Washington Real Estate Investment Trust (NYSE:WRE) Q3 2018 Earnings Conference Call October 26, 2018 11:00 AM ET
Tejal Engman - Vice President of Investor Relations
Paul McDermott - Chairman, President and Chief Executive Officer
Steve Riffee - Executive Vice President and Chief Financial Officer
Tom Bakke - Executive Vice President and Chief Operating Officer
Dave Rodgers - Baird
John Guinee - Stifel
Chris Lucas - Capital One Securities
Welcome to The Washington Real Estate Investment Trust Third quarter 2018 Earnings Conference Call. As a reminder today's call is being recorded. Before turning the call over to the company's President and Chief Executive Officer, Paul McDermott, Tejal Engman, Vice President of Investor Relations will provide some introductory information Ms. Engman, please go ahead.
Thank you and good morning everyone. Please note that our conference call today will contain financial measures such as FFO, core FFO, NOI, core FAD and adjusted EBITDA that are non-GAAP measures as defined in Reg G. Please refer to our most recent financial supplement and to our earnings press release both available on the Investor page of our Web site and our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.
Please also note that some statements during the call are forward-looking statements within the Private Securities Litigation Reform Act. Forward-looking statements in the earnings press release, along with our remarks, are made as of today, and we undertake no duty to update them as actual events unfold. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. We refer to certain of these risks in our SEC filings. Please refer to Pages 9 through 25 of our Form 10-K for our complete risk factor disclosure.
Participating in today's call with me will be Paul McDermott, President and Chief Executive Officer; Steve Riffee, Executive Vice President and Chief Financial Officer; Tom Bakke, Executive Vice President and Chief Operating Officer; and Drew Hammond, Vice President, Chief Accounting Officer and Treasurer.
Now I'd like to turn the call over to Paul.
Thank you, Tejal, and good morning everyone. Thanks for joining us on our third quarter 2018 earnings conference call. Today, I would like to focus on our key leasing opportunities within the context of the current trends in D.C. real estate and increased federal spending. Steve will then highlight the main elements of our third quarter performance and provide greater color on our updated 2018 guidance assumptions.
Starting with Watergate 600, we are at LOI with a large user for two of the top three floors of space that are currently leased to Blank Rome. Signing this highly coveted 50,000 square foot deal would further validate our acquisition thesis on tenants being drawn to the Watergate's iconic status and unparalleled waterfront location. The prospect is a blue chip company that considers Watergate to be its only relocation option as it looks to expand its regional footprint.
As we are currently in lease negotiations, we look forward to providing further details after the lease is signed. Additionally in the current quarter, we signed leases with a law firm and then an association for over a third of the remaining floor leased to Blank Rome. Once we sign the top two floors, we will have leased approximately 80% of the upcoming expirations at Watergate 600.
Moving on to Arlington tower, our collaborative suites within the space plus program are on track to deliver by the end of November. While our first floor, food and lounge amenities are scheduled to deliver at the end of the first quarter next year. Commensurate with the research we conducted with Congressional Quarterly that projected an increase in contract awards in the RB Corridor, there is robust activity among small and mid-sized office users looking for finished space with immediate availability and flexible terms in Roslyn.
Tour velocity at Arlington tower remains high and we look forward to converting the activity into sign leases as the suites and amenities deliver. As discussed we are addressing the rapidly evolving office leasing paradigm with a portfolio wide flexible space program branded space plus that is designed to meet our tenants growing demand for flexibility, speed to market and competitive amenities. The space plus program currently has approximately 113,000 square feet and forty two spaces across eight buildings. The program is 84% leased with the majority of the remaining space having been recently delivered. We have another 85,000 square feet across 26 spaces in the space plus pipeline that will deliver over the next six to eight months.
Thus far, we have achieved rents that are at an 8% to 10% premium to the market and it now takes us approximately 57 days on average to get from delivery to lease commencement. This compares favorably with three and a half months of average downtime for spec suites and sixteen and a half months average downtime for traditional to be customized shelf space according to NKF data.
