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From the Ground Up

A Bold Bet on Office Space in the District

By Dana Hedgpeth
Washington Post Staff Writer
Monday, August 16, 2004; Page E03

Republic Properties Corp., a major downtown developer, is making a bold move: building 1 million square feet of new office buildings in the city without having a major tenant signed.

That will join the 2.4 million square feet of office space under construction in the District right now, part of the biggest office-construction boom in the city's history. Many in the real estate industry worry it will prove to be too much, driving up vacancy rates.


Republic started the Portals project in 1989 and now has several major tenants, including the Energy Department. (Courtesy Of Republic Properties Corp.)

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Republic has a different view of the risk. The company is betting that by the time it's done building two or three years from now, tenants will be desperate for large spaces that only Republic and perhaps a handful of others can offer.

"We believe the market is tight now and that tenants will respond to someone who has the capacity to build and deliver a building now," said Peter J. Cole, a senior vice president at Republic Properties. "We've assembled the capital and we're moving forward."

It has started building two office buildings totaling 890,000 square feet, one in Southwest and the other near Union Station. And it plans to start soon -- how soon depends on the market -- on another 202,000-square-foot building that it expects to finish in 18 months.

One of the projects is Republic Square at 25 Massachusetts Ave. near Union Station. Republic Properties broke ground last week on the first part of the project -- a nine-story, 385,000-square-foot building expected to be done in January 2006. Republic said it is looking for the typical D.C. office tenants -- law firms, associations and government agencies -- to fill the space. It will start on the other part of the project -- another 202,000 square feet -- as it sees demand for space pick up, executives said.

Its other project is the third phase of a 3-million-square-foot complex of offices, shops and a 400-room luxury hotel at the Portals in Southwest, overlooking the Potomac River. The site is bounded by D Street SW on the north, 12th and 14th streets on the east and west, and Maine Avenue on the south.

The third building there, on which Republic started construction in June, will be 505,000 square feet and is expected to be done at the end of the year. Republic Properties said it plans to build out the rest of the site over the next six years.

Its projects are coming at a time when the city's office vacancy rate has stayed stable at 7.1 percent for the first half of the year, one of the lowest rates of any major market in the country, as the federal government and its contractors have leased lots of space. The Washington office market stays afloat through thick and thin thanks to the steadiness of government spending even during recessions.

But Republic is taking a big risk, said Margarita Foster, vice president and director of research at Cassidy & Pinkard, a major brokerage firm, considering there's so much new space under construction, of which 50 percent to 70 percent is pre-leased.

"They're banking on the fact that the market is improving," she said. "But [their space] is going to have to compete with the existing space and the new space that's coming on line."

Republic Properties' executives said they are undeterred. Steven A. Grigg, the company's president and chief executive, said: "We have significant capital resources and we have confidence in the market. And we have quality sites to offer."

The company said its Republic Square property will "raise the bar" for high-quality office space near Union Station. Its project on the Southwest waterfront, it said, is validated by other big developers, including JBG Cos. of Chevy Chase; Charles E. Smith of Crystal City; and Boston Properties Inc., with plans to build an estimated 1.5 million square feet there.

Republic Properties, like its competitors, is pitching its Southwest project as having good access to Metro and highways leading out of the city and as a cheaper alternative to downtown space. It is hoping to attract government agencies, law firms and associations.

The privately held real estate company started in 1987. It is best known for building Washington Harbour, a large project of restaurants, luxury condos and office space on the Georgetown waterfront; and Georgetown Park, a shopping center in the heart of Georgetown.

It also built Franklin Mills in Philadelphia, Sawgrass Mills in Fort Lauderdale, Fla., and Potomac Mills in Prince William County.

Whether its office projects will fill up or bomb won't be known for a while, but many people are watching closely for signs of just how strong the local market is.

"If you're a developer and you've got the financial wherewithal to see your way through spec buildings, there are rewards out there," said Stephen F. Lustgarten, executive vice president of Blake Real Estate Inc., a large D.C. developer. "But it does give you a little bit of a nervous stomach sometimes."

Closings

Washington Real Estate Investment Trust of Rockville said it paid $18.5 million for Shady Grove Medical Village II, a 66,157-square-foot building at the intersection of Key West Avenue and Darnestown Road in Rockville. The building is fully leased to doctors and medical service companies, including Children's Hospital.

Dana Hedgpeth writes about commercial real estate and economic development every week in Washington Business. Her e-mail address is hedgpethd@washpost.com.


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