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Washington DC Office Market could be Affected by Budget Deficit

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Washington DC Office Market could be Affected by Budget Deficit

By - Thursday 02 June 2011

Washington DC has proved particularly popular with institutional investors, including real estate investment trusts, sovereign wealth funds, pension funds and insurance companies. However, recently worries are beginning to emerge that efforts to quell the a USD 1 trillion federal budget deficit could badly affect a market in which one quarter of the population is employed by the Federal government.

One proposal for cutting the deficit includes reducing the size of government by cutting the federal workforce by a total of 10% during the next four years. There are worries that this proposal could affect investments made in these markets.

Jim Costello, who is the principal and director of strategy services at CB Richard Ellis Econometric Advisors, feels that some investors may not be aware of the full risks involved. He points out that this scenario is nothing new; Bill Clinton's administration cut the number of federal civilian workers in the District of Colombia by nearly 6% in 1994 and 1995. This created a downturn in the demand for office space in the District of Colombia, even as demand grew throughout the rest of the country.

The demand for office space in Washington DC has been extremely healthy since 2001, and Costello feels that many investors might feel this demand will continue, even though it was created at a time when the federal government was spending money much more freely. This isn't to say that investors should ignore the market in Washington DC, simply that they should be aware of the risks.

According to Real Capital Analytics who are based in New York, major markets such as Washington DC showed exceptional year on year gains for investment property sales volume during the first quarter of this year. These major markets included Chicago, Los Angeles, Manhattan, San Francisco and Boston, but Washington recorded the largest increase in volume.

All in all the market in DC recorded more than USD 1.6 billion in office sales during the first quarter of 2011 and outperformed New York. In early March, Wells REIT II's purchased Market Square East and West for USD 615 million at USD 905 per square foot. This complex includes around 679,000 square foot of office and retail space. This was one of 17 properties traded in DC in the first quarter at an average price of USD 498 per square foot, compared to 19 traded in New York at an average of USD 450 per square foot.

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