Foreign companies are for the first time pushing their way into lucrative downtown Washington development, paying premium prices for prime D.C. land where they plan to construct large office buildings. This is a new, bold step for foreigners, who have limited their Washington purchases in the past to existing office buildings.
"This is very, very new," said William Savage, president of Savage-Fogarty Inc., a Dutch-owned company based in Alexandria, Va., that specializes in finding Washington-area investments for Europeans. "Until now, [European] investors did not want to get involved in anything but completed buildings. Now they are willing to take the risk and develop the complete job."
The reason is simple, Savage said. "In order to get the return they want, they have to complete in more than a passive way."
Recent major transactions by foreign developers, who have established a significant beachhead here, include:
A parcel of land at 13th Street and New York Avenue NW bought in April by Daon Corp., a $2-billion, Vancouver development company. Said Bill Levine, Daon's vice president of development, "We will be looking at other opportunities."
A tract at 18th and H streets NW, bought recently by Savage-Fogarty, which last week announced it would build a $9.3-million, 10-story office building at the site with financing from European pension funds.
Property at 1023 15th St. NW, another Savage-Fogarty project. The company hopes to go to settlement on the property within the next week. Plans call for a $12-million, 12-story office complex, also financed by Europeans. Outside D.C., Savage-Fogarty is using European money to build homes in Prince George's County, convert several suburban apartment buildings into condominiums and build a $40-million, five-office building complex called TransPotomac in Alexandria.
Property at 1001 Pennsylvania Ave. NW -- one of the jewels in the Pennsylvania Avenue Development Corp.'s redevelopment plan -- was taken over in May by Canada's Cadillac-Fairview Development Co., which has more than $3 billion in property the $160-million, 15-story office-shopping complex project from local developers.
While it has not yet launched a development project here, the arrival of Olympia-York, the largest privately owned development company in Canada is seen by local developers as a significant move. Olympia-York recently financed the $17-million purchase of the 60-year-old Investment Building on the northwest corner of 15th and K streets NW. Like executives of other Canadian development companies, Olympia-York officials say they see Washington as a prime development market.
Some Washington-area developers, who have shaped the growth of downtown development for three decades, are not exactly overjoyed with the influx of foreign competition, saying Washington is competitive enough without outsiders coming in -- especially foreigners with access to large pools of financing. Savage-Fogarty, for example, interested some Europeans in office development after promising them a limited amount of 12 percent construction financing secured from other European contacts. Local developers pay from 20 to 22 percent on construction loans from banks here.
Not all foreign developers moving into Washington are as public as the Canadians and Savage-Fogarty. In 1979, the Jagner Co. paid $700,000 to join L. J. Development, a limited partnership controlled by Washington developer Kingdon Gould Jr. and parking lot magnate Dominic F. Antonelli Jr. So far, L. J. Development has paid $1.3 million for the 2000 L Street building and $1.4 million for a tract of land in the 1300 block of H Street NW.
Washington always has drawn foreign investors. A Washington Post survey in 1979 showed that wealthy Arabs and European banks and pension funds had quietly purchased seven major downtown office buildings and that construction of the Watergate building was party financed with Vatican money. In the suburbs, foreigners own shopping centers in Gaithersburg and Laurel, Md., and Alexandria.
But the change from being landlords to developers is for the most part something new, a trend most experts believe will continue.
"The competition for office buildings in Washington is so fierce and the prices are so high that you have to build if you want a decent return," explains Savage-Fogarty executive Julien G. Redele. "We told them [European investors]: 'You have to create your own product, build you own building. The risk is larger, but so is the return.'"
It was Daon's purchase at 13th Street and New York Avenue NW that dramatically signaled the arrival of foreign developers in the city. Daon paid a partnership headed by Antonelli and Stanley R. Bender a record-breaking $615 per square foot for the vacant tract, nearly $100 per square foot more than anyone has ever paid for office-site land in Washington. Officials say Antonelli and Bender netted $30 million profit from the sale.
A month later, Cadillac-Fairview reportedly paid $600 per square foot to buy into the 1001 Pennsylvania Avenue project.
Foreigners want to build rather than buy office buildings for many reasons. If investors buy an existing building, they may get a 4 to 6 percent return, Savage-Fogarty's Redele said. If the developer builds, investors can get 10 percent or more, he said.
The Washington market is especially attractive. "If you build in Detroit and the auto industry goes bad, the whole city goes bad," said Redele. "But Washington is stable."
Surveys show that the vacancy rate in Washington office buildings has not exceeded 3 percent in the last three years, pitting the Nation's Capital against Los Angeles as the best office-building market in the country.
"Effectively, there is no vacancy [for office space] in Washington right now," said Cole. "Even the holes in the ground are not vacant, everything on the drawing boards is committed."
"Everyone said we couldn't absorb more than 1 million square feet of office space each year, but we are absorbing 5 million a year and it doesn't seem to have a top," said John T. O'Neill of the Washington Apartment and Office Building Association.
It's that steamrolling demand that is attracting foreigners. "The Canadian market is one-tenth the size of the U.S. market," explains Robert I. Blackman, a vice president at Cadillac-Fairview.
Local development watchers like O'Neill, however, question how long Washington can absorb more office buildings. An estimated 75 million square feet of office space (not countingd government buildings) exists in the Washington area, and another 8.5 million square feet of new office space is scheduled for completion in 1982-83.
"The question is, will the market turn soft? I'm not sure in my own mind that we can continue to absorb at the rate we are building," O'Neill said.
Another question is whether Canadians can earn a profit after paying premium prices for land. Space is new downtown offices averages $22 to $23 per square foot. It's a low as $15 to $18 in old downtown buildings and from $18 to $20 in new suburban buildings, surveys show. Daon will likely have to charge three times the current rate to earn a profit after paying $615 per square foot for land.
"We are willing to take the risk because we are confident in the Washington market," said Daon's Levine. "We know it will pay off.