Vornado/Charles E. Smith, the local arm of New York-based Vornado Realty Trust, last week announced two major deals — with the law firm Sidley Austin and the U.S. Fish & Wildlife Service — that could lead to a changing of the tide for the firm locally.
For months, leasing brokers have been angling to lure the Washington offices of Sidley, the international law firm, out of the Vornado-managed 1501 K St. NW, where its lease expires in 2016.
Sidley occupies 289,000 square feet, a large enough lease for competitors to offer to develop a new building, such as the 620,000-square-foot office complex that Gould Properties and a partner are planning on New York Avenue NW.
Sidley seemed destined to become the latest law firm to jump from an old building to a new, more efficient one, and would have followed Covington & Burling, Arnold & Porter and Pillsbury Winthrop Shaw Pittman in opting for new digs.
But Vornado, which manages the building for majority owner JPMorgan and owns 5 percent of it, persuaded Sidley and its advisers JM Zell to sign an extension through 2031 for slightly more space.
“In a market where law firms are shrinking and generally moving into new spaces, Sidley will use swing space in our building while they renovate in place to make the space work better for them now and well into the future,” said Mitchell N. Schear, president of Vornado/Charles E. Smith, in a call with investors last week.
Malcolm Marshall, a broker with Cushman & Wakefield, said Vornado did not want to see vacancy further affect its stock price and was pushing the envelope to keep companies — a sign of how good the market is for office users. “They’ve done that with every group they’ve kind of aggressively gone after,” he said of Vornado. “They are really vying to hold on to that tenancy.”
Indeed, trouble in the Washington area office market has left developers and office owners scrambling to secure new tenants and doing what they can to re-sign those whose leases are expiring.
In Northern Virginia, for instance, the real estate firm CBRE reported a 16.2 percent vacancy rate in offices at the close of the second quarter, passing the previous high of 16 percent in 2002. Vornado is among those struggling, particularly at its Skyline office park in Falls Church, where occupancy is only 54.8 percent, and it has been engaged by a special servicer to address a $725.6 million balance on a loan the company took out at the peak of the market.
In the midst of those discussions, Schear revealed last week that he expected the company to finalize a lease very shortly that would bring the headquarters of the U.S. Fish & Wildlife Service — through a hotly contested government lease — from Ballston to its Skyline Technology Center building, at 5275 Leesburg Pike in Falls Church.
Fish & Wildlife would relocate in mid-2014, Schear said, though a spokesman for the General Services Administration said the agency had not technically approved a deal yet. It is the second major agency, following the National Science Foundation, to plan a move out of Ballston for more affordable digs elsewhere in Northern Virginia.
Many of Vornado’s problems trace back to vacancies caused by the Pentagon’s Base Realignment and Closure Commission. Schear said he has now replaced 54 percent of the 2 million square feet that emptied because of BRAC.
Skyline remains an issue, but Steven Roth, Vornado chairman and chief executive, told investors on the call that with Skyline, Vornado was close to an agreement that “will allow us to infuse the capital that’s necessary to re-lease that building.”
“It’s fairly baked,” Roth said on the call. “It’s just not ready for publication because the deal isn’t completely finalized, but we do know.”