By Jonathan O'Connell
Monday, August 30, 2010; 16
Ask Brad Cole what he is doing to attract tenants to the empty Dulles Corridor office building that he is marketing and he will tell you: "Praying. Going to church on Sunday."
Cole represents Walker and Co. in its efforts to lease 1 Dulles Corridor, a 216,000-square-foot office at 10740 Parkridge Blvd. in Reston that is, by all accounts, a very nice new building. Built in 2008, it is visible from the Dulles Toll Road and less than 10 miles from both Washington Dulles International Airport and Reagan National Airport. Cole said Northrop Grumman and Hilton Worldwide, two Fortune 500 companies, both considered 1 Dulles Corridor for their new headquarters before choosing other Fairfax County sites.
Unlike other buildings in the campus, which have tenants such as Qwest Communications and the law firm Jackson Lewis, Walker and Co. hasn't found takers for the new building at the right price. It used to be, "Building delivered. Building was leased," said Cole, who lives in Reston. "This time, building was delivered and two years later, building is not leased."
"It just amazes me that we're not doing a little better because of what a wonderful place it is to live and work," he said.
Despite rapid growth of federal government facilities, intense interest from foreign real estate investors, the presence of the country's largest federal construction project as well as one of its largest public transit projects, the Washington real estate market still has soft spots and one of them is the Dulles Corridor.
Walker and Co.'s building is just one of the newest and largest examples of "see-through" buildings, meaning essentially empty, in the area.
According to CoStar Group, more than 20 buildings in the Dulles Corridor, including Reston, Herndon, Sterling and Chantilly, are essentially empty (listing a vacancy rate that runs 98 percent or higher). In all, the properties total about 2 million square feet. Some of them are older, built in the 1980s and in need of upgrades, but others -- like 1 Dulles Corridor -- are the result of office builders who looked at the expansive growth in tech and defense contracting during the boom years and built speculative buildings that they figured they could lease later.
Now Dulles Corridor vacancies are one of the factors keeping vacancy rates in the region up. By the midway point of 2010, the Washington office market had a vacancy rate of 12.8 percent, fourth lowest in the nation but up from the year before, according to Delta Associates, a research firm. Comparatively, vacancy rates in Reston and Herndon ranged between 15 and 18 percent in the second quarter.
The outlier in the corridor is Reston Town Center, one of the only areas west of Tysons Corner that provides urban living, working and shopping opportunities that don't require driving. Cole said he would be happy to attract a tenant with an expiring lease from there but said a building on the Dulles Toll Road "doesn't appeal to people in Reston Town Center, where you can walk across the street and get your girlfriend something at Victoria's Secret or go get your iPod."
The empty buildings also have a dragging effect on the rents that landlords throughout the region can demand because even as they remain empty, the empty properties give tenants with expiring leases powerful leverage to squeeze lower rents and incentive packages for extensions from their current landlords. Paul Schweitzer, who represents office tenants at the brokerage firm Studley, said clients are being offered rent abatements, help with moving costs and other incentives.
Landlords that are not in Reston Town Center or on the Toll Road, he said, are sometimes offering space for less than $25 per square foot, even though asking rents average $29 in Reston and Herndon and $28 in the area along Route 28 South, according to CB Richard Ellis.
"If you're not being aggressive as a landlord right now, you're looking to sit on the sideline right now or you're not going to see very much activity," he said.
Matt Bundy, a senior vice president at Transwestern who is marketing 45610 Woodland Rd., in Sterling, said that he is "always competing against a renewal" when looking for tenants. In December of last year, Bundy said he went through all but the final stages of completing a 98,000-square-foot lease for the tech firm Network Solutions, only to see the company stay put in Herndon. "They must have gone back to their owner and said, 'Hey, we're taking this other deal,' and their landlord said, 'Hold on, let me give you some free rent,' " Bundy said.
For a tenant, he added, staying put for a lower rate at the moment is "just the right thing to do. And it's unfortunate that we're in a stalking position."
One of the factors holding some properties back is uncertainty of ownership. Buildings built recently and financed by large amounts of borrowing can put owners at risk of losing the properties to foreclosure and render them unwilling to further invest in leasing work or improvements. The research group Real Capital Analytics has listed more than 20 office buildings in the corridor as "troubled assets" because of owners who missed loan payments or because they have been put into the hands of a special servicer.
Some buildings have already been lost. In 2007, New York-based Tishman Speyer completed two new office buildings totaling 247,000 square feet, called Plaza East I and II, at the intersection of Route 28 and Westfields Boulevard in Chantilly. With no tenants three years in, Tishman's lender, General Electric Capital, foreclosed on the properties, according to Real Capital Analytics. They were purchased by MPR Realty and Rockpoint Group earlier this month. Tishman Speyer declined comment.
Nearby, another empty two-building office development called Mission Ridge at Westfields Corporate Center, on Route 28 in Chantilly, was purchased by Pictairn Properties in 2007 for $78.5 million. Shortly after the sale, a Pictairn executive told The Washington Post that the property's high security capabilities made it well-positioned despite the economy. "We feel that it is going to lease in a shorter rather than longer period of time," he said.
When that didn't happen, a lender on the property, Capmark Bank, took Mission Ridge back and is now in the unenviable position -- for a financial institution -- of having to find tenants. It has contracted with Jones Lang LaSalle for the leasing work. Pictairn did not return calls seeking comment.
What does the future hold? The good news, according to leasing experts, is that a lack of new construction since the recession began means no new speculative office buildings are coming on the market, at least until the vacancy rate drops. In the meantime, some landlords are watching to see the size and effect of planned Defense Department cuts that could affect the real estate needs of contractors. With so many landlords willing to offer a deal, though, it's one thing to find a tenant and another to find a tenant willing to pony up enough to pay the bills. Cole, for one, said he could have signed tenants to the empty Walker and Co. building but is still waiting.
"I think we could have leased 1 Dulles Corridor by now if we had taken significant losses," he said.