High-flying Canadian developers who swooped into the Washington area's building boom a few years ago are now perilously close to some crash landings.
In recent months the Canadians have been selling off property, delaying projects and seeking partners who can help finance their developments in Washington and across the nation.
The major Canadian projects in this area are three large office buildings within a few blocks of the White House; an extensive office and retail complex in Fairfax County planned at the key intersection of Rte. 50 and the Beltway; and residential land and buildings in Fairfax, Montgomery and Howard counties.
Developers of two of the massive office building projects have so far been unable to find tenants. One reportedly has been forced to give up a major share of its equity to obtain funding guarantees; and the other has delayed start of construction.
The four firms with large interests here are part of a southward movement by several of Canada's giant development corporations, beginning in the mid1970s. With quick access to funds from large banks back home and lured by the prospect of big profits in the then burgeoning U. S. market, the Canadians set records in prices paid for land across the country.
When interest rates shot up and the recession began to hurt the real estate market, the big-spending Canadian companies often found themselves burdened with expensive properties and facing shrinking demand for office and retail space.
Local developers say the Canadians paid as much as 20 to 35 percent more than market rates. And, with the buildings that two of the companies plan to erect downtown, they will add to the glut of office space that is not expected to dissipate for several years.
"Couple all those things together and put on top of it a bad leasing market with an overabundance of space, and you have what they have now -- a disaster," said one developer.
Cadillac Fairview Corp., North America's largest real estate firm, far bigger than most U.S. companies, and Daon, another Canadian corporate behemoth, together will add 1.46 million square feet of office space in the District when their office building projects are completed.
In 1981, Daon bought land on the southwest corner of 13th Street and New York Avenue NW for $615 per square foot, a local record. The company bought one parcel for $40 million and three others for a total of $9.7 million.
On this land, which covers about three-fourths of the block, Daon has started construction of a 12-story office building that will contain 1.2 million square feet, including parking and common areas. The plan is to lease 93,000 square feet to retail businesses.
None of the 730,000 square feet of office space in the 12-story structure has been leased. Local developers and brokers say tenants will be hard to find at the building's asking price of $32 per square foot plus operating expenses, which would add at least another $6 per square foot.
Daon "will get no tenants at that price" during the present recession, said Craig Lemle, a vice president of Julian J. Studley Inc., office building leasing specialists. Studley's most recent market survey, for July and August, shows rentals averaging $29.50 per square foot in new buildings and $24.20 in older buildings in the District. Rents in the Maryland and Virginia suburbs for the same period averaged $16.77 and $12.45 respectively.
John T. O'Neill, executive vice president of the Apartment and Office Building Association, agreed, and added that "any major user of space can make a nice deal now" given today's overabundant supply of office space in the District.
Daon's construction is being financed by a $132 million loan from the Bank of Nova Scotia. It also is backed by $160 million in equity funding from the Prudential Insurance Co. in return for an undisclosed share of the completed project. Estimates range from 70 to 90 percent for Prudential, with the most knowledgeable source placing it at 75 percent.
While work continues at 1300 New York Ave., Daon is fighting for its corporate life. The Vancouver-based corporation is negotiating with its bankers and hoping to avoid collapse by restructuring nearly $1.9 billion in debts. In addition, the company announced this week that it has reached a settlement in a case in which a New York bank charged Daon had not repaid $37.3 million in loans for two California projects.
Cadillac Fairview's massive project, named 1001 Pennsylvania, will cover the entire block in northwest bounded by Pennsylvania Avenue, E Street, 10th Street and 11th Street. A Cadillac Fairview official would not disclose the total building cost, but said $200 million "is in the ballpark."
The developer originally planned to start work last spring. But the company wants to have tenants signed up for a third of the space before breaking ground, said Michael V. Prentiss, president of Cadillac Fairview Urban Development Inc., a Dallas-based subsidiary of the Canadian corporation.
Prentiss said his company is negotiating now "with a couple of major tenants" and hopes to sign them up and begin construction within the next 12 months. Work on the first phase would be completed in 15 to 18 months, he added.
The Pennsylvania Avenue Development Corporation, which is overseeing the rejuvenation of the historic avenue, has given Cadillac Fairview permission to complete its project in two phases. That division of the construction is necessary because "the market is not strong enough to support" the project all at once, according to Prentiss.
Before giving its blessing to the two-part construction, the PADC won assurances that the highly praised design by the Washington architectural firm Hartman/Cox will be followed, said executive director Tom Regan.
"We made a basic agreement to protect the design our board previously approved," Regan said. Cadillac Fairview also pledged that the entire project would be completed within eight years and gave the PADC a letter of credit for an undisclosed amount as a guarantee. Regan said the the developer will forfeit the money in the letter of credit if the project is not completed.
Regan also said that if the project were sold to another development company, that firm would be required to follow the construction plans approved by the PADC.
Those plans include an interior atrium that the PADC insisted must be built as originally designed, despite a request from the developer for changes, said Regan. The builder also will preserve and incorporate into the finished project two historic buildings on the block and the facades of four older structures.
Prentiss said he is confident that his company will find tenants for the 730,000 square feet of office space and 50,000 square feet of retail space in the building because it is in an "excellent location" and because "Washington in the long term is a very good market."
