Scott Pannick, a leasing representative for Julian J. Studley, stood outside the D.C. Convention Center and looked at the parking lots that dominate the area.
"This is the best real estate in the city. In 10 years it will be terrific. It will be a prime development area in five years," he said.
Downtown is moving east. In the past few decades, many developers have hesitated to buy properties east of the White House. Today, that attitude is changing. According to Jay Franklin, vice president of commercial leasing at Cushman and Wakefield, the east remains one of the "pioneer areas" in Washington. The convention center is the base for much of the optimism since the beginning of the year. Developers' plans are getting more concrete as the center's reputation grows.
Lack of development in the area thus far is attributable to several factors. The biggest problems have been financing and a tight market caused by the surplus of office space in Washington the past two years. Franklin said that although the market was tight in Washington three years ago, the office market tends to run in cycles.
The construction process for an office building takes 18 months, from the time the developer completes his development plans to the time he lays the last brick, and the market could change for the worse. For this reason, developers around the convention center have been reluctant to build.
The market, in general, has been "soft" because of the recession, according to Franklin. The demand for space is picking up because of the upswing in the economy since the beginning of the year, he said.
"A lot of developers have put their plans on the shelf. However, the market is changing and improving heavily. There is a feeling of optimism because the convention center anchors that area," he added.
Elizabeth Milor, assistant professor of economics at the George Washington University, explained the unwillingness to develop near the center may be because developers are waiting for interest rates to drop further. Even though the economy is improving, Milor said the difference between the prime lending rate, now 10 1/2 percent, and the rate of inflation, about 4 percent, is still high. Although financing may not be easily accessible, she added the price of building materials is "cheap compared to the cost of borrowing money."
Duke Brannock of Rust Jackson-Cross is even more optimistic. "A lot of people are going to make a commitment . . . because of the money market" now. Some may be waiting, he said, because lack of faith in the District government. "Local developers are apprehensive about the ability of the District government to promote the convention center. The ability of people to promote is not going to come within the bureaucracy of the D.C. government but [from] the Washington Board of Trade. They're going to promote the city for greed . . . they're the guys that are going to make things work."
Another problem in getting development started is finding a lender. "The most challenging thing is financing," said Christopher Gladstone, project director for Quadrangle Development Corp. "The economy was the greatest single villain. There was chaos in the financial markets. The money didn't want to come in," but he said Quadrangle has a single financer lined up for its Convention Square project, due to begin this summer.
"Traditionally, financers are life insurance companies" because they have the liquid assets not just to lend but to invest in a long-term project," he said.
Psychology also plays an important role in the pace of development. According to Diane Yochelson, assistant vice president at Julian J. Studley. "People don't want to be pioneers," she said.
But she cited the upcoming move of the American Petroleum Institute to 1220 L St. NW as an indicator of change. API plans to occupy the top six floors of the 12-story building, totaling roughly 100,000 square feet. "This is a symbol to the marketplace that things are turning around. It is also a signal things are going to move around and the east end of town is an acceptable alternative" to the sought-after addresses on K Street and Connecticut and Pennsylvania avenues NW. "The hope is that Metro Center will become the central core of the business district like Connecticut and K is right now."
A spokesman for API said moving east was profitable since "the price was right." The move will save API $70 million over the next 25 years, he said. API narrowed the choice of locations to the West End near Rock Creek Park and the one eventually chosen. This is API's third move since 1970, when the firm moved to Washington from New York.
Scribbling on a map of downtown Washington to explain development trends in the city, Brannock said he sees the convention center area building up within the next five years if only because of its lucrative Commercial Four (C-4) zoning, a classification permitting high-density office space.
Most of the areas zoned for C-4 in the Connecticut and K area have been developed. "The convention center area is the only section of town with C-4 zoning that is undeveloped," Brannock said. "Any piece of ground that has fixed boundaries accelerates faster than those without boundaries" such as Georgetown where property prices can only go up.
Despite the problems, several Washington-based developers that own property around the center plan to break ground by the end of the year. The Quadrangle Development Corp., in a "joint venture" with Woodward & Lothrop, will be the first developer to start. Planned is an 800-room, 12-story hotel, Gladstone said. Quadrangle's finished project, Convention Square, will be a hotel-office-retail complex totaling $160 million.
