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Political Uncertainty Affecting Washington Market

12/05/2012 | By Matthew Bechard

George "Skip" McKenzie, president and CEO of Washington Real Estate Investment Trust (NYSE: WRE), joined REIT.com for a CEO Spotlight video interview at REITWorld 2012: NAREIT's Annual Convention for All Things REIT at the Manchester Grand Hyatt in San Diego.

McKenzie's company, commonly known as WRIT, owns and operates income-producing real estate properties in the greater Washington, D.C., region. WRIT invests in a diversified portfolio that includes office, medical office, retail and multifamily properties and land for development.

Leasing in WRIT's core markets has been a struggle in light of the uncertainty in the political climate, according to McKenzie.

"Clearly there has been negative absorption in our market," McKenzie said. "We've had somewhat of a mitigated effect by that, because we're not heavily weighted towards the government. Most of that negative absorption has been people waiting to see what the effects of the fiscal cliff are, where the government is going and how that is going to affect leasing in the D.C. area. It has had a negative impact on a macro level in our region."

McKenzie noted that just 2.5 percent of his company's tenants are direct government tenants, while 8 percent of WRIT's net operating income is related to government activity.

WRIT's diversified property portfolio has enabled the firm to mitigate some of the softness in the market, according to McKenzie.

"It has been a mitigating factor and a stabilizing force for WRIT over our 50-year history," said McKenzie, who pointed out that his company's portfolio of multifamily properties remains strong. In the retail sector, WRIT's properties have an occupancy level of roughly 93 percent and are commanding rent increases, McKenzie said. WRIT also has holdings in the medical office sector that serve as a "stabilizing force" in the company's portfolio and performance.

McKenzie also discussed the company's efforts to rebalance its portfolio. WRIT has sold off its industrial portfolio. Now, WRIT is trying to scale back its suburban office assets, which account for 20 percent of the company's NOI.

"On the macro level, when you look at our portfolio, we'll certainly always be in that 40 to 50 percent range on office because it's a very office-centric market. It's pretty hard to get away from that if you're going to be focused on D.C.," he said.

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