An unexpected economic slump, unbridled optimism among developers in calculating tenant demand, and the prospect of a revival of Washington's old central business district (CBD) have resulted in an unprecedented surplus of office space east of the White House.
More than 10 million square feet of office space -- the equivalent of 10 big regional shopping centers -- will be built in the next three years in a 658-acre sector, or little more than one square mile, east of 15th Street NW.
Commercial real estate experts say that construction of the 58 office buildings and hotels scheduled for completion through 1985 may cost as much as $2 billion.
In 1982 alone, more than 4 million square feet will be completed. But only half of that will be absorbed by tenants this year.
The normal absorption rate in Washington is about 2 million square feet. That means a surplus of 2 million feet, at least, will be carried over into the next year. Some commercial real estate experts project a surplus of at least three million square feet east of 15th Street next year.
In all, an estimated 9.5 million square feet are under construction in all of downtown, east and west of 15th Street NW, for delivery through 1984. More than half of that, roughly 5.5 million square feet, will be built in office complexes east of 15th Street NW.
At the core of that construction binge is the city's new convention center, which opens early next year.
Some buildings have been completed so quickly in the rush to grab preferred tenants that they are almost a year ahead of schedule.
Three years ago, the real estate market in Washington was riding the crest of a boom that began after the 1973-74 recession brought construction to a near standstill. And developers gambled that the market would continue at a record pace for several years to come.
But that proved to be an incorrect reading of economic trends, and despite an unprecedented building boom in the old CBD, new starts have slowed dramatically. Meanwhile, developers are mired in debt, and demand is at its weakest in eight years.
The recession, record interest rates, cutbacks in federal employment and the dampening effect that has had on office users whose operations depend heavily on government-related work have drastically altered the marketplace.
In the absence of those factors which apparently have corrected the construction explosion, "It would have taken only 10 years to build out downtown at that pace," said James O. Gibson, assistant city administrator for planning. "Now we think it will take little better than 20 years." Investment decisions are determined "by atmosphere as much as objective analysis," he added.
Several industry observers implied as much, pointing out that a shortage of developable land west of 15th Street NW spurred a stampede to rebuild the old retail and commercial core. Like dandelions sprouting overnight, office buildings and hotels were taking shape before the real estate market could properly assess the enormous buildup.
The sheer volume of development taking place in the old CBD is difficult even for some persons in the commercial real estate industry to imagine. That was apparent last week during a tour of the area by more than 200 developers, leasing specialists, brokers and a few prospective tenants.
"When you add it all up, it's staggering to see the amount of private development going on," declared an official at Blake Construction Co.
"It's awesome," added Thomas Tabor, resident vice president of Coldwell Banker, commercial real estate specialists.
The walking and bus tour, which was sponsored by the new development committee of the Washington Board of Realtors, covered at least 30 office, retail and hotel complexes that have been or will be completed this year in a corridor bounded by Pennsylvania Avenue, 15th Street, Massachusetts Avenue and North Capitol Street. An additional 28 buildings in that sector will be completed next year.
"The main focus of the tour was for brokers to see the type of development that is available and to give access and a detailed orientation, primarily to real estate people," said George Voris, sales manager at Coldwell Banker and chairman of the board of the realtors' development committee.
Voris estimates another 4 million square feet of office space will be built next year but only 1.5 million in 1984. "That's a self-correction in the market," he noted.
Indeed, the massive buildup of office space and lackluster rental activity may cause some developers to delay their building plans, industry sources report.
On the other hand, developers and leasing specialists point out, inquiries in the past few months indicate that pent-up demand by potential users of space will soon provide relief to owners who find themselves stuck with huge chunks of space.
"I've seen a dramatic increase in the last six months," said Philip Carr, vice president at Oliver T. Carr Co., a major developer of office buildings in Washington. "From March of this year, I've seen a dramatic increase in leasing and discussions."
Metropolitan Square, a mixed-use complex being developed by the Carr Co. at 14th and G streets NW, is about 30 percent leased. Three floors in the 12-story, 300,000-square-foot office building have been leased to two tenants.
Other developers and leasing specialists agree that 25 to 30 percent is about average for the amount of space that has been leased in new buildings or those that will be completed this year.
"We don't have any signed leases but a lot of strong activity and it has picked up since the end of the summer," said the developer of a large office building that will be completed some time next year.
But for several owners of new buildings that have opened this year, the near absence of tenant demand has been a costly experience. Nearly empty buildings containing 200,000 or more feet are going begging for tenants.
Although there has been an increase in interest from prospective tenants, "it still is not what we would like to see," acknowledged Neel Teague, vice president of the Quadrangle Development Corp., a partner in the joint venture development of National Place at 14th Street and Pennsylvania Avenue NW.
"I don't really care as a developer when I lease my building," Teague volunteered.
What's more important, he added, is that he can move tenants into office space immediately after completing a building.
National Place, a massive $200-million, mixed-use complex at the gateway to the Pennsylvania Avenue Development corridor and the CBD, will contain 410,000 square feet of office space, 70,000 square feet of retail space and a 774-room Marriott hotel.
"The situation won't break the major developers," observed an official of a large development company. "It's the individual developer whose career depends on a project."
Despite the oversupply of space, "It's not a panic situation," declared John E. Akridge, president of a development company of the same name. "It's not going to be good for some people but it's not going to be terrible for everybody.
"Fortunately, here in Washington we didn't do as they did in Houston, where they built six or seven years of space before anybody knew what was going on."
Although developers may be adding too much space to the market over the next two years, the number of buildings isn't that far out of line, Akridge believes. "If you're eating up 2.5 million square feet of space a year it means that we have to deliver about 16 buildings a year," he said.
"You have to have 32 buildings under construction at all times to just to stay even."
Akridge agrees with most developers that demand is still very strong although that doesn't seem to be in evidence based on leasing activity this year.
"The fact is, people have been extremely reluctant to make decisions to commit themselves over the last six or eight months; not because it's going to hurt them now but because they were concerned about the future," Akridge said.
Because of the reluctance to rent premium space at premium prices, office users have forced developers to negotiate lower rates. "It's a tenant's market," said Coldwell Banker's Voris.
Industry sources say they are aware of several instances in which building owners have lowered rental rates from $30 or $35 a square foot to $25 or $28. "Rental rates have come down and adjusted to the marketplace," said the vice president of one company. "People aren't being piggish anymore. They just want to fill up their buildings."
Rates currently being quoted for space in high-quality buildings in the old CBD generally range from $27 to $35 a square foot and owners of those buildings are confident that they will get those rates as the market bounces back.
Generally, the new generation of buildings in the CBD is superior in quality and design compared with the rows of glass and concrete boxes in the western half of the CBD. And several of the new buildings and those on the drawing board are much larger and more spectacular as Washington architecture goes.
In previous years the federal government leased large blocks of space in new office buildings and settled for minimum standards at lower rates, one developer said. Thus little care was given to design and appointments.
But "this market has grown up," Akridge noted. Not only are buildings designed better; they offer more amenities and are much larger.
Daon Development Corp., for example, has begun construction on a 1.2 million square-foot complex, believed to be the largest private office building in the area.
Typically, developers such as the Carr Co. and Daon are constructing buildings with wide appeal to large corporate users who require one or more floors. Tenants willing to pay premium rentals for space on the upper floors of Metropolitan Square will have a spectacular and commanding view, including the monuments and the White House. And all tenants will have access to a roof terrace for events like receptions and luncheons.
"The amenities will be in the east (the old CBD) because the big players are there," said Voris.