Michael D. Fascitelli, president and chief executive of Vornado Realty Trust, detailed for investors and analysts last week the company’s challenges in filling space emptied by the Defense Department, saying,“the Washington market is soft, but perception here is worse than reality.”
The Pentagon’s Base Realignment and Closure Commission (BRAC) is expected to ultimately create a total of 2.4 million square feet of vacancies for Vornado in Northern Virginia, but Fascitelli said that the company had re-leased or begun re-developing 818,000 of that.
“Washington today is experiencing the perfect storm: BRAC, the GSA trying to be more efficient, a presidential election and a budget standoff creating uncertainty. But we expect that moderate growth and limited supply over the next several years will stabilize the market,” Fascitelli said.
Executives at Vornado, a New York-based real estate investment trust with almost 20 million square feet in the District and Northern Virginia, held the Aug. 7 call with investors — its first ever — as part of an effort to rejuvenate its lagging stock price.
The slow leasing market in Washington has not stopped Vornado from continuing to ink deals, according to Fascitelli and Mitchell N. Schear, president of the Washington unit, Vornado/Charles E. Smith, who joined him on the call. In addition to the Crystal City deals replacing BRAC, Fascitelli said the company has signed five leases totalling 170,000 square feet for space in the Warner Building in the District vacated when the law firm Howrey liquidated. That leaves about 210,000 square feet.
The deals are not coming easy, however, and sometimes they are accompanied by drops in rates or increased costs for Vornado. In Bethesda, the company recently signed two renewals totaling 356,000 square feet from the National Institutes of Health at its Democracy Plaza office park. But the deals average $31.75 per square foot according to the General Services Administration, down from expiring rents that averaged between $36 and $50. In One Democracy Plaza, for instance, Vornado agreed to renew the space at $32.39 a square foot, down from $43.18.
In its Skyline complex in Bailey’s Crossroads, also suffering from BRAC losses, Vornado was forced to transfer a $678 million loan on one of the buildings to a special servicer, and Fascitelli said returning the property to lenders was “not out of the question.”