Boston developer Robert Elder thought that he knew a sure thing: Put up a new office building in Washington's revitalized downtown sector east of 15th Street NW and then watch the profits roll in.
Elder built a handsome marble-and-glass structure at 1333 H St., but his scenario stopped there. Elder says he could not find enough tenants to fill the building, and last year he sold it to his lender at an undisclosed loss.
"Somehow, I felt a building could be produced there and rented," Elder said. "The site was obviously marginal because of the tenderloin district next door. It's a risky business that I'm in. You take the bitter with the sweet."
Elder, like numerous other developers here in the last four years, had learned that not everyone wins in the high-stakes, roll-the-dice game of office development in the District's once-and-future downtown business enclave.
The Daon Development Corp. was forced to relinquish ownership of the mammoth, still vacant office building it had built at 1300 New York Ave. NW to a subsidiary of the Bank of Nova Scotia, Daon's construction lender.
Other well-heeled developers who rushed to construct office buildings in the once-tawdry neighborhoods east of 15th Street, with the wishful thought that tenants would beat down their doors, gamely have hung onto their properties.
But the developers have found that when they finished their buildings, the gleaming structures sat empty for months and in some cases for more than a year. Several buildings still are vacant.
Oliver T. Carr, one of Washington's largest office developers, said that the reason for the glut of office space "wasn't really very complicated."
Developers and lenders "ignored market information" showing that only about 2.5 million square feet of new office space can be absorbed in Washington in a year, he said, not the 3.6 million that was dumped on the market last year.
Now many of these buildings finally are being filled with tenants, but only since developers sharply dropped their annual rentals from the $27-to-$29-per-square-foot rates that they had thought the market would bear.
In addition, the developers have had to entice would-be tenants with offers of free rent for a few months, additional decorating allowances and extended leases.
It turns out that the winners in the eastward march of Washington's office community into the deteriorating environs of the old downtown sector have been the new tenants.
"It's been better to be a tenant than a landlord in the last couple of years," conceded Lewis Rumford III, a partner in the development firm of JBG Associates and chairman of the Franklin Square Association, a group of developers and tenants that has promoted the cleanup of the neighborhood around Franklin Park, bounded by 13th, 14th, I and K streets NW.
The new tenants have decided to desert their established surroundings in the K Street and Connecticut Avenue corridors for a move to neighborhoods in transition, places where the worlds of the homeless, the strippers, Jell-O wrestling and briefcase-toting yuppies meet.
More than 100 law firms and 125 trade associations now find their workaday home in the neighborhood bounded by 15th Street, Massachusetts Avenue, Pennsylvania Avenue and North Capitol Street, a business community heretofore largely populated by small, aging shops.
The new tenants have been drawn largely by the rental deals that they found too good to pass up, but frequently also by the attraction of more office space that can be configured however they request it in a new building.
The American Association for the Advancement of Science counts itself among the winners. The group's 270-member staff, which now works out of four locations, plans to move next May to the building constructed by Elder.
"I think we got a good deal," said J. Thomas Ratchford, the group's associate executive officer. "We got a 20-year lease, with three five-year renewals after that. We will be paying $18 a square foot. In the 20th year, we'll be paying rent that is now paid in the west end: the low $30s.
"It's right around the corner from the tenderloin district," he acknowledged. "But our impression is that it will be gone within two years. We anticipate the neighborhood will improve."
At least 30 new office buildings, most of them architectural clones of the box-shaped structures that line the K Street commercial strip, have been built east of 15th Street since 1980. The bulk of them are within two blocks of Franklin Park, but others have opened along Pennsylvania Avenue and further east in the Judiciary Square area near the federal and local courthouses.
The construction was fueled in the belief that Washington had far too little available office space. In 1979, the vacancy rate dipped to the almost unheard-of figure of 1 percent. As a result, developers here and some from Canada, New York, Boston, Chicago and Texas jumped into the fray.
