A slew of headwinds aimed at the nation’s capital has commercial real estate investors holding their fire, watching and waiting to see how the upheaval shakes out.
Bisnow/Emily Wishingrad
MetLife Investment Management’s Jeanine Lester, Hoffman & Associates’ Ryan Dring, Artemis Real Estate Partners’ Michael Vu, FCP’s Drew Schwartz and CoStar’s Melina Duggal
The year began with the Trump administration commencing mass cuts to the federal workforce and spending. Seven months later, National Guard troops flocked the city after the White House initiated a “crime emergency.” And at the beginning of October, the federal government shut down and has remained so for more than a month.
The tumult is leading investors to take a back seat and await more clarity, industry executives said Thursday at Bisnow’s D.C. Capital Markets and Finance Summit, held at the Hilton hotel at L’Enfant Plaza. Some developers said they are having trouble raising money for D.C. projects, while investors said they are becoming more cautious about the city.
“We would rather wait and see how the demand side of the equation plays out after maybe a couple years of Trump policy,” said Michael Vu, principal at Chevy Chase-based investment manager Artemis Real Estate Partners.
Hoffman & Associates Senior Vice President Ryan Dring, whose firm is best known for building megaproject The Wharf on D.C.’s Southwest Waterfront, has been working to secure financing for other projects, including its 425-unit residential redevelopment of the Ballston Holiday Inn. But he said investors have spent more time than usual doing due diligence, and he has had to “handle them through the headlines.”
One potential limited partner on a deal he didn’t specify told him within the last two weeks that “this term sheet’s on pause until the government shutdown ends.”
He said this represents an escalation in what has already been a difficult year for D.C.’s perception among investors.
“DOGE itself didn’t turn people off,” he said. “Even infighting with the District and the administration didn’t really turn people off. It’s been the recent cuts, and it’s really the prolonged shutdown that has made people scared.”
As it becomes more challenging to sell investment partners on D.C., Dring said most of Hoffman’s pipeline is now in other areas.
“I do think a lot of that is demand side and, for us, maybe less so the specific hiring and firing in the federal government and really how that actually plays out in the private sector,” he said. “For D.C. in particular, it’s still a bit of a question mark.”
The region is uniquely reliant on the federal government, not just for its base of hundreds of thousands of employees but also for the cash it funnels into the region’s contractors, researchers and nonprofits.
A Brookings Institution analysis published in September found that over the first six months of the year, the region’s unemployment rate increased at six times the national average.
While federal employment nationwide declined by 2.5% between January and June, in the D.C. metro, federal jobs were down by 4.5% — equating to nearly 17,000 lost jobs, the report says.
It found that venture capital flows in the area have slowed, counter to the national trend, and that D.C.-area households are showing more signs of distress.
“The feds have an incredible impact on how this town does financially,” DSC Partners partner Nicholas Smith said. “And let’s be honest, the federal government shits all over this town all the time. They call it a swamp.”
Bisnow/Emily Wishingrad
Mill Creek Residential’s Josh Posnick, EagleBank’s Ryan Riel, J.P. Morgan’s D’Juan O’Donald, Nuveen Green Capital’s Aaron Kraus, DSC Partners’ Nicholas Smith and Bisnow’s Jon Banister
Nuveen Green Capital Managing Director Aaron Kraus said that while the federal government has employees across the country and its cuts impact every market, people reading the national news see it as a bad time for D.C.
“I think vibes matter,” he said.
“When you go to your investment committee, you say you want to put ‘at risk’ on a spec property, and it’s D.C., it’s going to get a very, very different reaction than if you’re in Dallas or you’re in Canada,” he said. “That’s just the reality.”
This isn’t just the case for the city’s struggling office market, as multifamily developers are also having trouble raising money for projects. Mill Creek Residential Senior Managing Director Josh Posnick said the layoffs initiated by the Department of Government Efficiency didn’t have much of an impact on the multifamily firm’s D.C.-area portfolio.
“But the idea of that scared investors,” he said. “You have military in the street. How much did that really affect local dynamics? When you’re sitting in New York, or you’re sitting in Chicago or LA, that doesn’t look great on the news, so the headline risk can be pretty punitive.”
As investors look to take more defensive approaches to their investments in D.C., some are seeking to secure safer spots in the capital stack.
Last month, FCP announced it had taken a $47M preferred equity stake in Insight Property Group and PGIM’s 553-unit redevelopment of the Ballston Macy’s. Vice President Drew Schwartz described the preferred equity position as a way to stay active in the market while also balancing the risk.
“So on this Macy’s Ballston deal, we ended up taking a lower-risk position with a lower return,” he said. “I think there’s a lot of uncertainty on the demand side in D.C., and I think there’s also some issues on the supply side. But that, I think, is, for the most part, shorter-term.”
Vu said Artemis is taking safer positions and holding back on making investments in the region that require significant near-term growth.
“We are also trying to move lower in the capital stack, more senior in the capital stack,” he said.
He added that Artemis is capitalizing an office-to-hotel project as senior lender and is looking at other apartment projects in the region where it can be a preferred equity lender.
“So being a little more defensive and not necessarily having to believe in a lot of growth but still achieving our target returns,” he said.
As Hoffman takes a more cautious approach to the region, Dring said the firm is looking to ink deals now for jobs that call for paying up later, like advisory roles.
“We want to keep developing this area. We’ve been here 33 years,” Dring said. “We do think there’s a little bit of short-term stuff to get rid of. So if we can get at least in the hopper and positioned for a commitment down the road where we already love the city but don’t have to actually put dollars out today, that’s kind of the focus for the local area.”