It’s been more than five years since the Great Recession toppled real estate values, but some properties still haven’t recovered.
Take the pair of Chantilly office buildings known as Washington Technology Park I and II, part of the Westfields Corporate Center, one of the largest office parks in the Washington area. The buildings were appraised at $187.5 million in 2007, according to public filings, the year many values peaked before the economic collapse.
Since then the properties have been battered by a number of negative dynamics affecting Northern Virginia real estate, and this month they were re-appraised at $61.1 million, according to the ratings firm Trepp, a stunning $126.4 million drop in value over eight years. That’s a 68 percent reduction.
How could that happen?
For one, government contractors began moving out quickly as federal spending dried up. Defense giant Northrop Grumman, which occupied 65 percent of Washington Technology Park II, according to Trepp, paid $4.7 million to get out of its lease and vacated the building.
Government consulting and technology firm CSC had been the lead tenant in the other building, but it began cutting back as well, according to Trepp, from 180,286 square feet to 19,625 square feet.
Other factors came into play as well. The vacancy rate in Northern Virginia and Fairfax County began to rise, driving down rents.
On top of that, buildings far from public transit and walkable amenities like restaurants began to suffer in particular, as young workers flocked to more urban, transit-accessible neighborhoods. So far this year, 92 percent of all office leases of 20,000 square feet or more are within half a mile of an existing or planned Metro station, according to the services firm JLL.
The Washington Technology Park buildings, located along Conference Center Drive south of Route 50, are near Dulles Airport but not near Metro and struggle to compete with the likes of Reston Town Center when it comes to offering lively surroundings.
The buildings’ owner, Corporate Office Properties Trust, based in Columbia, has defended the buildings’ potential over the years. COPT took out a$150 million loan against the properties in 2007 and after Northrop Grumman announced it was leaving, COPT executives said the decision to depart had nothing to do with the building.
“It just had to do with consolidation,” said Roger A. Waesche, Jr, COPT president and chief executive, in a 2013 conference call with investors. “It had nothing to do with the location. The location is very strong. It’s an amenity-rich building and we feel very good about our ability to re-lease that space.”
But as the buildings’ values continued to drop, the loan became a problem. COPT, based in Columbia, tried to renegotiate the terms but wasn’t successful, according to public filings, and ultimately stopped making payments. The debt was transferred to a special servicer, a company that manages distressed loans.
Stephen E. Riffee, COPT financial officer, told investors on a call last year that “ultimately we will end up conveying those properties” back to the lender. COPT no longer manages the buildings, though it still owns large stakes in the rest of the office park. LNR, the special servicer, did not return a request for comment.
Even in a slow leasing market, it’s rare to see a Washington-area office building lose two-thirds of its value.
COPT issued a statement saying that the drop was a function of the buildings’ fractured ownership, not the Chantilly market. The values, the company said, “are a function of how much cash flow the properties generate” and that it has not managed them since mid-2014.
If that’s the case perhaps a new owner will happily take the buildings on. But at what price?
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