Washington DC used to be an almost entirely government-centred city, not so very long ago. Most of the office buildings not actually occupied by the government were leased to those either living off it or seeking to influence it.
This picture remained accurate for some time after the second world war, but it is far from accurate today.
Over the last few decades Washington DC has been transformed into one of the more significant business centres in the USA. Its total office stock, including government buildings, puts it in second place in the ranking of major US cities.
And even if the government offices are excluded, the city still holds third place in the national rankings, with an estimated 58.7m sq ft of space.
What is more, the city is highly popular with foreign investors. According to a study carried out a few months ago by Long & Foster Realtors, 4.5m sq ft was owned by Japanese investors (who two years ago owned nothing at all in the city). Another 3m sq ft is owned by British investors, while the Canadians rank third among the foreigners with around 2.8m sq ft.
The reason for this popularity, says Larry Baucom of Jones Lang Wootton, is that the city offers a consistent stock of affordable, portfolio-sized investments in the 100,000-sq ft to 750,000-sq ft range. As a result, he regards Washington as providing one of the best institutional investment markets going.
The secret of Washington’s success in this area is the strictly enforced rule that no development may be built higher than the Capitol. This restriction means that it is virtually impossible to create huge buildings on the scale of, say, New York
Unfortunately a side-effect was that, for many years, developers were more interested in maximising their sites than in producing attractive buildings so that Washington became a city of dull, unimaginative, box-like office buildings.
However, that is no longer the case, for today developers pay close attention to ensuring that their buildings are both efficient and attractive.
Indeed, attractiveness is seen as an element of efficiency, since the best-looking buildings will draw the best tenants at the best rents.
Until recently, the prime office core in Washington was in the so-called Golden Triangle area bounded by 20th Street to the west and 15th Street to the east. The area to the east of 15th Street had once been the city’s main business district, but it had decayed over the years and parts of it had come to cater more for pornography than the business sector.
However, as sites began to dry up in the Golden Triangle, so the pendulum started to swing back towards the long neglected East End.
James L Eichberg, president of Smithy Braedon, credits Cabot, Cabot & Forbes for making the first significant step, with a development at 1201 Pennsylvania Avenue.
Another pioneer was Texan developer Gerald Hines, with his Columbia Square development, which in the event was largely preleased despite its then-unproven location on 13th Street.
Smithy Braedon, who are the Washington members of the Office Network, assisted on the site assembly for the 550,000-sq ft Columbia Square, which was completed last year and is now almost fully let.
Now, the East End is firmly established as an acceptable office location, with activity stretching further and further east to 7th Street.
Willard Freeman, a vice-president of Smithy Braedon, points out that in reality there are five submarkets in downtown Washington. Aside from the Golden Triangle and the East End, there is the Capitol Hill area to the east and the West End and Georgetown to the west.
The Capitol Hill area contains a mix of government and private buildings, with the private sector attracting such users as political lobbyists, special interest groups and agencies with a need to interact with government departments.
The West End, between 20th and 25th streets, is a relatively uninspiring area hemmed in between the Golden Triangle to the east, George Washington University to the south and Rock Creek to the west.
Across Rock Creek is Georgetown, which caters almost exclusively for small office users, for the very simple reason that it has virtually no large buildings.
Georgetown is a rare survival of earlier days, with street after street of lovely old wooden buildings ranging from former slaves’ tiny cottages to imposing town houses, most of which are still in residential use.
At one time it had degenerated into an unsavoury slum, but a combination of conservation and gentrification has now restored it to a real attraction.
The whole area is heavily protected, so that there are simply no opportunities to create large office buildings.
To the north of the Washington city centres is what is defined as Uptown, lying north of P Street. This area, which is well served by the metro system, provides pockets of office supply which tend to attract smaller users wanting single-occupancy buildings which give them identity.
Another attraction of the Uptown market is that it is also a lot cheaper than the city centre.
Looking at the overall investment market, Julian Josephs, head of Julian Josephs Co, says that the past 18 months have seen an influx of Japanese investors who have driven down investment yields by as much as a full percentage point, making projects potentially more profitable for developers.
Indeed, he notes, several British developers, such as London & Leeds and Viking, have taken advantage of the fact.
Frank X Pfau, a vice-president with Coldwell Banker in Washington, supports the view that central business district capitalisation rates (CAP rates) have been coming down.
Indeed, he argues that in many cases they have been talked down, which in turn has made suburban locations outside the central business area more attractive to some of the more discerning investors.
Agreeing that the Japanese have been a factor in driving down CBD investments yields, Frank Pfau stresses that this was largely because the Japanese were in a sense one-dimensional as investors.
