Office buildings, which are a billion-dollar economic force in this paperwork-heavy Washington area with a total of more than 100 million square feet of space being used by government and private tenants, are now blessed with a high over-all occupancy and a current tight market in new apace in downtown.
In fact, the mood of the professional builders, developers and leasing and managing professionals is almost euphoric. The only inhibition is the memory of a glut of unleased office space in 1975 and the prospect of another cycle of oversupply in 1979, or even late in 1978. Even now eight new office buildings are under way or almost ready to be started in downtown and plans are known to be under way for that many more before this year ends.
Already preleasing of new space at rates that now range between $10.30 and $12 a square foot annually in prime midtown locations, is under way.For instance, the accounting firm of Peat, Marwick and Mitchell is reported to have spoken for a large chunk of space in a building barely started at 1990 K St. NW. And Booz, Allen and Hamilton, Inc., management consultants, is expected to take about 80,000 square feet in a new East-West Towers building in Bethesda, where the rates are about $2 less a square foot than for new space in midtown.
However, even with all the current activity in preleasing and the lack of major chunks of new space for immediate occupancy, there are still many choice, smaller spaces of 5,000 feet or less for $7.50 a foot and older spaces for $5 a foot even in midtown. But the costs of new development, utilities and maintenance have driven up the price of almost all office space in recent years. And now it is more difficult to get concession, or "goodies" from owners wanting to fill up a slack building.
In terms of viewing the Washington area office building market, in which nearly a hundred leasing specialists work full time, it should be recognized that total private office space in the area now totals about 70 million square feet, with about 40 million feet in the District and 24 million feet in suburban Maryland and 11 million more feet in nearby Virginia. Also, the federal government has about 35 million square feet in 175 buildings owned by the U.S. and also leases about 28 million square feet in 318 privately owned buildings, usually at rates below the private market.
In terms of private office tenants, this area thrives with the concentration and proliferation of what have become to be known as the "three A's" attorney, accountants and associations. They are a potent force in the market. Among the area's largest office space (over 70,000 square feet) users are IBM, the American Bankers Association, the Covington & Burling law firm, American Petroleum Institute in downtown and Time-Life Books in a new atrium building in old Alexandria. Another major space user is Amtrak in downtown. And there are others.
A view of the current market, as seen by Peter Speier, head of the Julien J. Studley leasing office here (and also in other major cities), this city's central business district absorbs 1.5 million square feet or more of space in a good year. "But new space coming on the market in the central business district in 1977 totals only 630,000 square feet, less than half the usual demand. And of that total, 260,000 feet have been preleased," he said, adding that more than 200,000 feet are in a pending or negotiating stage. That leaves only about 125,000 available in completed new buildings.
Speier and other professionals now like to use the term "double-digit rentals," which they expect to rise. Speier sees an averge of $12.50 a foot by 1980. However, that inflationary trend might be dictated nore by costs of construction and energy, and possibly be offset somewhat by an expected oversupply of space in 1979. In any case, Speier and other also agree that the main action center is downtown, in spite of the professional tax.
Patrick Cassidy, director of commercial leasing for Barnes, Morris & Pardoe (a firm active in both leasing and sales of downtown property), pointed out that new leases have increased $1 to $2 a square foot in the past six months. He called it an "unprecedented pace upward," obviously with some relationship to the current space shortage and to the mounting costs of energy and taxes that are written into most leases these days. Incidentally, Cassidy sees a continuing move eastward for the development of new space because of lesser land costs.
It was pointed out that the developer of new office building now faces a likely cost of $30 a foot for bricks and mortar, $15 to $20 for land for each square foot of the building and $3 to $7 in soft costs. That's total of about $55 to $60 in most prime locations. Most of the permanent financing now comes from insurance companies or a consortium of savings and loan associates or a pension fund. Terms are now 9 to 9 1/2 per cent, with a 25 or 30 years term payout schedule, and a chance to refinance in 10 years. It usually takes at least 18 months to complete a good-size office building. Most new lease run for 10 years, if the space is 5,000 feet or more. And many tenants now insist on options to get more space for expected growth.
Irwin Altman, senior leasing executive with the Charles E. Smith firm, said that "growth from within" is a major force in the office leasing market along with the movement of major coroprationsand consultants to this city from other metro areas. He figures that downtown now is nearly 99 per cent leased and that the hub of office leasing is Connecticut and L NW intersection, where his firm has the leasing for a new building that developer Gerald Miller is doing over the Metro station on the northeast corner. However, Cassidy and some others see the downtown keystone as being at Connecticut and K, mostly because of the substantial buildings to the south, east and west of that point at Farragut Square.
