Can Arlington’s Crystal City become a hip place to live?

(Courtesy of Vornado/ ) - A rendering of the planned building at1900 Crystal Drive.

(Courtesy of Vornado/ ) - A rendering of the planned building at1900 Crystal Drive.

Mitchell N. Schear is driving a golf cart in the late morning down Crystal Drive in Crystal City, showing off the brick sidewalks, the young trees and the new restaurants. There is Good Stuff Eatery, whose owner was a “Top Chef” star, a Chick-fil-A and Buffalo Wild Wings. And there are people waiting in line and sitting at the sidewalk tables.

Young people! Enjoying Crystal City!

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Sporting a blue blazer, checkered shirt and khakis, the president of Vornado/Charles E. Smith zips down to 220 20th St., a 19-story Vornado apartment building. In the elevator is a young man with a puppy and a young woman with a toddler. On the roof there is a young woman in a bikini by the pool enjoying views of the Washington Monument and the Jefferson Memorial.

Few would consider Crystal City and its dense collection of interconnected high-rises just north of Reagan National Airport a go-to destination for the 20-something crowd.

“In the old days, we had a lot of people say, ‘I’m in Crystal City for a meeting, or for business, but now I’m going to leave,’ ” said Schear, looking out from the rooftop. “You have all of the infrastructure in terms of transportation and Metro, and the airport. But you have people like John McCain who rented an apartment here, and then at the end of the week, would get on a plane.”

Schear, 53, is trying to change that perception block by block, and the restaurants and apartments are early steps. His company owns half of all the commercial property in Crystal City, a total of 26 buildings, so he’s got lots of work to do.

The key to drawing new interest will be making Crystal City seem cool. But will Vornado’s stockholders be willing to give the plan time to work?

BRAC takes its toll

Vornado Realty Trust is a $30 billion New York-based real estate investment trust with a charismatic chairman, Steven Roth, who is trying to reinvigorate the company’s lagging stock price. Schear controls the 20 million-square-foot Washington portfolio, which amounts to about one-quarter of the company.

That portion, however, is a matter of considerable focus in New York, largely because the Pentagon’s Base Realignment and Closure Commission (BRAC) has wreaked havoc on the holdings. Government agencies are vacating 2.4 million square feet of Vornado space in Northern Virginia. Roth, in his annual letter to shareholders in April, wrote that he expected BRAC losses to cost the company $1.50 per share. Two research firms downgraded the outlook for Vornado stock in the spring.

Since then, concerns about the company’s Washington portfolio have not receded. Last month, analysts from Stifel Nicolaus suggested that Vornado could ultimately face 3-to-4 million square feet of move-outs, writing that “while investors perceive Vornado to have a high quality management team, the bloom is off the rose.” Vornado has begun holding investor calls, and Schear has been asked to New York for the next one, Aug. 7.

The man behind the plan

Top Washington commercial real estate executives often say the same two things about Schear. First, that he is one of the smartest in the business. Second, given Vornado’s situation in Washington, he had better be.

“He is one of the most experienced and respected real estate executives in town,” said Douglas J. Donatelli, chief executive of First Potomac Realty Trust, a REIT based in Bethesda.

Another competing executive, speaking on condition of anonymity so he could freely assess competitors, said of Schear: “There are only four or five guys in that part of their career who can look at a portfolio of that size and take it somewhere.”

Schear has demonstrated his influence on the industry through philanthropic work in recent years, mobilizing the area’s top executives around a nonprofit District tutoring program that was largely unknown to them before Schear adopted it. In 2009, the Higher Achievement Program’s annual gala raised $318,000, which longtime executive director Lynsey Wood Jeffries called “a disappointment.”

Schear said he wanted to reinvent the gala, and he instructed his senior managers to raise money through Vornado’s partners, from brokers to subcontractors that install elevators and waterproof buildings. Jeffries recalled: “Mitchell said, ‘Okay, this is Higher Achievement. I believe in this. Let’s see how much money we can raise. We give business to all of these people.’ ”

Schear held the event at the Warner Theater (which Vornado owns) and convinced heavyweight peers to join, among them JBG Cos. Managing Partner Michael J. Glosserman, Lerner Enterprises principal Mark D. Lerner, Quadrangle Development President Chris Gladstone and Donatelli. The gala raised $557,000 in 2010, $840,000 last year and is shooting for $1 million this year. It has become one of the city’s go-to commercial real estate events.