For example, in the third quarter the space plus suites in the atrium section at Silverline commenced within thirty seven days on average and achieved approximately 49% GAAP and 32% cash rent spreads and a 10% to 12% premium to market. Continuing on Silverline, the asset continues to create excellent value for Washington REIT with mid teens rent roll ups expected for approximately 105,000 square feet expiring over the next two to three years.
To conclude on office, the Army Navy building is fully committed this quarter with rents that are at or better than our redevelopment pro forma underwriting.
Moving on to retail, for the HHGregg vacancy at Hagerstown, the opportunity we discussed last quarter is on hold because the prospect is delaying its store expansion plans for the market. For the HHGregg vacancy at Frederick, we are negotiating an LOI with an off price discount retailer that is interested in taking the entire 23,000 square feet of space. We're in active negotiations and expect both vacancies to be re-leased early next year.
Moving on to Kmart, we have 195,000 square foot store at Frederick County Square which recently exercised its option to renew through November 2023, while we have not received any further notification from the tenant re-leasing this space would represent a long-term NOI growth opportunity as Kmart pays us about $2.40 per foot in an $8 per foot market. Moreover, the prospects we are proactively speaking with have significantly greater ability to activate and energize the center.
Finally, our portfolio has two Mattress Firm stores of approximately 5500 and 4300 square feet at our Foxchase and South Washington shopping centers in Alexandria, Virginia and neither location is on the store closing list.
We understand the list of closing stores is mainly composed of underperforming stores that geographically overlap with competing Mattress Firm stores. According to our analysis, there isn't a significant geographic overlap for either of our two locations. On a related note a trend worth mentioning in retail is that of click to bricks where online retailers are opening brick and mortar stores nationwide. So while Mattress Firm is closing stores, Casper an online mattress retailer is planning to open physical stores over the next three years.
Our retail leasing efforts over the past 12 months have purposely worked to position our centers for everyday needs as well as experiences capitalizing on areas where consumer brick and mortar spending is rising. To that end nearly a third of our new and renewal leasing over the past 12 months has been to food-related experience and service providers such as restaurant and grocery stores. These are thriving retail segments that have seen a new wave of growth due to a surge in consumer spending buoyed by tax reform.
Moving on to multi-family, while supply deliveries remain at elevated levels both our Class A and Class B multi-family portfolios continue to grow rents and occupancy at nearly 75% of our multifamily NOI is derived from assets located in northern Virginia and approximately 80% is from B class assets.
As a result, our portfolio is relatively insulated from the large wave of Class A supply that's delivering in the Capitol Hill riverfront and NoMa submarkets of the district. In the third quarter, we grew Class A average rents by approximately 1.3% and Class B average rents by 2.6% year-over-year while ending occupancy grew 90 basis points year-over-year on a square footage basis.
Looking at deliveries over the next 12 months Northern Virginia is expected to receive 38% of the region's new units well below its historical average of 50% of new units, while Washington D.C. is expected to receive 44% of the new units well above its historical share of 20% according to Delta Associates. This sustained delivery trend leaves us confident in our portfolios relative positioning heading into 2019. That said, we continue to like multi-family product across our region including in the district where the median sales price of a home in D.C. hit a record high of $730,000 year-to-date in September according to MRIS data.
Expensive home ownership in a rising interest rate environment coupled with apartment rents that are out of reach for many create a powerful tailwind for Washington REIT's value conscious multi-family product. With regards to multi-family unit renovations at quarter-end, we had 274 units left to renovate at the Wellington and 230 units left to renovate at Riverside. The Wellington unit renovation program is now 60% complete, while Riverside is 73% complete. We are generating mid teens return on costs on the renovation dollars that have been invested at these two assets to-date and expect consistent returns as we plan for these programs to continue through 2019.
We are also expanding our value-add programs across the multifamily portfolio with a renovation lite model that generates a high teens or better return on a smaller budget. These programs focus on more targeted upgrades such as a change from carpet to wood flooring or upgrading to stainless steel kitchen appliances.
For example, at Yale West, we've invested $3500 for new wooden flooring that achieved a $75 increase in monthly rents and generated a 26% return on costs. We expect this program to help sustain our multifamily same-store NOI growth momentum next year when deliveries are expected to peak.