Quadrangle plans to start building its $100 million hotel first and an office building later when market conditions are better. The hotel will cater specifically to convention goers and will not be a luxury hotel. Although Gladstone would not name his hotel operator, Dan Mobley of the Washington Visitors and Convention Bureau mentioned Hyatt Hotels as Quadrangle's possible operator.
Gladstone, who has been in the development business only three years, said all public areas such as meeting space will be underground. Also underground will be a parking lot that Gladstone called "inherently necessary," citing the lack of parking space in the area.
Oliver T. Carr and Theodore Hagans will begin development on Metro Center, an office and retail complex that will include a new Hecht Co. department store, when the market is better, according to Philip Carr, senior vice president for the Oliver T. Carr Co. Looking ahead, Philip Carr, who remains "bullish on downtown," said, "Hecht's is first. That's a must. Then a hotel or office, depending on market conditions, or both if we can find a space user."
Gladstone said Woodies is happy with Hecht's plans to move closer to them because "people like to go to a number of different department stores." Mobley mentioned Hilton Inns as a possible operator for the Metro Center hotel.
Carr said "parking is a big problem for the city, which wants to put the responsibility on the private sector. But garages are not profitable." He cited Baltimore's Harborplace parking facilities as ideal, but explained that they were federally funded with grants that are no longer available.
Carr recently ended a dispute with the D.C. Redevelopment Land Agency over the value of the property between 11th and 12th and G and H streets NW.
Metro Center is "important as a catalyst to get things under way in the area," said Joseph Miller of International Developers, the group Gladstone said he believes will be the second to break ground. Miller said the company hopes to "start construction sometime this year" but added that the architectural designs are not complete. International Developers plans a 900-to-1,000-room convention-style hotel.
Morton Bender still has not completed his transaction with Greyhound Inc. in which Bender said he hopes to build a hotel, office or apartment on Greyhound property once the terminal is relocated near Union Station.
Ronald Cohen, a general partner of Ninth and I Streets Associates, said his group is watching the market before making a decision on when to build what will "probably" be a hotel or an office building. "We're not necessarily followers. We will start if there's a market. Just because others in the area are [developing] doesn't motivate us." Cohen said it was cheaper right now to "carry the ground" than build a hotel that won't make money. "We have not made a definite decision on whether to build a luxury hotel or one for the masses." Cohen said the company has five or six different schematics for how to use the property but has no working drawings yet.
If the District had gotten the Democratic National Convention, Cohen stressed, "it would have put a different light in the eyes of people across the country." The center must be "properly promoted by the people with a stake in it--the District"--to ensure the center's success and make the developers more confident about the center.
Joseph Hennage, after failing to sell his property at 814 H St. NW to the Beacon Co. will "tear down" the printing shop on that lot and "put in a parking lot in the next couple of months." He declined to comment further on additional plans.
Brannock of Rust Jackson-Cross said many retailers go into real estate because there is no one to take on the family business and they are left with a valuable piece of property. He says parking lots are profitable because they earn money while the owner waits for a buyer. Commenting on the Hennage property, Brannock said the building housing the printing shop, which was the former headquarters of the Redskins football team, "is terrible" and "had to come down."
Jerome Golub is one of the owners of what is currently a parking lot on New York Avenue NW. Golub said he hopes to begin building a 200-room, 13-story hotel and a 12-story office building by next summer. "I would like to start yesterday, but, realistically, construction is a year away." Golub said while his hotel will be small in comparison to others, it will attract convention center patrons. He said he has not yet found a financier, although his preliminary drawings for the 30,000-square-foot property are almost complete. "Six months ago, an overseas hotel operator showed an interest but then backed out," he said. Golub predicted that when construction finally begins near the convention center, it will all start at once.
"I wouldn't want to be the first project east of the convention center," Gladstone said. Christian Heurich of the Heurich Co. could be in this position but declined to comment on plans for his New York Avenue property. The Heurich family is an old D.C. family that has "owned key property in Washington for many years," Franklin said.
At one time, the family operated a brewery where the Kennedy Center now stands. Brannock said Heurich is probably waiting for an offer from a developer where they'll develop the grounds and he'll share the profits.