Election Implications

By Eric Berkman and Andrew Asbill
Capital Markets, Washington, D.C.

The champagne at election-night celebrations had barely lost its fizz when Senator-elect Tim Kaine of Virginia gave a sobering warning about the fierce financial hangover that is looming. Talking to Matt Lauer on NBC’s Today Show, Kaine reminded us that the fiscal cliff will still be there, waiting for a solution, when the lame-duck Congress comes back to town. Virtually everyone in town agrees that the superstorm mix of draconian spending cuts and tax increases would send the fragile economy back into a tailspin. No one wants that to happen. The question is whether Congress, still polarized after the election, can reach a compromise and keep us from going over the precipice.

Small wonder that all of this uncertainty in Washington has kept a significant amount of capital sitting on the sidelines. It’s hard to join a game, after all, when you aren’t sure what the rules are. But a clear-headed look at the situation reveals a lot of opportunity.

First, President Obama has just been reelected to office and will want to leave a positive legacy. He will never have to run for office again. That doesn’t mean he can do whatever he wants, but it does free him up a bit to take some risks, make a peace offering to the Republicans in Congress, and break the stalemate to find a solution to the fiscal problems at hand. And virtually everyone, on both sides of the aisle, seems to agree that the cost of plunging over the fiscal cliff is just too high. One way or another, Congress has to pull us back from the brink.

Likewise, Washington has a long record of being one of the most resilient commercial real estate markets in the country, especially so under a second-term president. Its historical performance tells us it will come back strong. While the short-term barriers to entry may seem daunting, even a slightly longer-range view tells us that it’s time to jump back into the Washington market, before the rest of the herd arrives. While short-term opportunities may be few and far between, money that can wait five, seven, eight, or ten years to show a good return would be hard pressed to find a better home than the nation’s Capital. And development deals in the right submarkets that will deliver three to four years out are being viewed as great investments.

Current deals being worked by Cushman & Wakefield underscore the logic to this approach: The deals are structured specifically to exploit the opportunities presented by that three- to five-year horizon. A land deal in Herndon is currently under contract that will be rezoned to residential, within walking distance of a future Metro station. A large redevelopment deal in Pentagon City has received strong interest and will be purchased without entitlements in place. Additionally, the only CBD development site in all of Washington – 2020 M Street – zoned for 183,000 square feet of office, residential, hotel or retail, is also a primary target for a number of developers.

So a lot of uncertainty is still out there. But chances are good that with the election behind us, government will work better than it has for the past four years. Washington will begin to move forward, quicker than many expect. And the smart money will stay ahead of the pack and be sitting pretty when Obama turns the White House over to his successor in 2017.

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