It's noon on a sticky August day, and buttoned-down government workers and tourists in T-shirts and sandals pack the Old Post Office Pavilion on Pennsylvania Avenue NW during lunch.
By late afternoon the cavernous atrium of this 101-year-old federal office building, the District's first modern skyscraper and a linchpin of Pennsylvania Avenue's commercial renaissance in the early 1980s, will be nearly evacuated. The clerks in the trinket shops that surround the food court will have nothing to do. And it will feel like an episode of "The Twilight Zone" where the people disappear into the walls.
In spite of the lunch rush, business here at the Old Post Office Pavilion is bad. So bad that the government has stopped charging rent for use of the retail space, which is just as well, because in the 17 years that the Pavilion has been open, it has never once turned a profit.
The vacancy rate for retail tenants is nearly 80 percent. Asked to put that figure into perspective, Richard Lake, a principal with the Madison Retail Group, a real estate firm based in the District, couldn't think of a shopping center in the entire Washington region with a comparable rate. A healthy retail vacancy rate is between 8 percent and 10 percent.
"It's so far below average," Lake said of the Old Post Office Pavilion. "It's horribly low."
If the Old Post Office Pavilion were a private shopping center, it likely would have been sold by now--torn down, even, and replaced with something that could make money.
After all, the building, which houses federal agencies in the top floors, is located on the District's most famous avenue, a street address that can command some of the highest retail and office rents in the city. It is a street that has produced nothing but success stories recently, which makes what's happening at the Old Post Office Pavilion all the more perplexing.
The District government is returning to its historic city hall on Pennsylvania Avenue and 14th Street NW. The Freedom Forum wants to move its Newseum, an interactive media museum, down the street and is willing to pay top dollar to do it. Office developers in downtown are leasing their new buildings faster than they can build them.
"It's just really sad that you have this building failing where everything else is surging ahead," said Seamus Houston, marketing director for the Downtown Business Improvement District.
In some respects, it is encouraging that the Old Post Office Pavilion between 10th and 12th streets NW is flopping in the midst of all that success. It could be the other way around. And an isolated problem should be far easier to address.
Except the Old Post Office Pavilion is a federal building and a historic one at that, with a tangle of procedures and protections that prevent anything from happening too quickly. The leasing rights to its failing retail center have been repossessed by a bank, which has complicated negotiations over its future. And for better or for worse, the building has attracted the affection of a contingent of lawmakers who are loving it to death with added oversight.
Nearly four years have passed since the U.S. General Services Administration, the federal government's real estate agency, began trying to figure out what to do about the Old Post Office building. Little progress has been made.
Meanwhile, the clock ticks.
A Slow Pace
Hypothetically, it could keep ticking until 2037. That's the year the 55-year lease expires on the retail portion of the building.
The General Services Administration has been negotiating to buy out the remaining years on the leasing rights from Wells Fargo Bank, which took over the lease after a private management company defaulted on a loan. The GSA doesn't receive any income from the leasing rights; it waived the payments because Wells Fargo, like its predecessor, can't collect enough rent to pay the GSA.
But once the GSA can buy out Wells Fargo, said Anthony E. Costa, assistant regional administrator of the agency, the government would then ask the private sector to submit plans for the redevelopment of the building, which is starting to show signs of age again.
Among the possibilities: The entire building could be converted into a hotel, the 109,000 square feet of designated retail space could be scrapped and made into more offices or the retail center could simply be redesigned so that it opens onto the street.
Costa said that process would be similar to the one the agency used to renovate the U.S. Tariff Commission Building, a 170,000-square-foot property that fills a city block across from the MCI Center.
Under the terms of that deal, the Kimpton Hotel and Restaurant Group Inc. of San Francisco is spending $37 million to transform the 1839 historic building into a 172-room luxury hotel. Construction started earlier this year.
"If we could do the deal, the private sector would dump a bunch of money into the building," Costa said. "The building needs a lot of work, tens of millions of dollars."