All they wanted was prime, prime space in a handful of US cities, of which Washington was one.
However, after that initial disruptive outburst of activity, the Japanese are taking a cooler and more realistic view, so that the artificial pressure which they had exerted has now largely eased.
As to who is next in line to start imposing foreign interest on the market, it is anybody’s guess. Perhaps the Taiwanese, perhaps the Koreans?
Whoever does come new to the market, the general feeling is that they will find it a healthy climate in which to operate.
Jeff Spruill, senior vice-president with Sterling Incorporated, notes that within the city core some 4.2m sq ft of space reached the market last year, while under 3m sq ft is expected to become available this year.
Against that, annual net absorption has been around 3.1m sq ft to 3.2m sq ft.
Looking ahead, he says that some 3m sq ft to 3.4m sq ft is likely to come on stream next year, with about 3m sq ft more in 1990.
The prospect is that rents, which Jeff Spruill argues have been flat for the past three years, will gradually come under upward pressure. This pressure is likely to be manifested first in a shrinking of the tenant incentives on offer, followed by a real increase in the actual rents agreed.
Ronnie Cohen, at James Andrew Badger, is another who feels that things are looking up. A year or so ago, he says, there was plenty of space available, but now the bulk of that has been absorbed.
The prospect, in Ronnie Cohen’s view, is that a real shortage of genuinely prime space will emerge over the next couple of years.
Rents, he says, are already starting to move, and have now just overtaken the levels which were being achieved some four years ago. They have just passed $35 per sq ft and there have been cases of even $40 per sq ft being achieved.
But, given the level of land prices being paid for city-centre sites, rents of $40 per sq ft or more simply have to be charged now.
Land prices for prime sites are reaching ever new high levels as developers scramble to secure a stake in the diminishing supply.
There is practically nothing left in the Golden Triangle, and the supply of absolutely first-class sites in the East End is not exactly vast either.
Indeed, Larry Baucom at JLW says that East End site prices, which have reached $146 per sq ft, are now nearly on a par with the Golden Triangle.
At Coldwell Banker, Frank Pfau takes the view that things have reached the stage where it is no exaggeration to say that the Golden Triangle and the East End can now be said to constitute the Golden Parallelogram.
Smithy Braedon’s Willard Freeman notes that the highest price recorded so far in the traditional Golden Triangle district is £167 per sq ft, and he predicts that that will be topped with the next important deal in the area.
Moving eastward, he says that land prices do tend to decline the further one gets from the core areas, falling to perhaps $70 or $80 per sq ft towards 5th and 6th streets, but then rising again to more like $100 per sq ft as one moves into the Capitol Hill office area.
Larry Baucom projects 10 years ahead and warns that things could be approaching the point where the Washington DC office market will be nearly built out, with a corresponding impact on investment values.
As the build out progresses towards the east, so the older stock in the traditional prime core will have to be upgraded and revitalised in order to compete.
But that does not alter the fact that the development opportunities within the District of Columbia are not only finite but are close to the point where the property community will become increasingly aware of the fact.
And already centres in the neighbouring areas of suburban Maryland and northern Virginia have burgeoned in order to satisfy the flood of demand for space in and around the capital.
In Maryland, Montgomery County and Prince Georges County have provided a strong draw for development in centres such as Chevy Chase, Bethesda, Silver Spring, Rockville and Gaithersburg.
Equally, northern Virginia provides such major attractions as Rosslyn, a close-in suburb which many regard as virtually an extension of Washington itself, Arlington, Falls Church, Fairfax and the rapidly expanding Tysons Corner.
Growth in Fairfax County, Virginia, has reached such a pace that the local administration is applying a policy to reduce the rate of growth. A major factor in the expansion of markets in Fairfax County has been the presence of Dulles International Airport, which has been a focus of interest.
In contrast, Prince Georges County on the Maryland side of the city is still very much a pro-growth location, thanks to good access to downtown Washington coupled with affordable housing.
Looking at actual city-centre activities, Smithy Braedon were brokers in one of the biggest single deals ever in Washington DC, when they acted for the Federal Home Loan Bank Board in taking 801 17th Street, which was developed by Blum, Frank & Kamins Co.
The 303,000-sq ft letting was a demonstration that the government can move fast when it needs to. The Federal Home Loan Bank Board was given authorisation to take on some 400 to 500 extra staff in order to handle the problems of the troubled home loan industry.
The board clearly needed space fast, and it did not hang about. According to Blum, Frank & Kamins, who were leasing agents for the building and continue to manage it, the whole deal took just two weeks to complete from decision to signing.
Smithy Braedon were also involved, this time on the developer’s side, in a 114,000-sq ft Federal Government leasing at 370 L’Enfant Promenade.
