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NoMa Gets Gentrified, Now Waits For Tenants
Lean Times Make Area a Tougher Sell

By Alejandro Lazo
Washington Post Staff Writer
Monday, August 11, 2008

When National Public Radio said in March that it would build its new headquarters in NoMa, politicians and developers heralded it as a key boost for the rapidly developing neighborhood.

NPR said it was drawn to the area north of Capitol Hill and Union Station for its proximity to official Washington and because of a desire to invest in a new neighborhood. The media company also received lucrative tax subsidies from the District.

"Over a period of time, neighborhoods change and improve, and we have a real commitment to diversity in our organization," said Dennis Haarsager, NPR's interim chief executive. "I feel that that neighborhood has great potential."

NPR plans to open its building in 2012. The Justice Department, which one day after NPR's announcement said it would move its criminal division to NoMa, is set to arrive in 2010.

In the meantime, about 880,000 square feet of office space in NoMa, or about 10.4 percent of the total market, sits vacant, according to CoStar of Bethesda. At least two completed buildings have no tenants. An additional 2.7 million square feet of office space are on their way, part of a wave of buildings financed during the boom, now being completed in the midst of an economic downturn.

Developers said interest in the area has picked up following the announcements by NPR and the Justice Department. But leasing has become increasingly difficult throughout the Washington area, and that could slow plans to use commercial real estate as a catalyst for transforming once-blighted neighborhoods such as NoMa, brokers said.

"People aren't showing up as quickly as people hoped," said David Lipson, executive vice president of the District office of Studley, the commercial real estate firm that brokered the NPR and Justice Department deals. "I think tenants are cautious just about the emerging markets in general."

NoMa has undergone numerous changes over the past decade, from possible cultural center in the late 1990s to potential technology hub before the bubble burst. None of that panned out, but a consensus among the District's development community emerged: This funky amalgamation of warehouses and run-down, empty lots north of the Capitol could serve as a natural extension of the downtown "box" that is now nearly built out. The area could also serve as a way of keeping companies in the District as they become priced out of downtown locations.

"There is a lack of space and those [downtown] sites are fabulously expensive," said Charles "Sandy" Wilkes, chairman of District-based Wilkes Co., one of the first developers to begin accumulating land in NoMa. "There was an inevitability that development would move toward NoMa."

As low interest rates earlier this decade made development deals easier to finance, commercial real estate took off throughout the Washington area. Big builders began looking at neighborhoods such as NoMa and along the Anacostia River, near the Nationals' new stadium, as opportunities.

The financing equation has changed since then. Debt has become increasingly difficult to come by since the credit crunch began last August. Job growth has slowed and, with it, leasing activity.

The average rent for a building downtown was $49.11 per square foot at the end of the second quarter, compared with about $45.21 in NoMa. That may not seem like much, but the majority of new space in areas such as NoMa and other emerging markets is "Class A" space, meaning it is made with highest-quality materials and extra flourishes. The price differential between Class A space in emerging neighborhoods and downtown can easily work out to about $15 a square foot, said Ernest Jarvis, managing director of the Washington area office of the commercial real estate firm C.B. Richard Ellis.

"Those savings are compelling," he said.

As students and workers scrambled up and down First Street NE and men in yellow NoMa Business Improvement District vests swept sidewalk trash and empty beer bottles into hand-held bins Friday morning, the drone of construction equipment punctuated the air.

Three high-end office projects on First Street alone are underway, including the future Justice Department site, which is being developed by Bethesda-based Stonebridge Carras. A 50,000-square-foot Harris Teeter grocery store will also be built in that area.

Two weeks ago, Brookfield Properties of New York completed 77 K St. NE, an 11-story building that shares a corner with First Street and now sits empty. Paul Schulman, senior vice president in charge of the Washington area for Brookfield, said that although the economy has slowed the company's leasing efforts, interest did pick up after the NPR and Justice Department announcements.

"There has not been as much leasing volume in the market that was expected," Schulman said. "There is still a perception that NoMa is lacking amenities, that it is very much a fringe location, but I think over the last year, a lot of those announcements have started to change those perceptions."

NoMa's development has been steady. XM Satellite Radio located its headquarters in the neighborhood at 1500 Eckington Pl. NE in 2001. The area got a Metro stop in 2004. And in 2006, the Bureau of Alcohol, Tobacco, Firearms and Explosives moved into an imposing headquarters across the street from the Justice Department's future site.

Mark Mallus, the senior vice president with C.B. Richard Ellis who helped broker the XM deal, said that although the development wave has been slowed by the downturn, leasing might pick up once a new president is in the White House. Leasing by government agencies has slowed at the end of the Bush administration.

"Don't forget GSA has been on the sideline for a long time," he said, referring to the Government Services Administration, the government's landlord. "It would be nice if the credit crunch never happened and the economy was still kicking along, but that is not the reality."

A similar situation is playing out near Nationals Park in Southeast Washington, where developers hope to market the cachet of the city's baseball team. There, Bethesda-based Opus East, District-based Monument Realty and North Bethesda-based Lerner Enterprises all have developments either completed or underway.

Monument plans to complete 50 M St. SE next year. The 275,000-square-foot office building is the first of a 1.9 million-square-foot mixed-use retail project that will line the entrance to the new ballpark.

Russell Hines, executive vice president of the firm, said that although the slow economy has made leasing the building more complicated, the company had seen interest from some associations and other private companies looking to escape high rents downtown.

"It's obviously been stronger, but developing an office building of this scale, it is a process of two to three years, and in any one point of time we don't spend a whole lot of time hand-wringing about where the market is," Hines said. "The types of tenants that we are looking for, they believe in the area, they have seen this before, they have seen areas in Washington, D.C., develop and change."

Others are more skeptical.

"The buildings in those areas that were built with a lot of leverage -- less equity and a lot of debt -- are going to be in trouble, and there are definitely a lot of buildings like that in the market," said Lipson of Studley. "Long term, that will be fine; these areas are going to be great. . . . It is just a question of exactly when; it is just a question of how long it takes."

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