But even if GSA can negotiate a deal with Wells Fargo, because of Congress's interest in all things Pennsylvania Avenue, the redevelopment plans are still subject to a congressional review. That means any redevelopment plans must, by law, pass muster with the Office of Management and Budget. It's a step that the Tariff Building did not have to take, and it's holding up the process, said Robert A. Peck, GSA commissioner of public buildings.
"Our plan has been sitting at the [Office of Management and Budget] for more than a year, while they mull it over," Peck said. "It's the same kind of plan that we put together on the Tariff Building and because we didn't have to go through this review, the Tariff Building is underway."
Linda Ricci, a spokeswoman for OMB, said it's the agency's job to raise questions.
"There's certainly agreement on the idea of buying out Wells Fargo," she said. "Then you get to the question of once the buyout takes place, what do you do?"
She said OMB is not convinced the building should be turned over to the private sector to be used for something other than government offices. OMB is worried, among other things, about relocating the 500 government employees at the Pavilion to another building in a cost-efficient manner.
"What do you do with the government employees?" she said. "We are working with GSA to answer those and other questions, and we're making progress."
Ricci said the budget office is determined to move the process forward, however, and said OMB will move to resolve the situation soon after Congress returns in September.
But Del. Eleanor Holmes Norton (D-D.C.) said that while she supports some limited review of the project, she also wants to make sure that the people making decisions about the project understand the real estate market.
That has not always been the case, Norton said. And moving such a small number of employees from the Old Post Office building is not an issue.
"Holding this up is at odds with one of [President Clinton's] priorities, which is to revitalize the District before he leaves," she said. "The White House has inquired of me about what kinds of things he can do for us. . . . We have to see if we can move this along."
Joe Delogu, director of federal services for Spaulding & Slye Colliers, a commercial real estate firm that was helping GSA with its redevelopment plan for the Old Post Office building, said the real problem is timing.
The real estate market will grow tired of waiting for a solution, especially when there are so many other development opportunities currently competing for the attention of builders and investors, he said.
"They have a limited attention span, and if it can't be done quick with a quick return, they won't be interested," he said. When the government "moves at a slow place, they are in effect limiting the market. If people feel like it's moving quickly, they get excited."
A Fatal Flaw
Visitors to the Old Post Office Pavilion are greeted by a sign that tells the history of the building they've just entered. The sign and its title, "The Old Post Office: A Story of Survival," tell only part of the story:
The 12-story structure, built in the Romanesque Revival style, was built in 1899 as a headquarters for the then-U.S. Post Office Department, which outgrew the space within a decade. By the 1930s, the building was obsolete.
Ironically, the Great Depression saved it. The government didn't have the money to tear it down then. And by the 1960s, when the government did have the money, the public rallied behind the building, demanding that it be restored.
In 1974 Nancy Hanks, then chairwoman of the National Endowment for the Arts, urged Congress to pass a law that would allow a retail center in the lower levels of the Old Post Office building to help pay for a renovation.
The Old Post Office became the Old Post Office Pavilion and reopened in 1983 with a food court and shops in the building's restored atrium, which now carries Hanks's name.
The D.C. Preservation League was born out of the effort to save the Old Post Office building. In 1979 its president was a young real estate professional named Robert Peck.
This is what the sign doesn't say:
It was anticipated that the retail center--the first ever in a government building--would be a cash cow for the taxpayers.
Under the terms of the lease with the center's first private manager, the General Services Administration would collect $166,000 a year in rent, with a 5 percent escalation over the life of the lease. It also would take a portion of the profits.
But from the beginning, the retail center was a failure.
"It never made a dime," said Kelly Marfyac, who cut her retail teeth at the Old Post Office Pavilion from 1985 to 1992, when she left as general manager.
"There just wasn't enough gross leasable area and physically it was a difficult space," said Marfyac, now a vice president at the Westfield Corp., which owns Montgomery Mall.
A second atrium, which cost nearly $20 million to construct, was added in 1992 to help create a larger mass of retailers. It was closed three years later, a complete disaster.
