Washington’s sputtering office market has developers scrambling
May 18, 2016

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..

Washington’s sputtering office market has developers scrambling

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