Moving on to federal spending, we are still awaiting data the pace of contract awards and the government's fiscal fourth quarter, which runs from July through September 2018 and it's typically when the largest share of annual appropriations are awarded. As the FY'18 omnibus spending bill was only passed at the end of March almost seven months into the government's fiscal year, contract awards were expected to be back end loaded. However, we have already seen a significant increase in job growth since that metric bottomed in April. We experienced an up tick in May and June followed by a sharp acceleration from July through September when the region added approximately 211,000 jobs year-over-year compared to 127,000 in third quarter 2017. That's a 66% increase over the job growth generated in the third quarter last year.
Moreover the quality of these jobs is better than it's been in quite some time. In September, professional and business services grew 22,900 jobs and represented 34% of all new job growth. Year-to-date, professional and business service jobs have averaged 30% of all jobs created through September compared to 20% for the first nine months of 2017. This is the strongest growth professional and business services has seen since 2006.
Furthermore, professional, scientific and technical jobs which are the most important sub-sector of the PBS grew 21,800 jobs in September and have averaged 29% of all jobs created this year through September as compared to the 13% average in 2017. These numbers appear to represent the impact of increased federal procurement spending that was projected by our study with CQ earlier this year.
If contract awards accelerated from July through September as they typically do, we would expect to see sustained job growth momentum. In terms of office leasing, we expect increased leasing activity as job growth accelerates and expects certain submarkets to continue to outperform others. Within our portfolio thus far, we have seen increased small and mid-sized contractor activity in Roslyn as well as increased contractor activity at Quantico and Stafford and Monument Two in Herndon.
Finally, we are very encouraged that the majority of fiscal 2019 spending has now been passed. The President signed an $855 billion FY'2019 mini-bus funding bill for five of the twelve annual appropriations, which includes preparations for the Department of Defense as well as a short-term continuing resolution to temporarily fund remaining government programs until December 7th this year. Notably with the completion of this package, congress will have approved approximately 75% of all discretionary funding for 2019 prior to the end of fiscal year 2018 an achievement our region hasn't experienced in over a decade.
Of the seven remaining bills, a four bill spending package appears to be mostly wrapped up with CQ's budget team expecting little need for further negotiations. This leaves us with only three bills that have not come to either chamber's floor or headed to conference yet, which is significantly better than where we were at this time last year.
Federal spending remains a key demand driver for D.C. Metro real estate and having fiscal 2019 appropriations passed on time is expected to have a positive impact on the region's real estate fundamentals. We continue to believe that multi-family will be the greatest near-term beneficiary of the new jobs that result from the increase in federal spending in 2018 and 2019 as a tight labor market should help the region achieve its previous domestic in migration highs.
While we remain committed to allocating capital to our multi-family portfolio long-term, our stringent investment criteria remain unchanged. We continue to seek value add multifamily assets that are under managed, trading at discounts or replacement cost located in sub-markets with wider than average gap between Class A and B rents which leads to unit renovation potential and that have greater room to add greater density.
This brings me to conclude with an update on the investment sales environment in the D.C. Metro region where there is still no shortage of capital especially for value-add multi-family which is seeing peak pricing and continue cap rate compression. That said, the volume of A and B multi-family product coming to the market has also increased substantially in an attempt to capitalize on what is a seller's market. One of the two value add multi-family portfolios I mentioned on the last call has cleared while the other has been broken up and cleared in parts.
In office, we have seen a sharp increase in commodity A office supply and while stabilized product is expected to clear the market is not being as aggressive with underwriting our near-term lease expirations. There is increased investor appetite for stabilized D.C. B office product where leasing is strong and vacancy and concessions continue to decline.
And finally, on retail there continues to be a dearth of retail opportunities available to investors as good infill retail in the D.C. Metro region is redeveloped and repositioned more often than it is traded.
Now I would like to turn the call over to Steve to discuss our financial and operating performance in the third quarter.
Thank you, Paul and good morning everyone.
Net income attributable to controlling interest was $5.9 million or $0.07 per diluted share which was higher than the $2.8 million or $0.04 per diluted share reported in the third quarter of 2017. As the 2017 quarter included the recognition of an impairment charge related to Braddock Metro Center.