Battling a weak market

Reviving Crystal City is only one of the challenges Schear has endured since he assumed responsibility for the portfolio of Washington area buildings.

In 2004-2005, the Patent and Trademark Office vacated 2 million square feet in Crystal City. Re-leasing took almost three years.

The BRAC process has led to more departures, and Schear’s buildings are emptying just as the leasing market weakens. Office tenants this year — anxious at the prospect of government cutbacks — are occupying hundreds of thousands of square feet less by the end of each quarter than they did at the start.

At its Skyline complex in Bailey’s Crossroads, also suffering from BRAC losses, Vornado was forced to transfer the $678 million loan on one of the buildings to a special servicer because it was empty and at risk of default. Anser Analytic Services has since leased about one-fifth of the building.

Last year, Howrey law firm, the anchor tenant of the Warner Building, a Vornado property on Pennsylvania Avenue NW in the District, dissolved, leaving Schear with outdated office space. Vornado updated the lobby and added a new fitness center and roof terrace. After hanging a massive marketing banner on the building’s side, Vornado signed the Cooley law firm for about one-quarter of the space last week, but that required buying out the firm’s lease on Sixth Street NW.

Meanwhile, Vornado is juggling complex redevelopments of two retail centers, Springfield Mall and the Shops at Georgetown Park, the latter drawing criticism because it is nearly empty two years after Vornado purchased it and rumored tenants include the less-than-bourgeoisie T.J. Maxx and Michaels, the crafts retailer. Some critics expect Vornado to sell the building after leasing it. “We’re going to completely reposition the asset, and then we’ll see where we are,” Schear said.

“They own some great real estate. It’s just going to take a significant amount of patience and hard work to see it through,” Donatelli said. A concern, he said, was whether Vornado shareholders and management in New York would grow impatient. “It’s going to be a little bit tough for the D.C. guys because at the same time they are being asked to be responsive to the public markets, they have got to make sure that they make the smart real estate decisions.”

Amping up the events

Every weekend and evening after work, Vornado’s effort to remake Crystal City is managed largely by the Crystal City Business Improvement District, a marketing group that Schear helped form in 2006.

The organization is charged with representing all interests in the area, but because Vornado owns half the commercial real estate in the neighborhood, it pays about half the organization’s budget. Four Vornado senior vice presidents are on the organization’s 20-member board and one is chairman.

Angela Fox, executive director of the organization since its founding, has created a bevy of events similar to those now commonly found in more hip neighborhoods, including yoga classes, wine tastings, a farmer’s market, food trucks and outdoor movies.

But lately, she’s been feverishly trying to amp up the amenities and attractions to generate the kind of buzz that would make PT Barnum proud. There are street hockey games and weekly 5k runs. She and Schear brought 1,300 artists and performers to an empty Vornado office building for the six-week Artomatic festival. In late September, she’ll debut“a dog-friendly outdoor beer festival” called Pups & Pilsners, and a bike race, the Diamond Derby, that will take place inside a Vornado parking garage.

Fox said she is fighting a deeply held image. “I think people have had a perception for many years,” she said. “You’d hear the term ‘concrete canyon.’ A very functional place but not a very happening place.”

Meanwhile, operating under a new, more dense plan for Crystal City, Schear has begun plotting the future of Vornado’s holdings there. What is now 220 20th St. was Crystal Plaza 2, a gray office building erected in 1969. Vornado ripped off the exterior, added six floors and reopened it in the summer of 2009. One-bedrooms list for between $2,000 and $2,900 a month; two-bedrooms range from $2,800 to $3,500. It is 97 percent leased.

Next door, Vornado plans a 23-story office tower — what would be the tallest building in Crystal City — to replace the aging and vacant property at 1851 S. Bell St. He signed defense contractor DRS Technologies to a 93,000-square-foot lease at 2345 Crystal Dr.

Schear says things are easier this time because Crystal City’s image has improved, and he began preparing for BRAC years ago. “We knew that leasing in 2012 and 2013 was going to be very weak. And that’s just a fact.”

Roth, in his letter, sounded a note of patience, writing of the losses: “Damn annoying, but livable.”

Robert J. Murphy, managing principal of MRP Realty, said Vornado was doing all the right things to make Crystal City competitive with other parts of the area looking to reinvent themselves as mixed-use neighborhoods such as NoMa and Capitol Riverfront.

“Some areas are ahead of others. I think you have to pick your plan and forge ahead.”

 
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