A Digital Gateway in the Rural Crescent

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The Prince William County Board of Supervisors will vote tomorrow on a plan to convert rural land into as much as 27 million square feet of data centers, according to The Washington Post. The “Digital Gateway” proposal asks the county to amend the planning guidelines to allow data center development on 2,133 acres along Pageland Lane in Gainesville, according to Prince William Times. The land that is within the county’s “rural crescent”—an 80,000-acre portion of the of the Occoquan watershed, according to the Post, and close to Manassas National Battlefield Park, where two major Civil War battles were fought.

The proposal would require the sale of more than 200 homes and small farms—most of which are under contract with either QTS Realty Trust or Compass Datacenters, according to the Post. Blackstone acquired QTS Realty Trust last year for approximately $10 billion.

Prince William County—which currently has 35 data centers, covering six million square feet, with another 5.4 million square feet under development—estimates that the Digital Gateway plan would generate an additional $400 million in annual tax revenue, according to the Post. Neighboring Loudoun County is expected to bring in more than $576 million in tax revenue from the data center industry in FY2023. This amounts to 29 percent of its total projected tax revenue, according to WUSA9. Prince William is the next-largest data center hub in Northern Virginia, according to the Post, and receives about $79 million per year.

Toronto and Frankfurt Top the 2022 UBS Global Real Estate Bubble Index

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According to UBS, the term “bubble” refers to a “substantial and sustained mispricing of an asset, the existence of which cannot be proved unless it bursts.” Typical signs of a bubble include “a decoupling of prices from local incomes and rents, and imbalances in the real economy, such as excessive lending and construction activity,” according to the report.

The UBS index score is a weighted average of five standardized city sub-indices: 1.) price-to-income (fundamental valuation); 2.) price-to-rent (fundamental valuation); 3.) change in mortgage-to-GDP ratio (economic distortion); 4.) change in construction-to-GDP ratio (economic distortion); and 5.) relative price-city-to-country indicator. The index uses the following risk-based classifications: depressed (score below –1.5), undervalued (–1.5 to –0.5), fair-valued (–0.5 to 0.5), overvalued (0.5 to 1.5), and bubble risk (above 1.5).

Toronto (score of 2.24) and Frankfurt (score of 2.21) top the list. UBS notes that real house price levels in Toronto have more than tripled in the last 25 years and property price growth in the city accelerated to its highest rate in five years, with house prices now 17 percent higher than a year ago. Despite some recent cooling, Frankfurt’s nominal housing prices are currently more than 60 percent above their levels five years ago and during this period, price growth has significantly outpaced income and rental growth in a major decoupling from fundamentals, according to the report.

Eataly Leases Space in SoHo for Third Manhattan Location

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Italian marketplace/food hall chain Eataly has leased 18,353sf of retail space at 200 Lafayette for its third Manhattan location, according to the New York Post. The asking rent for the space, which was previously occupied by luxury appliance showroom Pirch, was $2.6 million per year, according to Commercial Observer. Eataly’s other two New York stores are located at 200 Fifth Avenue in the Flatiron District (opened in 2010) and 4 World Trade Center in the Financial District (opened in 2016).

Last month UK-based private equity investment firm Investindustrial acquired a 52 percent stake in Eataly for 200 million Euros (roughly $198 million), becoming a majority shareholder, according to Restaurant Business.

The 130,000sf SoHo property at which Eataly will operate its third store was purchased for $20 million in 2006 by the Zaccaro family; for $50 million in 2012 by Jared Kushner and CIM Group; and for $148.75 million in 2013 General Growth Properties (GGP), according to the New York Post. Brookfield Property Partners acquired GGP in 2018.

Saudi PIF To Invest in MENA Real Estate Markets

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Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), plans to invest $24 billion in Middle Eastern and North African countries, including in the real estate sector, according to Bloomberg. Reuters reported in August that Saudi Arabia has registered a budget surplus of nearly $21 billion in Q2-2022—an almost 50 percent increase from a year earlier. Since 2015, the PIF has grown assets under management from about $150 billion to $620 billion, according to Bloomberg.

This month, Saudi Arabia hosted the sixth Future Investment Initiative (FII) conference in Riyadh. The Initiative seeks to attract investment in Saudi Arabia. Attendees included Jamie Dimon of J.P. Morgan Chase, David Solomon of Goldman Sachs, Stephen Schwarzman of The Blackstone Group, Jared Kushner and former Treasury Secretary Steven Mnuchin.

Interest Rates Impact Housing Market

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Home prices in the U.S. fell by 1.1 percent between July and August, according to Full Stack Economics (citing data from the Case-Shiller index). However, significant variations exist at the metropolitan area level. For example, in metropolitan Austin, home prices decreased by 8.2 percent from May through September whereas in the Miami metro area, prices increased by 4.7 percent during the same period, according to the report (citing research from Zillow).

The average interest rate on a typical 30-year mortgage increased from 3.2 percent in early 2022 to 7.16 percent this week—the highest level since 2001, according to CBS News.

The REIT Footprint on the U.S. Economy

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According to the National Association of Real Estate Investment Trusts (Nareit), REITs of all types collectively own more than $4.5 trillion in gross assets across the U.S. and U.S.-listed REITs have an equity market capitalization (stock market value) of more than $1.7 trillion.