This is a 378,700-sq ft scheme by a New York developer which, say Smithy Braedon, is now around 70% let with deals pending on most of the rest.
Rents on the scheme, which is situated in the Federal district south of Independence Avenue, were set at the low $20s upward.
On a more modest scale, Sheldon Kamins and Gary Frank of Blum, Frank & Kamins have put together a scheme at 3307 M Street, in Georgetown, which they then sold on to James Andrew Badger’s client Colonial Property Group.
Work starts in August on this development, which will include 31,000 sq ft of offices on three floors (big by Georgetown standards) along with a 21,000-sq ft ground-floor retail unit.
Completion of the $30m project is scheduled for the second half of 1989, and James Andrew Badger plan to occupy part of the office space themselves.
Blum Frank & Kamins carried out the major Capitol Place project on the other side of Washington, completing the final phase last year.
This project, on F Street and New Jersey Avenue, comprised the up-market Sheraton Grand hotel along with three office buildings developed in a phased programme with each one at least 50% leased before completion.
These were the 153,000-sq ft American Federation of Government Employees Building, the 268,000-sq ft Association of American Railroads Building and the 217,000-sq ft American Federation of Teachers Building.
In all, the development totalled just over 1m sq ft. One of the benefits of the scheme was that, under a government scheme to encourage hotel development in the Capitol Hill area, the developers were allowed an extra 40 on top of the usual height limit in the area.
One of the headaches was getting the hotel completed in time for President Reagan’s second inauguration — they made it by the skin of their teeth, with the last load of Italian marble actually being air-freighted in from Italy!
Blum Frank & Kamins are currently looking at further projects on Capitol Hill, which they say has the benefit of being one of the few nationally known addresses.
In an example of trading between off-shore investors, Eagle Star last year sold their Demonet Building at 1155 Connecticut Avenue to Mitsui Fudosan for $23.8m. The 142,000-sq ft scheme, completed in 1984, showed Mitsui an initial yield of around 7.75%, according to James Andrew Badger, who continue to manage the building and supervise leasing.
JAB are also leasing Eagle Star’s development at 816 Connecticut Avenue, which was completed about a year ago and is now some 50% let.
The building, which is being let floor by floor in small suites, has the rare attraction of offering views over the White House.
Partly because of the combined effects of the grid street pattern and the height restrictions, buildings with views of anything apart from the building across the street are scarce in Washington. As a result, the few that do offer a more interesting outlook tend to attract a premium.
One such is 900 17th Street, which overlooks Farragut Square. This is owned by Ariadne Real Estate Corporation (an arm of Royal Dutch Shell pension fund) and is being renovated with a number of tenants still in place.
About 50,000 sq ft is currently available in the building, which is fetching rents in the $32 to $35 per sq ft range.
Richard Ellis are the development managers and advisers, while Coldwell Banker are the leasing and managing agents.
Also overlooking Farragut Square is the Army and Navy Club Building, for which Jones Lang Wootton are sole letting agents.
This development, which has been acquired by a Dutch institutional investor for over $40m, contains the club itself along with 103,000 sq ft of offices, all built behind the retained 1911 facade.
The club, which was officially reopened by President Reagan in January, has its entrance on the square, while the offices are reached from a separate lobby on I Street. Almost all the office space is now let, with most of the balance under offer.
JLW are also agents for 1701 Pennsylvania Avenue, which was acquired by Grosvenor in 1986. Built by General George Olmstead in the 1960s for his United Services Life Co, Grosvenor bought it with vacant possession of some 80,000 sq ft out of 180,000 sq ft.
The building is going through a rolling programme of modernisation as leases fall in, a process which is likely to take another three years to complete.
This is another building with a view, overlooking the Old Executive Office Building and the White House.
Another renovation project is 1201 Connecticut Avenue, which was bought by BAPUT and Greycoat in 1985. This building, dating from the 1940s, was the first in the city with continuous ribbon windows, but by the time the present owners acquired it, it was looking distinctly seedy.
Now the exterior has been completely modernised and there is a continuing programme to refurbish the interior as existing leases fall in. JLW, who are leasing agents for the 180,000-sq ft building, say that all the space apart from one tenancy has now been refurbished and reoccupied.
Jones Lang Wootton are also agents for what was the first high-rise property in Washington, the Colorado Building at the corner of 14th and G streets. Built in 1903, this was Greycoat’s first 100% purchase in the city.
They have just completed a rebuild within the existing facades, while taking advantage of the fact that the height limits in that locality permitted the addition of two extra floors to the building. The scheme totals 130,000 sq ft with average floor plates of 11,000 sq ft.