We grew core FFO by 1.1% year-over-year primarily due to 3.4% same-store NOI growth. Non same-store NOI declined by approximately 9.2% year-over-year due to the sales of 2445 M Street in Braddock Metro Center which were partially offset by the acquisition of Arlington Tower
On a sequential basis core FFO declined mainly due to the sale of 2445 M Street at the end of the second quarter. Sequential same-store NOI was slightly lower due to a couple of known office tenant move outs as well as sequentially lower reimbursements and higher abatements in the office same-store portfolio.
We delivered robust year-over-year same-store NOI growth across all three asset classes. Office delivered 4.1% GAAP and 5.6% cash year-over-year same-store NOI growth as we grew average occupancy by 80 basis points year-over-year through lease commencements at Army Navy 1901 Penn, 1140 Connecticut and 1220, 19th Street in D.C. as well as Silverline Center and Monument Two in Northern Virginia.
Multi-family delivered 3.4% GAAP and cash year-over-year same-store NOI growth driven by 230 basis points of year-over-year rental growth and 20 basis points of average occupancy gains. Although one of our multifamily assets grew average rents both year-over-year and sequentially. New lease and renewal trade-outs were also strong at 3.3% and 4.1% respectively.
Our Class B multifamily assets delivered 3.7% new lease and 3.9% renewal trade outs, while our Class A multifamily assets delivered 2.2% new lease and 4.9% renewal trade-outs during the quarter. And finally, retail delivered 2.4% GAAP and 3% cash, same-store NOI growth year-over-year due to higher rental income and reimbursements and lower provisions for bad debts compared to the third quarter of 2017.
Same-store expenses were higher across all three asset classes on a year-over-year basis due to increased weather related costs in multi-family as well as higher operating expenses across the portfolio. In the third quarter, we leased approximately 103,000 square feet including 54,000 square feet of new leases and 49,000 square feet of renewal leases. Office new leasing tenant incentives were $10.34 per foot per year of average term due to a large component of shorter duration space plus leases in the quarterly mix. We expect to share [TIs] [ph] to be reunified when the spaces are released.
For example, we have been able to reutilize approximately 90% of the first generation tenant improvements for the few second generation leases that have been signed thus far from our early prototype of the space plus program at 1600 Wilson.
On retail renewals, we achieved positive cash and GAAP rent spreads for all of our retail renewals except one where the tenant is heavily investing in improving the store with their own capital and where we achieved a 10-year term with no incentive dollars in exchange for a 9% roll down in the initial cash rents and a 13-percent roll up in GAAP rents.
Moving on to office lease expirations, with 92.7% of the overall office portfolio occupied at quarter end and only about 2% of rentable square feet expiring in the remainder of the year, our focus is on our 2019 lease leasing challenges particularly at Arlington Tower and Watergate 600. These two assets account for about a third of our office lease expirations and provide us the opportunity to create longer term value by growing rents and further enhancing NAVs.
As Paul mentioned we are making good progress on our leasing opportunities. It is important to know that if we finalize the 50,000 square foot deal at Watergate, it will require a very significant tenant sit out, which will require a termination of the master lease in order to meet the tenants 2019 occupancy target.
In retail, we have approximately 89,000 square feet or 5.5% of annualized retail rent expiring in 2019. The majority of these lease expirations are in our neighborhood and community anchored shopping centers with the median lease size at under 2500 square feet.
Now turning to guidance with one quarter of the year remaining we are tightening our core FFO guidance range by $0.04 to $1.85 to $1.87 from a previous range of $1.83 to $1.89. We have maintained the $1.86 midpoint of our guidance range. although 2445 M Street is contributing approximately $0.02 per diluted share less than our original guidance as we sold into quarter earlier. While we are tightening and maintaining the midpoint of both the core FFO range and the overall same-store NOI growth range, we have updated the following detailed guidance assumptions.
