June 24, 2011 / 12:39 AM / in 6 years

Washington DC office building prices rise

NEW YORK, June 23 (Reuters) - Beacon Capital Partners has sold Liberty Place, a 12-story building located six blocks from the U.S. Capitol, for $139 million or $870 a square foot, underscoring the ongoing strength of the Washington, D.C., office market.

Paramount Group Inc was the buyer of the building at 325 Seventh St. NW overlooking the National Mall, said Eastdil Secured Managing Director John Kevill, who co-brokered the sale with partner Collins Ege.

Office prices in Washington have skyrocketed as vacancies have fallen and rents have finally begun to rise as a result of the spending by the federal government and the lobbyists it attracts. The market is severely constrained because buildings in the city cannot be higher than the U.S. Capitol, which usually restricts them to 12 or 13 stories.

In the first quarter Wells Real Estate Funds Inc bought Market Square East & West for $615 million or $905 per square foot, a record for the city.

Values have been soaring as measured by the first-year yield, called a capitalization rate, or “cap rate,” which moves in the opposite direction of prices.

“It’s been amazing how much cap rate compression we’ve seen for prime assets in D.C. and Manhattan,” Dan Fasulo, managing director at Real Capital Analytics, said. “It’s clear to me that the last several trades have come in at sub 5 cap rates, which is aggressive.”

Washington attracts global investors interested in buying and holding on to their properties, Kevill said.

“What they want to do is buy exposure to the stability and long-term growth of the Washington trophy market,” Kevill said. “They’re not concerned with income in the first few years. They’re focused on long-term appreciation and long-term cash yield.”

Since the U.S. commercial real estate market faltered during the credit crisis, Washington has been leading a turnaround of the priciest U.S. cities.

At the end of the first quarter, vacancy in Washington was 9.2 percent, the lowest of the 77 markets in the country tracked by Reis, and down from its peak of 10.9 percent in the third quarter 2009, according to real estate research firm Reis Inc.

Meanwhile, asking rents bottomed in the fourth quarter last year and turned positive in the first quarter this year for the first time since the second quarter of 2009.

“We expect that to continue to trend upward through the end of the year,” Reis Senior Economist Ryan Severino said. “Past that, we do expect to see continued rent increases in Washington.” (Reporting by Ilaina Jonas)

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