Another Greycoat scheme is at 1331 F Street, where they started work in April on a 130,000-sq ft new development which is scheduled for completion in August 1989. The 10-store atrium building will provide average floor plates of 13,000 sq ft.
Greycoat are also planning a new development at 1321 H Street, which they acquired last year along with 1331 H Street in a single deal worth around $24m. No 1331 has subsequently been sold on, while 1321 is being retained for redevelopment with some 132,000 sq ft of new space after the existing tenants, the University of the District of Columbia, come to the end of their lease in May 1991.
Also active in Washington are the Church Commissioners, who last year acquired a 50% stake in the McPherson Building at 901 15th Street from Prudential of America, in a deal worth $37m.
This is a 301,000-sq ft development, just completed, which was 70% prelet, mainly to law firms, according to agents Chesterton, who advised the Church Commissioners. Rents have been in the mid-$30s region.
However, it should not be thought that the Washington market is made up of only offshore interests. Late last year Richard Ellis acted for one of their US pension fund clients in buying 1440 New York Avenue, also known as the Washington Building, in a deal worth close on $78m.
The 252,000-sq ft renovated building was acquired by Bell Atlantic Pension Trust from Perpetual Savings Bank, a DC-based savings and loan association.
However, the Japanese were the front runners when it came to the sale of 2001 L Street by joint owners Viking Capital Inc and Markborough.
The 153,700-sq ft building was sold to Mitsui Seimei America for $54m, which equates to around $351 per net sq ft.
Moving out to the suburbs, Knight Frank & Rutley have completed the sale of the Washington Business Park at Lanham, Maryland, to a local investor for around $6m to show an initial yield of 9.5%.
The 74,000-sq ft distribution centre, in Prince Georges County, is let on a 20-year triple net lease to the major Washington-based retailing chain of Garfunkels.
Going up the scale, work is under way on the major PortAmerica development, 5 miles from downtown Washington on the Maryland side.
Julien J Studley are sole agents on this development by James T Lewis Enterprises, which will include 1.8m sq ft of offices along with residential units, hotels, retailing and a marina.
The first phase of PortAmerica, the World Trade Centre Tower, will be ready for occupation in 1990.
Shifting over to the Virginia side, London & Leeds have bought two buildings at Rosslyn with a view to eventual refurbishment. Each is of nearly 300,000 sq ft.
Work has already started on the complete refurbishment of the first — originally known as the Plaza West Building but now to be renamed — for delivery next spring.
The second — the Commonwealth Building — is let to the government, and London & Leeds hope to be able to start refurbishment in about a year’s time.
However, probably the biggest project on line at present is the vast Tysons II project by Homart at Tysons Corner.
This is a joint scheme between Homart Development Co and Lerner Enterprises covering 117 acres and ultimately totalling some 4.6m sq ft of office and retail space.
Stage one of this huge project is the 680,000-sq ft retail Galleria, which will be opening in the autumn. The anchors here are Macy’s (260,000 sq ft), Saks Fifth Avenue (120,000 sq ft) and Nieman-Marcus (120,000 sq ft opening next year).
The retail element will include a 1,200-seat food hall, making it one of the largest in the country.
In addition there will be 10 office buildings, to be built in phases and finally totalling 3m sq ft, along with two hotels.
Wayne Angle, a vice-president with Homart, calculates that the completed project will have a value of $0.5bn to $0.75bn at today’s prices. When completion day finally comes will depend on market conditions, but a 10- to 15-year build is on the cards.
Work is already under way on the first phase of office development and an agreement has been signed on one of the hotels, which will provide the first luxury town centre hotel at Tysons Corner.
Looking at Tysons Corner as a whole, there seems to be a curious lack of understanding of what has happened in this new development area over recent years.
Bounded by the 1495 Capital Beltway, the R7 Leesburg Pike and the parallel Dulles Airport access roads and toll road, Tysons Corner has come from green field to major commercial and residential centre in only a few years.
With an existing office stock of around 15m sq ft, all built within the past 10 years or so, Tysons Corner already rivals many long-established centres across the USA, and it still seems to have a long way to go.
It is a dynamic and exciting place — there are cranes everywhere and an air of bustling confidence. Yet locally there seems to be more concern over how much extra traffic Tysons Corner might generate, rather than how much employment and economic growth the area is set to provide.
Homart — who are the development arm of Coldwell Banker under the overall umbrella of parent company Sears Roebuck — are among those who have not missed what Tysons Corner is all about.
But there are some around who do not seem to understand, or grasp, the sheer scale of what has happened and are therefore slightly bewildered by it.
However, there is little arguing with reality — centres like Tysons Corner seem set to be the shape of things to come, whatever the slow-growth and no-growth lobbies might wish.