First, we project office same-store NOI growth to range from 4% to 4.5% from a previous range of 4% to 5%. Second, we project multi-family NOI growth to be approximately 3.3% from a range of 3.25% to 4%. Third, we expect retail same-store NOI growth to range from 0.5% to 1% up from a 0.25% to 1%. Fourth, we expect non same-store office NOI to range between $35.25 million to $35.5 million from $35.5 million to $365.5 million previously expected.
Finally, we expect interest expense to be approximately $51 million to $51.25 million from a previous range of $51.25 million to $52 million. We expect no further acquisitions or dispositions for the balance of 2018.
Let me now discuss the changed office multifamily and retail guidance assumptions in greater detail. Starting with office, as a result of a few later than assumed lease commencements, we are tightening and slightly lowering the midpoint of our office same-store NOI growth. For multifamily, we've lowered the guidance by approximately 30 basis points from the prior midpoint of 3.6% year-over-year growth due to an increase in repair and maintenance related operating expenses as the region has experienced near record levels of rainfall and weather-related challenges in the third quarter.
Importantly, our revenue growth assumptions remain unchanged as we continue to experience strong leasing momentum. Finally, on retail, we've raised guidance to reflect higher revenues and specialty leasing as well as lower than expected real estate taxes. To that end, we have retained approximately 95% of our expiring retail square footage and renewed close to 250,000 square feet of retail leases year-to-date.
Most of the retail renewals this quarter have been driven by tenants exercising early renewal options a trend that exemplifies the resiliency of retail in the D.C. Metro region and our proactive approach to tenant retention.
Although we are not providing 2019 guidance at this time, we would like to address our adoption of the new leasing accounting standard ASC 842, which becomes effective for us on January 1, 2019. While we are still evaluating the impact this standard may have on our consolidated financial statements, our preliminary estimate is that had we implemented the standard at the beginning of 2018, our annual earnings would have been reduced by $1 million to $1.5 million or approximately one and a quarter to $0.02 per diluted share related to the indirect leasing costs that will no longer qualify for capitalization under the new standard.
To conclude with the balance sheet, in the third quarter, we further unencumbered our balance sheet with the pay down of one more secured loan and have reduced our secured debt to 2% of gross assets. Our debt service coverage ratio is 3.7x and our net debt to adjusted EBITDA ratio is 6.3x. We expect to remain within our target range of 6 to 6.5x net debt to adjusted EBITDA at year end.
And with that, I will now turn the call back over to Paul.
Thank you, Steve.
We believe prospects for a sustained acceleration in regional job growth appear bright with federal spending on the rise and large tech companies such as Amazon, Web Services and Apple looking to significantly increase their regional presence. With unemployment in the metro region at 3.5%, we believe growth at this stage in the cycle will likely result in net in-migration into the region, which should provide continued support for multi-family office and retail.
Washington REIT remains a secular way to play the D.C. recovery with a platform that strategically positioned in segments with the strongest supply demand dynamics within D.C. real estate. To conclude on a topic that may be on your minds today, a few weeks ago there were media reports about Washington REIT considering a sale of all or a portion of its retail portfolio.
In keeping with our company policy, we do not comment on market rumors or speculation and that will be our response to any questions on this particular topic. We delivered a stable third quarter with solid same-store NOI growth across all three asset classes and continued balance sheet strength. Washington REIT is well-positioned to capitalize on key regional growth drivers and create value for our shareholders.
With that, I would like to open the call to answer your questions. Operator please go ahead.
At this time, we'll be conducting a question-answer-session. [Operator Instructions] Our first question comes from Dave Rodgers, Baird. Please proceed with your question.
Hey, good morning. Paul wanted to start with you on a comment you made early, I think in your prepared comments about spending on kind of the broader rollout of the co-working suite program that you guys have developed. Give us a sense of maybe how broad you're thinking of that program now or maybe I read too much into that. But thoughts on how much that might cost upfront and how pervasive that program could be here in the near-term?
I'll start it off and then I'll ask Tom Bakke, who is in-charge of that program to jump in.
I think we're looking as an opportunity to draft off some of our current tenants and take a look at some of the vacancies within our portfolio. I think I gave some numbers in terms of total square footage that we have in the current portfolio and what we're building out. I think our -- what we're looking at in particular right now and what we're showcasing which will deliver soon is, this space plus program at Arlington Tower. And I will ask Tom maybe just to comment a little bit further on that Dave.
