Foreign investors are changing the face of the city. They also are changing the dynamics of Washington real estate, spending record amounts on land and construction for projects with rents among the highest in town.
Washingtonians can see the fruits of foreign investment for themselves. Foreign-backed additions to the cityscape are beginning to appear all over town, from Connecticut Avenue and M Street, where British interests are renovating the Domenet Building, to 1300 New York Ave., where the American subsidiary of a Canadian firm is finishing the largest private office building in the city.
The impact of foreign investment on the economics of Washington real estate is harder to measure. International brokers play down their clients' impact, saying they neither dominate the market nor have any exemption from the laws of supply and demand that determine rents and property values.
But it is hard to ignore the amounts of money that foreign interests are spending for land, buildings and construction. Second British American Properties paid about $1,000 a square foot, or $10.45 million, for the Domenet Building site, breaking the previous land sales price record set when Daon Corp. purchased the 1300 New York Ave. site for $46 million, or about $605 a square foot.
The Daon project is not only the largest private office building in the city but, at a cost of $160 million, may also be the most expensive, according to leasing agent Coldwell Banker. A foreign investor also paid a record price for an existing building when the Prudential Assurance Co. of the United Kingdom paid $182 a square foot for the Board of Trade Building at 1129 20th St. NW, according to Coldwell Banker.
The consultants, who represent foreign investors here, admit that their projects will rent for more than most office tenants are used to paying. "We're above the market, and we recognize it," said Vernon Knarr of Coldwell Banker, leasing agent for 1300 New York Ave., which will have office rents of between $30 and $32 a square foot, net of operating expenses. The Domenet Building and an adjoining new development will also rent in the low- to mid-30s.
But those consultants deny that their clients' projects will pull rents upward across the board. "There has always been a market for prime office space," said Brian J. McSweeney, public relations consultant to Daon Corp. "I think what Daon is doing is establishing a new standard for prime space."
Although rents generally will increase as the market absorbs the current oversupply of space, the prime space developed by foreign investors could prolong the tenants' market for older buildings as their owners try to hang on to or replace tenants who move to new projects or better locations. "The less-than-prime space will be more price sensitive, allowing continued bidding on price," McSweeney said.
In the long run, tenants will benefit from foreign ownership, according to Graham Bond, senior vice president of Richard Ellis Inc., a British consulting firm that represents foreign clients in the United States. "They will end up with a potentially more stable type of landlord who has built a better quality building and is committed to better maintenance," he said.
Because they are interested in long-term returns, foreign owners will take extra steps to ensure good tenant relations, Bond said. "Foreign investors have a very definite sense of pride of ownership over and above what's considered good management," he said.
A caption in Saturday's Real Estate section incorrectly identified the Daon Corp.'s building at 1300 New York Ave. NW. In addition, the name of the Demonet Building was misspelled.