When developers erected a semicircle of office towers along Leesburg Pike in the 1970s and 1980s, the buildings attracted a crowd of security agencies and contractors eager for highway access to the Pentagon and National Airport.
That business model, tried and true for the past four decades, helped shape a Washington region where office corridors rose along major suburban thoroughfares, each seemingly as successful as the next. But that march is sputtering.
Record-high vacancies have become the new normal as employers curb their appetite for space and shift their attention to more urban locales. Some office buildings have been empty so long that several of the region’s stalwart development firms are tearing up their plans and selling off large chunks of property at bargain-basement prices in favor of pricier, more centrally located buildings.
Buildings began to empty during the recession, and they took another punch when the government shut down and federal spending slowed. The local economy began to pick up last year, but the recovery has been spotty, with construction cranes dotting the Washington skyline but absent from many parts of the suburbs, particularly areas far from mass transit.
After the Defense Information Systems Agency, Deloitte, SAIC and other tenants left or downsized at the Leesburg Pike buildings, leasing has been so slow that owner Vornado Realty Trust of New York booked a $160 million loss on the properties in the first quarter this year and put them on the market.
A $678 million loan on the buildings has been transferred to a special servicing company because it is at risk of foreclosure. The buildings, called Skyline City, are 44 percent leased.
Vornado’s chief executive, Steven Roth, said the company has been looking to sell the properties and spin off its entire Washington-area portfolio (which also includes 70 percent of the commercial space in Crystal City) into a new business.
In a recent call with investors, Roth said he believed Vornado would benefit “by being a focused New York business, so that global investors can invest in the New York platform, the New York assets, and our New York activities, separately from Washington” or other assets.
The pain for Washington building owners is most acute in the suburbs, where vacancy rates have been on the rise for five years in a row and are about double that of the District. By one count, there are 151 spaces of 50,000 square feet or more available in Northern Virginia alone.
But downtown has not been spared; developers of newly erected buildings steal companies from old ones as a market flush with space gives businesses freer hand to negotiate favorable terms. “For tenants, there just continue to be a lot of options,” said Thomas Fulcher of the brokerage firm Savills Studley. He said a company looking for 30,000 square feet on or around K Street could choose from 30 different buildings.
“People are just not taking as much office space anymore,” Fulcher said. “Even if companies are growing, they are not taking as much space.”
So rather than continue to try to lease the buildings, some of Washington’s most tenured firms are selling them off or moving on to greener pastures.
Seven weeks ago, First Potomac Realty Trust, a half-billion-dollar Bethesda firm, jettisoned 26 office and industrial buildings in Chantilly, Herndon, Manassas, Merrifield and Reston, for $96 million.
The sale price was $26.5 million below what the company paid for them years before — an unfortunate buy-high, sell-low maneuver — but the buildings were about a quarter empty, and First Potomac chief executive Robert Milkovich says he plans on dumping another $200 million in similar properties the same way.
Instead, the company is focused on buying properties near Metro stations, restaurants and also bike lanes, a variable for evaluating office buildings that, Milkovich said in an interview, he had never previously considered in his 25-year career in Washington real estate.
“I’m just continually amazed at how many people are commuting around downtown by bicycle,” he said. “I don’t think that was the case even five years ago.”
The buildings First Potomac sold are “the poster child of suburban office space obsolescence,” said Greg Leisch of the research and brokerage firm NGKF.
So few companies are leasing space away from Metro stations and walkable neighborhoods that properties in office parks and in traffic-riddled corridors have become risky propositions for landlords even at bargain prices.
“The marketplace has evolved in the last 10 or 11 years where tenants can be much more choosy today, and they are,” he said. “So the advantages that were true back then are much more pronounced today.”
Even for JBG Cos., the top owner of Washington real estate with rights to 44.6 million square feet, a move out of Washington is afoot. For more than 50 years, the Chevy Chase-based firm has been fully locally focused, becoming the darling of Ivy League endowment funds with projects such as U Street condominiums and the Wardman Park Hotel.
JBG is considering a merger with New York Real Estate Investment Trust, according to a report from Reuters, which would give it 3.3 million square feet in New York.
JBG declined to comment, and the New York company did not respond to inquiries, but executives and an investor familiar with JBG’s plans said that’s just the first step and that JBG also plans to move into San Francisco and Boston.
“We have for a long time had our eye on taking our mixed-use expertise to other gateway markets where the demand drivers are similar and the demographics are similar and frankly where the market needs for that kind of an operator are similar,” said the investor, who spoke on the condition of anonymity because of Securities and Exchange Commission rules.
The investor said the company planned to move into one new market at a time: “We’ve always believed in starting with one market so we can demonstrate our ability to master this kind of expansion before we branch out beyond that.”
Like other firms, JBG is tightening its focus on properties in the urban core. So what will become of the company’s holdings in farther-out areas along the Dulles Toll Road, Interstate 295 and Interstate 270?
Those, the executives said, will ultimately be sold.