A joint venture announced this week by IBM and a Boston-based developer will make IBM a commercial real estate landlord in the Washington area for the first time. The deal is one of five such transactions in the country revealed during the last three months, and more may follow, according to IBM.
A healthy economy and falling interest rates probably will prompt IBM to "look at more opportunities like this" in the future, said Susan M. Eldred, communications manager for IBM's real estate construction division. She denied, however, that the rash of real estate deals represents a trend toward more ownership by IBM.
Because the corporate giant is the Washington area's second-largest occupant of office space -- the federal government is the largest -- the prospect of IBM moving into space in its own buildings is enough to cause shivers in the commercial leasing market.
Such a move will take place after completion of the first of two buildings in the joint venture announced this week, when "some leases in the Washington area will be consolidated there," Eldred said.
IBM occupies 2.274 million square feet of space in the metropolitan area, nearly two-thirds of it in Northern Virginia and suburban Maryland. Of this space, 1.19 million square feet is leased and the remainder is owned by IBM, according to Eldred.
These figures, however, do not include the 1.5 million square foot Manassas facility that houses IBM's Federal Systems Division and General Technology Division. Also not included are 200,000 square feet of space in four buildings planned as an administration and test facility in Manassas. One of the four structures is completed and occupied, another is nearly finished and two others have not been built. Eldred's figure also leaves out the quarter of a million square feet of offices the company will occupy in the joint venture just announced.
When the Manassas buildings and the new project are added, IBM occupies nearly 4 million square feet of office and plant space in the area, a million more than are contained in the sprawling Pentagon.
The new venture consists of two office buildings, each with 250,000 square feet of space, in a Montgomery County office park at the intersection of the Beltway and I-270, according to the development company, Spaulding & Slye. IBM will occupy the entire building that is scheduled for completion late this summer. The second, expected to be ready for occupancy in January 1986, will be leased out, although no tenants have been signed up yet.
Spaulding & Slye, which will act as the managing general partner for the project, "started talking to IBM last summer" about the two buildings it already was planning for the site, to be called Rockledge Centre, said Randall W. Byrnes, Spaulding & Slye's senior vice president and regional manager. His firm will manage both buildings and handle leasing of the second structure, he said.
Neither IBM nor Spaulding & Slye would divulge the size of their ownership shares and other terms of the venture. In such deals, however, IBM often leases space from the company formed by its partnership with a developer, and in effect pays rent to itself, according to Eldred.
Byrnes would not discuss specific amounts of money involved in the agreement, but he said it will cost about $75 million to develop the twin buildings.
Although Montgomery County's office vacancy rate is over 20 percent, Byrnes said, he does not expect to have trouble finding tenants for the second building. "Corporate titans," such as Martin Marietta and the Marriott Corp., occupy space in the area, creating an "exceptional" demand for space there, he said.
While this is the fifth joint venture IBM has announced since October, it is not a new undertaking for the company, Eldred said. The corporate giant "has several such projects, some going back to the 1970s."
"There have been a flurry of these projects recently because we needed space in these areas," she said. Joining with a developer to put up the company's own buildings "looked like the right financial moves."
IBM's four other new joint ventures will be located in Philadelphia, Dallas, Atlanta and New York City. When completed, they will contain a total of 3.55 million square feet of office space, of which IBM will occupy 1.63 million square feet, Eldred said.
Unlike many large companies, IBM traditionally has owned more space than it leases. At the end of 1975, the corporation owned 37.5 million square feet of space and leased another 19 million throughout the United States. Nine years later, at the end of 1984, those figures had risen to a staggering 55 million square feet of owned space and 43 million square feet of leased quarters, according to Eldred.
One reason IBM holds title to so much space is that the company prefers to locate its manufacturing and laboratory facilities in structures it designs and owns, she said. With office space, the company has more flexibility to buy or lease, depending on which route makes the most economic sense, she added.
IBM expects some of its divisions, such as sales and services, to grow in the near future, producing a need for more office space. This is why the company expects to be on the lookout for good deals, and in some areas, "when leases are up, we may buy," Eldred said.
The purchase of office space by other large companies appears to be on the increase across the country, according to Howard Flax, vice president and regional manager in Washington for the Abacus Group, a commercial mortgage banking firm.
"But I'm not sure it's a . . . trend. It depends on how purchase-versus-lease affects the balance sheets," he said. "The good thing about a purchase is that it fixes your cost of space forever, as opposed to leasing."
Flax said it was "trendy" in the late 1970s to build offices and rent out some of them, as IBM is doing with its new joint ventures. Companies were speculating in real estate "as a hedge against inflation."
That trend has slowed because of the cost of land and of carrying space until it is leased.
"Space cost has become so exorbitant . . . that taking on the risk is not attractive," Flax said.
Another industry specialist, Robert McLean of Cushman & Wakefield, a commercial real estate firm, believes, however, that there is "a strong trend . . . throughout the country" toward ownership of buildings by large corporations. These companies "want to have facilities tailor-made to their operations," he said. They want to ensure assure that their communications technology needs are met, and that they have their buildings that take into account the markets they are serving and their personnel practices, McLean added.