Thomas G. Owens, of Shannon & Luchs, now is chairman of the commercial leasing committee of the Washington Board of Realtors. "We're running out of space," he said, pointing out the new and huge International Square building being completed by Oliver T. Carr is leasing well and that two floors are now pending at 3217 K (formerly Dodge Center) in Georgetown. He added that the word is that is big chunk of space is being taken at 400 N. Capitol, where Braedon handles leasing and where the Governor's Conference is located already. In new construction, the Oliver T. Carr firm has started the first phase of the big Westridge complex at M Street and Pennsylvania Avenue NW, where there will be mixed use development that eventually will encompass 2 million square feet of office space in the West End and many residential units too. Weihe, Black Jeffries and Strassman is architect for the entire project, with the George Hyman Co. being the general contractor for the first phase. The Carr firm, in addition to Charles E, Smith, Marshall Coyne and Blake Construction, has been a major force in the vast rebuilding that has occurred in downtown Washington over the past 15 years.
The developer at 1990 K is Swesnik & Blum and Melvin Lenkin has the developing-building hand in new structures being completed at 818 Connecticut and 1775 Pennysylvania. Quadrangle Development Corp. has started a sizable new office building t 1919 Pennsylvania. Donohoe Construction has a new building at 4200 Wisconsin and John Akridge is the developer at 1627 K. Akridge is the young man who also has plans for a partial "air rights" building at the northeast corner of 15th and K NW., where he has made an assembly. He needs District approval for a contract to use space over an existing alley on 15th, just north of K. The firm headed by veteran Edwin Weihe is the architect. As the result of this projected building, which would involve demolition of the old H.L. Rust Co. building on the corner, plus others, the 42-year-old Rust firm will move in April to the International Club building at 1800 K.
Commercial real estate professional James E. Farr (Farr-Jewett & Associates, Inc.) pointed out that his firm handled the transaction involving the assembly and $5 million site sale of more than an acre at New Hampshire and 19th NW, where New York developer Theodore Gould plans a large building that would combine special purpose and commerical zoning under Article 75 of the District regulations for a large site with mixed use. "The idea is to use the floor area ratio of the Columbia Historical Society, which will stay, to make the nearby buildings larger. This building, which could go about 300,000 square feet, is being designed by the Vlastimil Koubek firm," Farr said. The site is just south of the Euran building on Dupont Circle.
Meanwhile, two new buildings have been started on corners of 19th and L NW, with Thomas P. Brown III and sons doing one and Marshall Coyne the other. It is also known that there are offices buildings in the eyes of owners of ground on L Street, just west of Connecticut; at 1575 I St. NW., and at the former Goodwill site at New Hampshire and M, Plus other sites on 19th Street and at 19th and I. In fact, there's even a report that restaurateur-developer Ulysses (Blackie) Augur has plans for a big hotel or building over his sprawling restaurant at 22d and M.
Additionally, there's leasing and construction activity in suburban areas, with Bethesda, Rosslyn, Tysons Corner-Westpark and the Crystal City areas being strong. As architect William F. Vosbeck Jr., FAIA of the VVKR Partnership in Alexandria, put it: "Associations are gravitating toward the suburbs, especially to Virginia. Land costs, low compared with downtown Washington (now often $200 a square foot for land), are a major influence. For instance, the National Automoblie Dealers Association chose a site near Tysons Corner, one of the area's fastest growing locations. And the extra space available was leased readily."
Vosbeck added another dimension in regard to associations. "The American Society of Association Executives was in the news recenlty in regard to a new building at 1575 I St., where a group plans to develop a 12-story building. ASAE will occupy 10,000 feet and rent the rest to association tenants and ailied organizations. There's definitely a trend toward including rental space in association buildings."
That's look at the Washington area office market today. It's far brighter than two years ago, with optimism abounding. New assemblies of land are being made and architects are creating drawings for nre structures. Occupancy is much higher than in most other American cities and the Nation's Capital still seems to be gaining stature as "the place to be."
However, a few judicious realty professional persons who remember the gult of new space that occurred the mid-1960s, again in 1970 and again in 1975, see the cycles of shortage and oversupply shortening. Thus, some observers wonder how the offices leasing market will be here in the spring of 1979.
It could be cold, cold, not cool.