Leasing experts say, however, that Cadillac Fairview will be hard pressed to find tenants willing to pay the high rents it must get to make money. And without anchor tenants, the developer is unlikely to find construction loans, these experts add.
Rents being asked for 1001 Pennsylvania range from $28 and $29 per square foot for the second floor to about $40 for 14th floor offices, said M. Anthony Gould of Shannon and Luchs Co., who is handling the leasing. Gould said the first phase of the building will be ready for occupancy in mid1985 when, he predicts, the office space glut will have disappeared.
Others disagree. O'Neill of the Apartment and Office Building Association calls the office building vacancy rate "horrendous." He said he expects the results of his association's fall survey, due out in about two weeks, to show a vacancy rate of 8 to 10 percent in existing buildings.
In addition, structures now under construction will contain about 5 million square feet of space. And many do not yet have tenants. Traditionally, Washington has absorbed 2 million square feet of new space per year, O'Neill said.
More than half a dozen buildings near the Daon and Cadillac Fairview projects are under construction and advertising for tenants. Space is priced in the mid $20s per square foot.
"Corporate America is on hold," says O'Neill. "Nobody is making decisions to expand, to move or to lease space. They want to wait and see what happens" to the economy.
Cadillac Fairview's problems are more serious in other areas. The company two weeks ago forfeited a $21 million down payment for midtown Manhattan property on which it had planned to put up an office tower. The company agreed to pay $105 million for the site, setting a record of $1,900 per square foot for the property. Citibank, the lender and former owner, is taking back the site in the wake of Cadillac Fairview's default on an $84 million mortgage.
Earlier this year, Cadillac Fairview's corporate leaders decided to sell $1.9 billion in land and housing properties so that the company could concentrate on more lucrative commercial properties, said a spokesman at company headquarters in Toronto. Before the selling began, Cadillac Fairview's assets totaled $3.5 billion, according to the corporation's interim report.
Elsewhere, the company is agressively building in the U.S. Sun Belt, particularly Texas and California. In Houston, for example, it is part of a joint venture with a Texas firm to develop a 33-block area of the city center with offices; luxury hotels and apartments; and shopping malls.
Cadillac Fairview and Costain, also a Canadian firm, hold the southeast and northeast quadrants, respectively, of the Chiles Tract. One of the most valuable pieces of land in Fairfax County, the tract is located at the intersection of Rte. 50 and the Beltway, where a major office and shopping settlement is expected to grow up in coming years.
Both Canadian companies have sold the portions of their quadrants zoned for residences to local developers, who will build town houses and condominium apartments.
On its remaining 107 acres, Costain plans to build 1.7 million square feet of office space and 50,000 square feet of service-oriented retail businesses, such as restaurants and banks, said Michael McGuire, executive vice president for commercial leasing for Costain Washington Inc.
Costain and Cadillac Fairview have agreed to build a "large traffic management system" to serve the two sites. Under terms of the companies' agreement with Fairfax County, the elaborate system of highways, access roads and on and off ramps must be completed before occupancy permits are issued for its buildings. The two Canadian firms will share the cost, estimated at between $15 million and $20 million, said McGuire. He said work on the road system is expected to start "in the near future" and will take about 18 months to complete.
He saidThe entire complex of offices and retail space will be built over the next five years, he added.
Costain has offices and properties in several major U.S. cities, but, in Canadian real estate terms, is relatively small with $407 million in assets reported last year. The company's one-year growth is impressive, however, up from $264 million in assets in 1980. McGuire said his company is focusing its efforts on expanding its U.S. activities, with at least half if not more of its work taking place in this country.
David Adler, president of Costain Washington Inc., said the company entered the Washington metropolitan area residential market about 4 1/2 years ago by buying property in Fairfax County. It has since expanded bought to include projects in Montgomery and Howard counties as well. Adler said the company's assets in the three counties amount to about $50 million in land and an apartment building being converted to condominiums. Costain also has built about 300 single-family homes here that sold in the $130,000 to $150,000 range, he said.
The third Canadian holding in the District of Columbia is the Investment Building at 15th and K streets NW, which is owned by Olympia & York.
The company has concentrated on the New York market, where it bought eight buildings, then worth $320 million, six years ago. Office rents have tripled since and the properties are now said to be worth $1.75 billion. Their first major project was the largest renovation in the history of the city, a 1.1 billion-square-foot project in midtown Manhattan.
Recently, however, most attention has focused on the company's plan to build the $1.5 billion Battery Park housing and office complex to be known as the World Financial Center. It will hold a four-tower, 6 million-square-foot complex in lower Manhattan.
Amid great fanfare and press hoopla, American Express Co. announced last March that they it would sell their its nearby headquarters building to Olympia & York for $240 million and Amex would sign a 35-year, $2-billion-lease for 2.25 million square feet of space. A second building at the site has been leased by City Investing Co.
Since that announcement all has not been well. No final agreement has been reached on the property although Olympia & York says the problems are not terribly all that consequential. Another problem has been the company's decision to finance the project primarily from U.S. rather than Canadian banks. Plans to raise the money by selling interest part ownership in their New York properties were abandoned when interests rates fell and assembling long-term financing became more attractive.