Explained mortgage banker Robert H. Gidel of the Abacus Group: "There seemed to be no end to the [construction] boom. But we didn't do our homework. That market [east of 15th Street] prior to 1980 had 4 million square feet of office space. Now it has nearly 9 million square feet without identifying the absorption rate, who were the tenants willing to move there and what rates they were willing to pay."
With the vast office construction -- more than $500 million completed or planned within two blocks of Franklin Park alone -- the vacancy rate rapidly zoomed to 15 percent citywide last year, and well over 50 percent east of 15th Street. With the recent rentals, the overall rate has now been cut to 9.6 percent, still high by Washington standards but below the national vacancy rate of 11 percent.
In its simplest terms, would-be tenants were skeptical about moving to foreign turf east of 15th Street. The mention of 14th Street conjures up red lights, pornography shops and nude dancers.
Rumford's Franklin Square group successfully has fought the renewal of the liquor licenses of several of the sexually oriented bars on the 14th Street block between I and H streets. Developers, tenants and those planning to move to the area all expect that relatively soon the 14th Street strip will become a part of Washington's seedier history and still more office buildings will be built. But the predictions of the strip's imminent demise seem premature.
When the Franklin Square group got the liquor license at the This Is It? bar revoked last month, it immediately started a new attraction: Jell-O wrestling by nude women that has drawn crowds of about 150 patrons on weekend nights.
But the liquor ban has taken its toll. As a nude dancer gyrated the other night, bartender Krise Murthy had to inform a customer that the bar no longer served beer. The customer walked out.
How long will This Is It? stay open? "As long as it's making money," Murthy said.
Daryl Nickel, managing partner of the Brownstein, Zeidman & Schomer law firm with offices at 1025 Connecticut Ave. NW, said that the presence of the 14th Street strip "gave us a lot of concern" as the firm weighed moving to the area. Eventually, the 41-member firm decided that it will move next February to a building at 1401 New York Ave. NW.
"We didn't want to be a pioneer," he said. "We're betting on that strip being closed down."
Another law firm, Spiegel & McDiarmid, now located in the Watergate office building, vetoed a move to the new building at 1400 I St. because of its proximity to the porno shops and bars. Instead, in December the firm will move to offices at 1350 New York Ave.
With that selection, David R. Straus, a partner in the firm, said that "you don't have to walk past those areas with the sexually oriented shows if you don't want to."
While there is a surfeit of nudie shows, decent restaurants are few and far between. Several trade association executives said they still go west of 15th Street when they want to take a client to lunch.
"We're anxious to see the area develop," said Charles J. Carey, president of the National Food Processors Association, which helped build the red brick and glass structure at 1401 New York. Rentals were "very, very slow at first," he said, but that now he believes "the period of uncertainty is over."
Another newcomer to the east side of 15th Street is the American Petroleum Institute, which moved its 325-member staff from 2101 L St. NW to 1220 L.
"We did our own analysis and concluded that in the long we're better off here," said William O'Keefe, a vice president of the oil trade group. "We were able to enter into a 25-year lease, which is important to us. Since we've been here, people say their fears have been alleviated."
While some developers were forced to offer cut-rate rental deals in order to secure tenants, others with the proverbial deep pockets have waited through the recessionary years for the office market to turn around. One such developer is parking magnate Dominic F. Antonelli Jr., part owner of the building at 1301 New York Ave., which has been vacant for more than a year.
He wanted a single tenant for the entire building, according to his leasing agent, and now is close to completing a deal with the General Services Administration to house more government offices there.
Despite developers' difficulties in filling their buildings, there seems to be no continuing fear of overbuilding. Another office glut seems to be a distinct possibility.
More office construction is underway or planned along Pennsylvania Avenue, in the Franklin Park area, near Capitol Hill and in the main business district west of 15th Street. In addition, as law firms and associations vacate their current space for moves to the east end of town, only part of their former space is being leased by other tenants in the same buildings, according to real estate officials.
"People still remain very confident about office buildings," said developer Rumford. "That confidence may still be tested."
In the view of Robert Pickeral, Riggs National Bank's senior vice-president for real estate: "The only lesson we learn from history is that we don't learn anything. It's true of builders and lenders, too."