit financially from investing in strip malls around the nation’s capital. In general, though, investors tend to buy strip malls at anywhere from 6 to 8 percent cap rates.

Older Properties with Upside Potential: Older commercial properties in prime locations can often bring an investor significant returns. New zoning plans sometimes make the land on which these properties are sited worth more than the existing build-out. While the current structures often can be updated, such improvements can be challenging because of the possibility of uncovering hidden defects and complying with complex governmental regulations. Nonetheless, the returns can be substantial, and such properties reinforce the saying that the higher the risks, the higher the rewards.

No matter the region, each commercial property investor takes a different approach to his or her business. For some, the immediate return is the most important, while others focus on the long-term results. Many base their decision on the risk-versus-return factor, and others consider property location, vacancy rates and supply-and-demand issues. Regardless of the approach, investors in the D.C. market are finding that the above niches in commercial real estate can provide excellent returns.

About the author: Ken Ulsaker, CRB, is the vice president of Long & Foster Real Estate’s Commercial Division. He has been part of Long & Foster’s commercial real estate team for almost 20 years and has worked in the real estate business for more than 30 years. Ulsaker has received numerous awards during his career, including Realtor of the Year from the Dulles Area Association of Realtors. He specializes in commercial real estate leasing and sales, and he is a member of The Commercial Network (TCN Worldwide), the NAIOP, the Commercial Real Estate Development Association, and the International Council of Shopping Centers. You can reach him at 703-506-2850.