Market Microcosm
Point West Plaza Illustrates State of Northern Virginia Office Buildings

By Dana Hedgpeth
Washington Post Staff Writer
Monday, May 9, 2005; E01

To understand the dynamics of the commercial real estate market in Northern Virginia, it helps to examine Point West Plaza, an eight-story building just off Route 7 in Tysons Corner.

Almost two years ago, its major tenant moved out. New tenants did not take their place. The building was soon in bankruptcy, surrounded by other empty office buildings abandoned after the tech bust.

Now Northern Virginia is again booming. Federal contracting money is flowing. Although vacancy rates have not hit the lows of the tech boom years nor have lease rates reached the highs, they are headed in the right directions. Dozens of prospective tenants have been knocking on the door of Point West Plaza, which is less than a block from where a Metro stop is proposed. Two have negotiated seriously with the owner.

But the deals have died. The potential clients saw a region with a still-high vacancy rate and they wanted big concessions. The owners saw a region in recovery and refused to lease cheaply. In fact, Point West Plaza's lease rates have recently gone up.

Point West Plaza, with its neatly trimmed shrubs and its pink marble lobby, illustrates both the revival of the northern Virginia commercial real estate market and the fact that the recovery is not complete. The building remains empty, but it has generated wealth for a Connecticut firm that last year bought the building out of bankruptcy for $21 million and then sold it last month to a Parsippany, N.J., group for $32.5 million.

The idea that an owner can make $11.5 million in one year selling an empty building shows how much money is pouring into the market, real estate experts said. "That's unprecedented in the market, that people are able to make profits without doing any leasing," said Paul J. Collins, a managing director at Cassidy & Pinkard, which handles leasing and sales of commercial real estate offices.

Commercial real estate also took a hit in suburban Maryland and the District, but "the Northern Virginia market is the most volatile of the three markets," said Mary S. Petersen, a senior adviser at Cassidy & Pinkard. "In 2001 and 2002, we were awash in space," she said. "Then in 2003, you started to see a revival of demand and it accelerated in 2004 and it's strong in 2005, as government contractors and agencies are taking space." Northern Virginia has 19 million square feet to fill, down from 26 million two years ago, according to CoStar Group Inc., a Bethesda research firm.

One of the 47 still-vacant buildings is Point West Plaza. It was built in 1986 for about $19 million by J.A. Loveless Co., a Vienna-based developer. With its slightly curved glass-sheathed profile, it was then considered one of the top office buildings in the Tysons Corner area.

The developer lined up a major tenant for the new building -- McLean Financial, which was a subsidiary of McLean Savings & Loan Association. But McLean Financial failed soon after it moved in, said Robert A. Cocker, an executive vice president at Loveless.

Soon another prestigious customer appeared. Freddie Mac, the mortgage-lending giant, leased most of the building for 16 years and filled it with accountants, financiers and analysts.

But almost two years ago, Freddie Mac moved to a huge campus about a mile away at Jones Branch Drive, just as the real estate market was tanking and vacancy rates soared. "The market was terrible," Cocker said.

When a federal tenant did not sign a deal as expected, Loveless Co. couldn't pay the interest on its debt, so its lender foreclosed on the property, forcing the building into bankruptcy in September 2003.

In January 2004, Starwood Capital Group Global LLC, a Greenwich, Conn., investment group, bought the building out of bankruptcy. It paid $21 million -- $129 a square foot. The new owners spent about $600,000 on improvements, said Michael A. Shuler of Millennium Realty Advisors LLC in McLean, the leasing broker for Point West Plaza.

In October, Shuler and his partner John P. McEvilly threw an Oktoberfest-themed party , complete with a German band, that drew about 200 brokers. Some of them expressed interest, the brokers said, but there were no deals.

Paul S. Schweitzer, an executive vice president at Studley Inc., a commercial real estate services firm, said he showed the Point West Plaza building to some of his clients but either the space wasn't right or they could get less expensive deals elsewhere. Some clients also found "the kidney-shaped layout a bit strange," he said.

Starwood found two potential tenants, but the companies were "trying to push for a more competitive deal and Starwood said, 'We'll wait,' " Shuler said. "You don't want to do a deal and realize six months down the road that you could have gotten $5 more."

Then last month, Prudential Real Estate Investors, an investment fund owned by Prudential Financial Inc., bought the building from Starwood for $203 a square foot. Although that was a huge profit for Starwood, it was still below the average price in the region. In the first three months of this year, the average price for a building sold in Northern Virginia was $245 a square foot. Last year, the average was $229 a square foot. Starwood and Prudential did not return calls.

"In 2001, buyers didn't want to buy a vacant building," said Michael C. Jones, director of leasing at Republic Properties Corp., a District-based company that owns about 17 million square feet of office and retail space in the area. "Now you've so much capital out there it's a feeding frenzy." His company bought three half-empty buildings in Herndon last year for about $114 million.

Although Point West Plaza remains empty, Prudential raised the rent, from $28 a square foot to $30.

Prudential "looked around Tysons and didn't see a whole lot of buildings available," said Shuler, who is also the leasing broker for the new owner. "At some point, we'll see a tenant who wants to be in Tysons and there won't be any options for him" except to pay what Point West Plaza is asking.

Shuler said Starwood and Prudential have turned away tenants who are not interested in a big space, because they don't want to bother with a lot of small tenants.

"Provided they're patient and prepared to wait for the right tenant, it's a good strategy for them," Schweitzer said.

There are not a lot of large spaces available in Tysons Corner, Shuler said.

With the region attracting lots of capital, construction is beginning in parts of Northern Virginia. So far though, little is going on in Tysons Corner. .

"There's no construction cranes in sight," Shuler said, other than those for a new building that is being built for PricewaterhouseCoopers in Tysons Corner.

But developers are expected to start on new buildings in the Tysons Corner area soon. "We've got a year-and-a-half window to get the building leased before we have any competition," Shuler said.