Former First Potomac Realty Trust CEO Doug Donatelli has begun buying D.C. properties with his new firm, but he said it is a difficult market for office investors.

Donatelli's firm, DSC Partners, has made about $300M in acquisitions since launching in July 2017, and he said he aims to double that total over the next year.

But Donatelli, who will be a speaker Wednesday at Bisnow's D.C. State of the Market, said the District's office market dynamics have forced him to be selective about the types of properties DSC acquires.

"D.C. has become a very challenging market to operate in right now," Donatelli said. "The leasing fundamentals are just not good, and yet pricing is high, so making new investments in the city requires a fair amount of creativity."

He said DSC's $100M acquisition of 1250 Eye St. NW in May 2018 displayed that type of creativity. The Class-B office building has rents in the high $50/SF range, a segment of the market that Donatelli says has strong demand without the supply surge of the Class-A space.

The 178K SF building was 69% leased at the time of the acquisition, and DSC has since signed leases that bring it to about 80%. DSC spent roughly $7M on common area renovations, a level of investment that Donatelli said makes the building more attractive without forcing it to compete with Class-A space.

"We thought real hard about moving into the A category, which would mean investing more money into it," Donatelli said. "The reality is the A market is extremely competitive. There is a lot of vacancy in very high-quality buildings. Putting the investment people have put into other B buildings in the market to move them from B to A didn't make any economic sense."

The company also bought a 15-property portfolio in Chesapeake and Norfolk, Virginia, for $167M. DSC is actively pursuing new acquisitions, and Donatelli said it is focused on the Maryland, D.C. and Virginia markets. He said DSC is looking for more Class-B buildings in D.C. where it could pursue the same strategy it has at 1250 Eye, but they are not easy to find.

"We're trying to find other buildings we can buy that have that formula," Donatelli said. "There aren't an enormous number of opportunities like that."

Donatelli led First Potomac from 1997 to 2015. In 2017, he founded DSC Partners with fellow First Potomac alum Nicholas Smith. Donatelli said today's conditions are not the worst he has seen in the D.C. market, but it is a challenging environment.

"It's not a disaster, but it's a slog," he said. "It's like day-to-day, hand-to-hand combat. You're not seeing a tremendous amount of growth in the market."

Donatelli will discuss his outlook on the market at Bisnow's Washington D.C. State of the Market, Wednesday at 1101 New York Ave. NW.