Ernst & Young LLP (EY) estimates that the total economic contribution of U.S. REITs and related businesses in 2021 was 3.2 million full-time equivalent (FTE) jobs with REIT operations, including dividend and interest payments, contributing $109.9 billion in labor income to the U.S. economy. U.S.-headquartered public listed equity REIT portfolios included over 535,000 properties at year-end 2021, according to EY.

Metro’s Dulles Extension Ready but Lacks Equipment To Operate

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The Washington Metropolitan Area Transit Authority (Metro) has announced that the 11.4-mile Dulles extension is operationally ready and can open by the Thanksgiving travel period, subject to approvals from the Washington Metrorail Safety Commission (WMSC) of two submissions—a data-driven Return to Service Plan for the 7000-series railcars and a safety certification report of the Silver Line extension. However, on October 17, WMSC asserted technical objections to the Return to Service Plan, stating that the plan “is not supported by available safety information.”

The first phase of the Dulles rail line was completed in July 2014 and extended to the Wiehle–Reston East station in Fairfax County, Virginia. According to The Washington Post, the first phase cost nearly $3 billion and the price tag for the second phase, which will extend the line to Ashburn, Virginia. is just over $3 billion. In total, the 30-mile Silver Line cost about $200 million per mile, according to Forbes.

UPDATE: This afternoon (October 25), WMSC announced that it has reviewed Metro’s revised Return to Service Plan and stated that WMSC has no technical objections to the revised plan as submitted today.

Clarendon Station
Photo: Ramin Seddiq

Warehouse Ownership Shifts to REITs and Institutional Investors

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In the industrial sector, REITs and institutional investors are replacing smaller, private owners. According to Business Insider (citing data from CBRE), over each of the past 12 years, institutional investors have purchased more warehouse space than they’ve sold, while private owners and owner-operators have sold more than they’ve acquired. In 2021, net transfers of warehouse assets by private owners totaled -$27.9 billion, while net acquisitions of warehouse space by REITs and institutional investors totaled $25.9 billion, according to the report (citing research from Savills North America).

Prologis, a public REIT with a market cap of $100 billion, and Blackstone, an alternative-investment firm with a market cap of $131 billion, are the biggest investors in warehouses, according to the report. Prologis has 570 million square feet of warehouse space under management in the U.S. and over 1 billion square feet globally whereas Blackstone owns 480 million square feet of warehouse space in the U.S. and a total of over a billion square feet across the world, according to Business Insider.

Since the beginning of 2010, average US warehouse rents have climbed almost 75 percent (from $4.72/sf to $8.18/sf), according to the report (citing data from CBRE). The average price per square foot for last-mile/urban logistics transactions have increased by a compounded annualized growth rate of 17.2 percent, increasing from just over $150/sf in 2017 to “instances” of over $300/sf in 2022, according to Avison Young.

CBRE Reports Improvements in Manhattan’s Retail Leasing Market

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The average asking rent in Manhattan’s retail corridors was $607/sf in Q3-2022—a 2.2 percent increase from the prior quarter and the first increase since Q4-2016, according to CBRE. The rolling four-quarter aggregate leasing velocity—a measure of total leasing (renewals and new leases) for the four prior quarters—was 2.7 million square feet—up 2.6 percent from Q2-2022 and 53.1 percent from the same period last year, according to the report.

Flatiron/Union Square was the most active retail market in the third quarter, registering 56,000sf of leases signed across 12 transactions, most of which were in the Fifth Avenue corridor, according to CBRE. With over 68,000sf leased across five transactions, Grand Central recorded the highest leasing velocity (on a deal volume basis) among all Manhattan neighborhoods in Q3-2022; however, a significant share of this volume was driven by short-term deals, according to the report.

DC OAG Reaches $10 Million Settlement in Housing Discrimination Lawsuit

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In 2020, the DC Office of the Attorney General (“OAG”) filed a housing discrimination lawsuit against DARO Management Services, LLC, a real estate management company that operates, maintains, and leases about 1,200 apartments across 15 buildings in NW DC; DARO Realty, LLC, which owns the majority of these apartment buildings; and Infinity Real Estate, LLC, the company overseeing investment and practices of both DARO entities. DC also named several of the entities’ executives as defendants. The lawsuit alleged that the defendants violated DC civil rights and consumer protection laws by treating people who receive housing subsidies inequitably and making it difficult or impossible for them to rent apartments in the 15 buildings—located in Wards 1, 2, and 3.

On October 20, 2022, Attorney General Karl Racine announced a settlement. Under the terms of a settlement agreement, the three real estate companies and its principals will be required to pay $10,000,000 in civil penalties for illegal housing discrimination, permanently stop managing residential property in DC and forfeit a professional license (surrender DC real estate licenses and not seek reinstatement or seek to apply for a new license for 15 years).

According to OAG, approximately 11,500 low-income DC households depend on the federally-funded Housing Choice Voucher Program (“Section 8” vouchers) to rent housing in the private market. Sixty percent of DC households that use federal rental assistance are seniors, families with children, or people with disabilities. Ninety-five percent of DC voucher-holders are Black, and 79 percent of households using vouchers are headed by women. In total, more than 50,000 DC residents rely on some form of subsidy for housing stability, according to OAG.