A Groundbreaking Week for D.C.
Washington Post Staff Writer
Tuesday, June 23, 1998; Page C01
The District's real estate industry is spending this week celebrating what appears to be the end of a long drought for the office-development business downtown.
The owners of three new first-class office buildings have scheduled groundbreaking parties for today and tomorrow -- a contrast with the rest of this decade, when new office projects have been a rarity in the wake of 1980s overbuilding. Together, the three buildings add up to more than a million square feet of new office space, enough room for about 4,000 workers and an investment of hundreds of millions of dollars. They also will bring with them theaters, apartments and room for restaurants and stores.
"It's a lot for one week, but not a lot for eight years," said Richard Ruben, whose family's New York-based Lawrence Ruben Co. is starting construction on a long-planned project at 555 11th St. NW known as Lincoln Square. The building, which also will have an eight-screen movie theater, will incorporate the facades of nine small historic buildings that for years have been propped up in anticipation of the construction.
The other two buildings holding formal kickoffs are the Victor Building at 750 Ninth St. NW, being developed by the John Akridge Cos. of the District in a partnership with Apollo Real Estate Advisors and Prudential Real Estate Investors, and Market Square North at 401 Ninth St. NW, being developed by a joint venture between District-based Gould Property Co. and Boston Properties Inc.
The Victor Building also aims to retain a historic feel, using the exterior of an office building first built in 1900; construction crews have been at work for several months preparing the site and shoring up the old building. The Market Square North complex will include two apartment buildings as well as the office space; there's already a construction crane on the site because work has begun on the apartments and on the foundation of the parking garage under the office building.
The three buildings are clustered in the eastern end of downtown, within blocks of MCI Center and amid a growing number of new restaurants. "That's going to be a dynamic neighborhood down there -- which many of us find hard to believe, from many years ago," said Walter G. Howell, a broker with Grubb & Ellis Co.
Developers and industry analysts say the downtown office revival is fueled not only by shrinking supply because of the paucity of construction over the years, but also by growing demand, mostly from burgeoning law firms willing to pay top dollar.
"We have a substantial number of tenants interested, and we expect to be largely committed shortly," said Garrett Preis, a spokesman for Market Square North. Although no tenants are signed yet, his company has had serious discussions with law firms, associations and corporate users, Preis said.
When it comes to building booms, the District is lagging about a year behind the Northern Virginia suburbs, where construction caught fire last summer. Jeff Tanck, director of research at the real estate brokerage Goodman Segar GVA, said his firm counted 6.6 million square feet of office space under construction in Northern Virginia as of last week, with 44 percent of it committed to tenants. He said there's another 2.3 million square feet of space "with permits and ready to go."
In comparison, he said, there's 2 million square feet under construction in the District, not counting the three newest buildings. Overwhelmingly, those projects involve gutting and renovating existing buildings rather than new construction.
"The reason people want to build is that, of that 2 million square feet, there's just 22 percent that's not committed," he said.
Office development in suburban Maryland is lagging far behind, he said, with just 544,000 square feet under construction.
While the Northern Virginia construction boom has been fueled by rapid job growth, the District's reawakening comes in spite of well-documented job losses. Since 1990, employment in the city has fallen by about 72,000 jobs.
So how can there still be a need for new office space? Researchers at Grubb & Ellis argue in a recent report that the main reason is that most of the job loss has been among government employees, and that has not translated to office vacancies. "Despite substantial government job losses since 1993, the federal government's leased space inventory has remained pretty much the same," that report says.
In addition, the report points out, in recent years a number of obsolete buildings have been demolished or are being converted to other uses, such as hotels.
"It's the percolator thing -- the better stuff is perking to the top, and the rest of the stuff is falling out of the pipeline," said John E. "Chip" Akridge, president of the Akridge Cos. He said rents have risen to the point where new space can bring in more money than it costs to build.
"That tends to lead people in my chair to build," he said.
Two of the three new buildings, the Victor and Market Square North, are starting on a completely speculative basis -- that is, with no tenants lined up in advance. "Spec" construction is significantly riskier than pre-leasing, because there's always the chance tenants might not materialize.
The third building, Lincoln Square, has one large tenant on the verge of a lease: The law firm Latham & Watkins is negotiating to rent about 150,000 of the building's 345,000 square feet of space.
Ruben, the developer of Lincoln Square, said he has three other "strong contenders" for the rest of the space. "We'd love to have Latham as the lead tenant . . . but even without them, there are enough tenants out there that need big blocks," he said.
The other developers echoed his optimism -- not surprising in their position.
"For the first four or five buildings out of the chute, you're going to have a very receptive marketplace," Akridge said.
Much of that is based on the strong performance of a few scattered projects in recent years. Two buildings that started from scratch with significant chunks of spec space -- 1900 K St. NW and 600 13th St. NW -- are completely leased. And several buildings that were renovated also have drawn tenants quickly, including the old Garfinckel's department store at 14th and F streets NW. Even though that building won't be complete until year-end, just about all the office space is committed.
The three most recent buildings won't be the end of downtown construction, those in the industry say. For instance, broker Howell of Grubb & Ellis ticked off half a dozen other sizable projects that are nearly ready to start. "There's enough demand for it now," he said. "There's been a spike in the rents, and they seem to be holding."
© Copyright 1998 The Washington Post Company