Familiar Faces, Distant Owners
CarrAmerica Deal Advances Trend

By Dana Hedgpeth
Washington Post Staff Writer
Monday, March 13, 2006

Oliver T. Carr Jr., Charles E. Smith and John E. "Chip" Akridge III put their names on companies that represented homegrown money and enterprise in Washington commercial real estate.

Over decades they built many of the area's signature office buildings. Now such locally owned companies may be going the way of other business landmarks, such as banks and department stores, that sold to out-of-towners.

"You used to have Citizens, Riggs and First Virginia, all of these great regional banks," said Raymond A. Ritchey, an executive vice president with Boston Properties Inc. who runs its local office. "And then we had all these regional retailers like Garfinkels, Woodies and Giant. And now we're seeing real estate companies going the same way."

Last week, CarrAmerica Realty Corp. -- a District-based real estate investment trust that traces its local roots to Carr's company in the 1950s -- announced a deal to sell for $5.6 billion to Blackstone Group, a New York-based private investment firm.

"What was once a market with local developers is now becoming more institutionalized and national in scope," said Greg Fazakerley, a D.C. developer. "It's gone through a metamorphosis."

What's driving the change, real estate brokers and buyers say, is that large companies like Blackstone have deep pockets to buy multibillion-dollar portfolios of real estate and enough diversity in their holdings to ride out downturns in individual markets. In snapping up a company like CarrAmerica, the out-of-towners also buy local connections and expertise.

The Blackstone deal for CarrAmerica also reflects another trend that is playing out nationally: publicly traded real estate companies going private.

Some real estate investment trusts, which have tax benefits but must pay most of their taxable income as dividends to shareholders, are finding they are not able to operate as nimbly and aggressively as private firms. As public companies, it is difficult for them to buy and hold property for development because rating agencies frown on too much debt. Real estate companies also complain that analysts and investors undervalue their stock.

CarrAmerica is the third local, publicly traded real estate company to make a deal to go private in the past year. Private investors bought Capital Automotive REIT for $3.4 billion late last year, and Blackstone offered $2.6 billion last month to buy MeriStar Hospitality Corp., a Bethesda hotel investment company.

Cedrik Lachance, an analyst at Green Street Advisors Inc., said large publicly traded developers are attractive acquisitions for private companies flush with cash.

"There's been a tremendous amount of capital allocated to real estate in companies like Blackstone, and that glut of money is seeking a home," Lachance said. "They're putting it to work easily through REIT acquisitions."

The Carr family has been in Washington real estate since Solomon Carr arrived from England in the 1880s. Oliver T. Carr Jr. started building houses in Montgomery County in the 1950s. After the real estate crash of the late 1980s, many companies struggled to stay out of bankruptcy. In 1993, Carr went public.

CarrAmerica grew rapidly in the District and its suburbs and eventually expanded into markets including Austin, Chicago, Dallas, Denver, San Diego and San Francisco. It now has 285 office properties, totaling 26.3 million square feet. The company owns or controls 26 properties in the Washington area, including the Willard Office Building on Pennsylvania Avenue, Terrell Place near the Verizon Center, and large office parks in Maryland and Northern Virginia.

While CarrAmerica's new owners will be based in New York, executives inside CarrAmerica and brokers and partners who work with the company say they expect little to change in day-to-day operations.

That has been the case for Charles E. Smith Commercial Realty, a locally run real estate company acquired in 2002 by Vornado Realty Trust, a publicly traded real estate trust based in New Jersey. Smith, which built much of Crystal City, still has a large office there and is given considerable leeway by its owners making local deals, brokers and developers said.

Longtime Washingtonians also run area operations for other out-of-town companies that are major players in the area, such as Boston Properties, a publicly traded real estate investment trust, and Hines, a private company based in Houston that is in charge of redeveloping the District's old convention center site near New York Avenue and Ninth Street NW.

At CarrAmerica, the two best-known public faces of the company's D.C. operations -- chairman and chief executive Thomas A. Carr, who is one of the sons of the retired Oliver T. Carr Jr., and president and chief operating officer Philip L. Hawkins -- oversee about 400 employees in the region. Once the deal closes, Carr would receive $11.7 million from the exercise of his stock options, restricted shares and personal holdings, according to filings with the Securities and Exchange Commission. Hawkins would receive $6.8 million.

"There are no changes right now, but clearly we have a new owner and we have a lot of work to do with them," said Karen Widmayer, a spokesman for CarrAmerica. "For the time being, we're the same. They're buying us for our platform and for the people."

John A. Ford, a spokesman for Blackstone, would not discuss his company's plans for CarrAmerica because "the deal has not finalized." The sale, which needs shareholder approval, is expected to close in the second quarter.

But some local brokers expect that Blackstone, which has real estate assets valued at almost $30 billion and is one of the most active private owners of real estate in the country, will sell some of the buildings in CarrAmerica's local portfolio.

"Blackstone feels like there's hidden value here," said Paul Collins, an investment sales broker at Cassidy & Pinkard. "These assets could be worth significantly more than the share price. . . . Blackstone is likely looking for high yields. To get that you have to sell."

Douglas Jemal, a D.C. developer who redeveloped rundown streets near the Verizon Center, said his deals with CarrAmerica on two office buildings will remain unchanged. CarrAmerica is providing mezzanine financing, developing and providing the leasing and management of the Atlantic Building at 950 F St. NW, which is almost completed, and another building at 1199 F St. NW, where construction is expected to start near year, according to CarrAmerica executives. Jemal is owner of the buildings.

"If the same people are there at CarrAmerica, I'll do more deals with them," Jemal said. "I enjoy a good relationship with the Carr people."

Other private companies such as Akridge said they have no interest in selling to a bigger company but expect to feel some competition from a Blackstone-owned CarrAmerica, with its vast resources.

As a major developer who still controls the company he founded, Chip Akridge said last week that he feels like "the last guy standing" in Washington real estate.

Closings

· Construction will start this summer on an $80 million facility near College Park for the National Oceanic and Atmospheric Administration. Opus East LLC of Rockville was selected from 75 developers to build the agency a 290,000-square-foot facility near River Road and Kenilworth Avenue in Riverdale Park. The building is in the M Square research park, which is affiliated with the University of Maryland. The building is described as both environmentally friendly and secure, with guarded entrances and walls that will not collapse if there is a blast.

The federal agency said it wants to consolidate some of its offices that are now in Camp Springs and Silver Spring. The new building, which will house about 900 employees, will be completed in 2008.

· Akridge sold seven acres it owns in the area known as NoMa, or north of Massachusetts Avenue, for $122 million to a joint venture of Walton Street Capital LLC, a private equity fund in Chicago, and StonebridgeCarras LLC, a real estate investment firm in Bethesda. The vacant land is next to the New York Avenue Metro stop and south of the new headquarters for the Bureau of Alcohol, Tobacco and Firearms. The new owners said they plan to build 2.2 million square feet of offices and apartments over the next five to eight years. Construction will start next year on the $750 million project and it is expected to be completed in 2009.

· Duke Realty Corp. of Indianapolis paid $855 million for most of the portfolio of the Mark Winkler Co. Its purchase includes almost 3 million square feet of office space and 166 acres of undeveloped land, mostly in Alexandria and Chantilly.

Dana Hedgpeth writes about commercial real estate and economic development. Her e-mail address ishedgpethd@washpost.com.