Yes. I think to follow on that -- the program we've talked about this on previous calls where you look at how much exposure you want to a flexible space program and some of that's dependent on the size of the building and then some of it's just dependent on the size of the portfolio and the types of assets you have in the portfolio. So we look at the Arlington Tower asset as a great example of where it's 400,000 foot building. We think Rosalyn is a perfect market to attack the opportunity with a flexible space program.
We're starting off with one floor. We've got another floor behind that so that roughly be about 40k of flexible space in a 400,000 foot building so the 10% which we think is about the right amount. But our goal would be to probably not have the program be more than a couple hundred thousand across the entire four million foot portfolio and so that's sort of one way to look at it Dave.
Yes. I think that that's definitely helpful, so appreciate that. Maybe jump over to Watergate 600 really quickly and Steve heard your comments that if you were to sign this tenant, it sounds like in the fourth quarter that you can terminate the master lease. So that was clear. I think you mentioned another floor for law firm and association space, does that also fall under the master lease? And what's the timing on that?
So the master leases for three floors, if we sign the lease to build out the top two floors then we would break the master lease for that. We've got about one-third of the third floor already spoken for. So we won't be getting master leasing come for the space that we are building out but we are leasing for that. So that would leave the remainder of the third floor under the master lease until we get further leasing done.
Okay. That's helpful. And then Paul, sorry, I can't resist. On the retail side, you said there's a lack of options out there. Regardless of whether you may or may not sell it. What are the pros and the cons of keeping it at this point given the opportunity to kind of invest in other asset classes that seem to be having higher transaction volume?
Well, I think what I said is I'm not going to comment on the retail portfolio. I didn't talk about options out there Dave. We're always looking for opportunities on a macro level or create value for our shareholders on a long-term basis. We're going to consider all opportunities as they're presented. But aside from that I can't really comment any further on the retail portfolio.
I think the other thing Dave we've talked about is that 90% of the portfolio's community or neighborhood centers which we know are frankly some of the best real estate to own at any time in any cycle. And so we sort of like retail in that regard.
Okay great. Thank you for the color.
[Operator Instructions] Our next question comes from John Guinee, Stifel. Please proceed with your question.
Great. First congratulation on the ATM execution in the recent quarter. Very, very smart. Drill down a little bit more on Blank Rome. What's the master lease gross and net rent? And then, what do you think you'll be able to sign your next 50,000 square foot lease? And what kind of TIs will it take to get there?
John. This is Tom. So the deal is still in negotiation. I would tell you that any big deal in the market you sort of have a pretty good flavor on what those economics look like. We think we're outperforming the market at this point. That being said, the master lease is roughly 215k a month. And so depending on how this deal plays out that would go away at that time.
I know that, but it is 215k get replaced with 180k or 300k and what's it cost to put that new tenant in?
Yes. We just can't really comment on it right now. It's still in negotiation. And frankly, we got a lot of work to do to get it done. We -- presumptuous to even contemplate those numbers at this point.
Great. And then, second, I know you hear a lot of news in D.C. that the majority of new leasing relocations is happening along the Silverline from Tyson's out to Dallas. Can you sort of drill down a little bit Tom or Paul in terms of what sub-markets are benefiting and what aren't and sort of an evolution as these millennials get a little older.
I think our observation would be John that we're definitely seeing our RB corridor, Tyson's and the toll road in close proximity to Metro i.e., the Silverline benefiting the most. I think if you're beyond probably a half a mile to three quarters of a mile off of that we're not seeing any of the large deals really going into those areas. And in terms of millennial clustering that you're referring to I mean we're certainly seeing that around the rails. But specifically I would say that those three particular markets we think are probably getting the lion's share.
But I hired but also dragged back into D.C. I think the ballpark area, and the capital riverfront while there's a lot of supply. There's also a tremendous amount of absorption taking place there. And those are probably more for people that are that are working within the confines of the district.