In between, Pittsburgh-based Hillman Properties, which had the leasing rights contract for the retail center, defaulted on a loan and had to transfer the rights to Wells Fargo.
Houston, who was director of marketing for the Pavilion, said Hillman walked away from the Pavilion because it was losing money, not because it didn't have the means. "Hillman could afford to pay the rent. It was a conscious decision."
Marfyac said nobody wanted the building to look like a retail center, so it didn't. And in the end, no matter what they tried, they could not overcome the design flaws--specifically, its lack of approachable retail fronts from the street.
"If you were John and Betty from Iowa, you would never know that there's food in the building," she said. "There are ways to counter that, with music and entertainment. But then office workers would complain about the noise. It was ill advised from the get-go."
From the outside, it is hard to imagine the Old Post Office building contains some 13 shops and 17 eateries. The only thing that distinguishes it from other office buildings on the block are green awnings stamped "Pavilion."
But blinds cover the windows and none of the shops or restaurants spills out onto the street, which the Madison Group's Lake said is a fatal flaw in retailing.
"The only way interior space works is if you have a large mass of retailers," he said. "It's a beautiful building. It's an absolutely spectacular street. But like so many other places on Pennsylvania Avenue, there's no street life. Good architecture doesn't sell retail."
A North Carolina development team believes good architecture can, however, sell a hotel.
Denhill D.C. LLC wants to invest more than $100 million to replace the offices in the Old Post Office Pavilion with a 222-room hotel and open the retail space to expose it to Pennsylvania Avenue.
That's the proposal Denhill brought the General Services Administration three years ago after contracting with Wells Fargo to buy out the remainder of the lease.
But Robert H. Spratt, a Denhill partner, said that to make the company's investment pay off, it needed to extend the lease past 2037.
So it began negotiating with GSA officials for a 65-year lease with three 10-year options.
Spratt said the process was moving far enough along that the developers were able to sign tenants, including a five-star hotel and other retailers.
But then GSA pulled out, he said, after Denhill had spent $500,000 in planning and designing the project.
"It's not because of a lack of interest on our end," Spratt said. "GSA is the roadblock. . . . We could have been under construction a year ago."
Spratt took his concerns about the way GSA handled the process to Congress, bending the ear of Senate Majority Leader Trent Lott (R-Miss.) and other Republican lawmakers who added the oversight language to an appropriations bill.
Peck, of GSA, acknowledged that he was the one who pulled the plug on the Denhill proposal, worried about the length of the lease being negotiated and the lack of an open bidding process to develop the Pavilion.
"At some point it came to my attention that we were negotiating a long-term extension, which always raises a big question in my mind," he said. "You just don't want to negotiate a lease like that. It didn't look like the terms would be to the advantage of the government."
Costa said the agency prefers to open the process to competition.
One thing both Costa and Peck are sure of. The duality of the property--both restaurants and offices in an interior--never worked.
"It's just a crazy situation," Costa said.
When they first started considering options for the Old Post Office Pavilion, Peck favored turning the building into a hotel, he said. That's what he thought the market would dictate.
Now he thinks a boutique office building might work better. But, Peck said, it doesn't make sense for the government to operate it, even if it did have the money for the necessary renovations. "I'd have to find a federal agency that would spend $55 to $60 a square foot" in rent, he said. "We couldn't do it, and if we did, Congress would be all over us."
So the clock continues to tick.
A bright yellow sign at the entrance to the closed east atrium declares that the Old Post Office is currently being renovated.
When? That's anybody's guess.
Empty Mail Box
The Old Post Office Pavilion's retail occupancy rate is a fraction of other downtown sites.
(% Occupancy rate)
Ronald Reagan Building and International Trade Center (37,000 square feet): 90%
Old Post Office Pavilion (109,000 square feet): 22%
Union Station (212,000 square feet): 96%
Shops at National Press (70,000 square feet): 89%
SOURCES: U.S. General Services Administration; National Press Building Management Inc.; Jones Lang LaSalle Inc.