A new downtown Washington office building that is virtually empty has been sold to the New York Life Insurance Co., which held a $17.8 million mortgage on the property.
The building is the first among the new crop of office buildings east of 15th Street NW to be sold, despite the unprecedented vacancy rates suffered by the Washington office market for more than a year, according to several real estate experts.
They said the sale is not the beginning of a trend of developers pulling out, because many of these buildings are owned by some of the area's wealthiest and best known developers and some large insurance companies.
The insurance company purchased the 11-story building at 1333 H St. NW from developer Robert C. Elder for $19.2 million on May 2, said Arlen Dahlquist, New York Life vice president for real estate. After paying off the mortgage, Elder received approximately $1.4 million as "our consideration of his equity," said Dahlquist.
"It is a good investment in a quality building in a good location," said Kathleen A. Cosgrove, head of the local New York Life real estate office. She said 34,000 square feet, or about one and one-half floors, had been leased.
Elder would not comment on the reasons for the sale. He said that the downtown market "is difficult, to say the least. It is certainly not as attractive an opportunity as we have in other cities."
The building is one of about a dozen new office buildings that started springing up in the city's honky-tonk Franklin Park area east of 15th Street three years ago in the midst of the office building boom.
By then, the traditional office building locations along K Street NW and its environs were saturated with office space, and developers finally crossed 15th Street NW eastward into the fraying fringe of the old downtown.
An estimated 3 to 4 million square feet of space is either finished or under construction around Franklin Park. Building has continued during the office slump because the plans and financial commitments were made at least two to three years ago and construction could not be stopped even though the recession virtually crushed the office market.
Many of these new buildings are now high-rise ghost towns. Nearly 5 million square feet of new office space came on the market in Washington in 1982, with another 4 to 4.5 million planned for delivery this year and another 2.1 to 2.9 million in 1984, according to Cushman & Wakefield and Smithy Braedon. Before the boom, only about 2 million square feet of space was opened annually in the city.
Elder, who formerly worked for the Boston development firm of Cabot, Cabot & Forbes and was in charge of that firm's development of 1201 Pennsylvania Avenue NW, was a relative newcomer to Washington, according to several real estate sources. The H Street building was his first and only independent Washington venture.
"His building was among one of the first available east of 15th Street NW and I think the strength of his competition has more staying power," said Steve Goldstein, vice president for the Washington office of Julien J. Studley Inc., a leasing company.
The competition reads like a who's who of developers in Washington. Parking lot magnate Dominic Antonelli has a building down the street at 1301 New York Ave. NW; Blake Construction, a block away at 1350 New York Ave. NW; Daon, a Canadian real estate company, and the Prudential Life Insurance Co., at 1300 New York Ave. NW; Oliver T. Carr and the Equitable Life Assurance Society, at 655 15th St. NW; Melvin Lenkin, at 1400 I St. NW; Charles E. Smith and Richmarr, at 1250 I St. NW, and JBG, at 1220 L St. and 1400 K St. NW
The insurance companies came to town during the boom and widely fluctuating interest rates. They changed from their traditional role of lender to part owner so they could share in the buildings' future profits and hedge against inflation.
"They have the wherewithal to stay with the building until the market turns around," said developer John Chip Akridge III. "When you have a billion-dollar institution investing, you have strong project sponsorship, and they don't want egg on their face."
In order to become partners with local developers, the insurance companies often would put up all the cash needed to buy land, pay architects, engineers and lawyers, plus lend the money for the permanent mortgage at below-market interest rates, Akridge said.
In return, the companies would share the return from rents, tax write-offs and profits from the buildings' eventual sale, usually five to 10 years later.
At the H Street NW building, New York Life was not a partner but was to receive 50 percent of the building's profits and set a "favorable below-market interest rate" on the permanent mortgage, according to Dahlquist and documents filed with the D.C. Recorder of Deeds.
Dahlquist said the mortgage interest rate was 12 percent.
Some developers, particularly those not associated with insurance companies, borrowed enough money as part of their construction loans to pay their bills during a slow lease-up.