And then, the last question is, you hear about these gut rehabs in the CBDs and the market's very aggressive you're up to 10, 12, 14 dollars per square foot for re-lease year for tenant concessions. How is that affecting your bread and butter product in the CBD.
Well, I'll comment on a couple of things. New development and some of these glass boxing that you're seeing John when I look at new development right now and I'll just pick on the CBD for example. I believe the numbers I've seen is there's 1.8 million square feet in the CBD and 70% and that's under construction, 70% of that $1.8 million is being priced at eighty dollars a square foot or greater.
And so, then I go to the glass box which still has kind of the same deficient eight point two foot ceiling height finished and 20 by 20 column spacing. And then, I drill down to probably an average B rent in Washington D.C. in the CBD being $55. We just have not really seen a tenant that is going to keep the same type of footprint decide that they want to pay anywhere from $15 to $25 for a floor to ceiling glass.
The relocations where we're seeing people compress and give back space. Those are really gravitating towards new construction and particularly in these redevelopments that you're referring to, we can name a couple buildings right now that yes they've done a pop top, they are probably over nine feet on the top two or three floors that is getting leased as well as the street retail from a just monetization building and monetization standpoint. It's really the commodity. It's really the commodity lower ceiling height space in the middle that we're seeing probably very stagnant in the leasing market.
Great. Thank you.
Thank you, John.
[Operator Instructions] Our next question comes from Chris Lucas, Capital One Securities. Please proceed with your question.
Good morning everybody. Hey Steve. Just a quick follow-up question on the lease accounting charges that you mentioned. Is that a 9-month or a full year number that range that $1 million to $1.5 million?
That's a full year impact for 2018. We really don't have a rest with the '19. If that was said, it had been implemented in '18.
Yes. I guess the question is, does leasing volume matter to that number much. I mean is it or is it a pretty static number?
I think it's going to be pretty representative. It really depends on what you use to capitalize and who used to do your leasing and your legal work and your support work. So I think it will be representative for '19, but we still have a little bit more work to do before we finalize that.
Okay, great. Thanks. And then, Paul bigger picture as you look at the market from the -- in terms of opportunities in the office, the apartment side, is there any place that you find particularly attractive or maybe set differently what's the least unattractive pricing out there in the marketplace right now between office and apartments.
Well, Chris, it's hard to pick just one, but I mean I'll step back a second. Let's talk about what we're kind of competing with right now. And this is both for multifamily and office. Definitely have seen kind of a drying hub of core capital, a bulk of the -- the bulk of the capital that we're competing against is really value-add capital and that that can be either domestics or hedge funds. We've definitely seen the Asian capital pull out. Interestingly Chris just on some of the value add deals that we're seeing downtown I think three of the four deals that I've heard that have been tied up downtown our South American Capital and so that that's kind of a new one for us.
I would say the elements of the deal where we think the pricing where there's just a disconnect. And I'll pick on say a value add multi-family or excuse me value add office deal in the CBD right now. Let's say that deal is probably 80% occupied and the sales pro forma is at 95%, where I think the disconnect we're seeing between sellers and buyers such as Washington REIT would be is on that 15% delta that 1% occupancy delta where we're hitting that pretty hard. We're not getting any credit to get it to ninety five percent stabilization because we think that that is a artificial number. Most of these value-add [BE's] [ph], usually have a store cloak somewhere between 90% and 92%. So we're not giving credit for that 30 basis points and that's quite frankly where a lot of people are losing deals.
And multifamily, Chris, I think it's really the value-add capital. I think our multifamily team has really done a good job identifying affordability gaps in the submarkets that they are in. But we are definitely seeing people either not put them enough in to achieve that affordability gap or allocate capital that they think is value-add capital that they're going to get mid-teen to returns. And we think it's capital, they're going to need to put in just to hold the rents that they have from a competitive standpoint. And the cap rate compression has been fairly dramatic especially in the multifamily space over the last 12 months. I think as we've talked about before.
Great. Thank you. Appreciate the time.
And if there are no further questions, I'd like to turn the floor back over to Paul McDermott for any closing remarks.
We'd like to thank you all for your time again today. I would like to thank everyone and we will look forward to talking with many of you soon. Have a good afternoon.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.