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Developer: Capitol Crossing is ‘very tough to get,’ but will be worth it

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Jeffrey I. Sussman was facing stiff head winds with his ambitious 2.2 million-square-foot development project, Capitol Crossing.

And that was before the kerfuffle over his proposed closing of Interstate 395.

Sussman and the New York-based company he founded 43 years ago — Property Group Partners — have forged an expertise in developing buildings that quickly attract the prestigious law firms and professional services companies that typically pay some of the highest rents in Washington.

In 2006, the company completed 1101 New York Ave. NW and landed a slew of tenants led by Ernst & Young. Three years later, it completed a glass-skinned building a few blocks from the White House that attracted the law firm Fried Frank and sold earlier this year for a record price of $948 per square foot.

Capitol Crossing is Sussman’s boldest Washington effort to date, one that requires years of engineering and political maneuvering and which is moving headlong into a leasing market that some commercial real estate analysts are calling the worst in decades.

In a deal with the District that Sussman inked in 2010, his company — then named Louis Dreyfus Property Group — acquired the “air rights” to 6.8 acres above the sunken I-395 entrance. The project offers the District an opportunity to grow its tax base by an estimated $30 million and recover the street grid in the area by connecting F and G streets between Second and Third streets.

Sussman lined up a Fortune 500 insurance company with whom he previously partnered, W.R. Berkley Corp. of Greenwich, Conn., to put up the lion’s share of the development costs, which could be near $1.5 billion. It is the chance to build four new office properties, the likes of which Sussman has been so successful at leasing, at a time when companies — led by tech firms — and their employees are quickly moving into downtown areas.

“That’s where their employees are going to want to be,” Sussman said. “You read about it in San Francisco because those employees don’t want to be in Palo Alto, despite the incentives of buses and shuttles and bikes. They’re going to want to be in the heart of the city.”

The agreement, however, carries tremendous upfront costs before Sussman can collect a dime of rent from the project.

To begin with, a 138-year-old brick building that housed District’s first synagogue was on the development site and could not be torn down. PGP negotiated a deal with the Jewish Historical Society of Greater Washington to move the 273-ton structure, twice. Once to get it off the development site, which was done by flatbed truck before construction began, and a second time to what will be its permanent home as a museum at Third and F streets.

Then there is the matter of the deck on which the buildings will sit, estimated to cost $200 million. Sussman has been pushing to get the Federal Highway Administration to close more than half a mile of I-395 in order to save as much as 18 months of construction time. To improve its chances, Property Group Partners has spent $330,000 with the public affairs firm Mercury/Clark & Weinstock since 2012, according to

But the suggestion was met with disdain by drivers last week. Mayor Vincent C. Gray (D) indicated he would not request the closure, effectively killing the idea.

Looking at the leasing market downtown, a delayed construction schedule might not be such a bad thing. The white collar firms Sussman is used to courting have been downsizing, pushing the vacancy rate downtown to 11.3 percent. About 823,000 more square feet was vacated than occupied over the past 12 months. Also, one of the few big tenants in the market, Fannie Mae, recently took a pass on Capitol Crossing.

Harrell and Sussman both said buildings with efficient floor layouts are still leasing well. Construction of the deck, Harrell said, would give companies looking to move far more assurance.

“Once they make the investment of $200 million, they’ve played the card at that point and they’ve got to go,” he said.

Sussman said it’s been difficult to lease the project because people have a hard time envisioning three new city blocks where there is currently empty space. “It’s very tough to get it. To see that. And I think once this infrastructure is complete, in seven or eight years people will say, ‘How come we didn’t do that before?’ ”

PGP has been marketing the project for more than a two years from its office on New York Avenue, but recently began pulling out all the stops in search of tenants. Scrapping an old three-dimensional model of the site, PGP purchased a new one that shows the neighborhood around it in intricate detail — down to the tulips along the sidewalk — and a second that interacts with an iPad program to highlight amenities.

Visitors are shown a flashy video that’s nearly three minutes long on a wall of nine flat-screen televisions. Sussman said the idea is to give people a better idea of the location, which he said some have called “funny” or “questionable.”

“I love how people are saying it’s a questionable location. Questionable to what?” he said. “It’s the western end of the downtown area. It’s Capitol Hill. It’s a new area.”

He said he pictured Capitol Crossing as a legacy project for his company, one on par with some of the most ambitious work of his competitors.

“There are a bunch of developers who step out. Boston Properties, Vornado, JBG certainly, Carr, Akridge — they really step out and do big stuff. And I think the tenant community and the broker community tend to lag in interest because they don’t see it. They want to see it before they believe it,” he said.

Follow Jonathan O’Connell on Twitter: @oconnellpostbiz