An Interview With: Mike Elis
Mr. Ellis runs the leasing and management practice in the metropolitan Washington area for Chicago-based real estate giant Jones Lang LaSalle. During 2003 and 2004, Ellis and his colleagues in D.C. region completed leasing transactions with a value over $1.3 billion. He joined Jones Lang LaSalle in 1999 as a result of the merger with Jones Lang Wootton. He is a graduate of Marquette University.
Bisnow: How might market conditions here be affected by Katrina? We’re entering a situation where we’ve had decreased vacancies and an increase in rents, especially in the Northern Virginia area, and Katrina could definitely have an effect over the next 18-24 months. We’ve seen the rise in gas costs, but as supplies and construction costs continue to rise, it becomes more and more difficult to justify building when rents don’t support the cost of construction. So, we have a situation where typically you’d be looking at a lot of speculative construction taking place. In Northern Virginia, we only have about 2 _ million square feet of speculative construction underway right now, of which 45% is already pre-leased. Our markets across the board are going down into single-digits in vacancies. DC, Arlington, the Rosslyn-Ballston corridor were projecting to be at about 5% at the end of the year, so that would typically say: “Let’s build.” We were seeing an increased cost of construction prior to Katrina, and now our concern is with the insurance companies having to reserve pay-outs, particularly down in that area, so the derailment of supplies in this area to help rebuild down there may cause us to slow in what would be a normal continuation or addition to our market of new buildings. We have very low unemployment rates here, so we’re going to really have no new space to put people in, and therefore rents are going to go up.
How significantly are you talking about? Well, in the Reston/Herndon market last year between July of 2004 and July of 2005, we saw a 20% increase in rental rates. And that was with a low double-digit vacancy, in the 12-14% range. We’re now at just around 10% and going down. With a 20% vacancy, we only had one new speculative construction project underway that doesn’t have any pre-leasing, and if that continues we could see another 20% spike. But again, if you are a user of office space, where do you put your employees and when does the rate really preclude you from increasing your business aspirations because the rents have gotten too high?
Wow. So how will that increased rental cost affect business in Washington? Will they just pay it or are some businesses going to relocate, or not expand? I think our development community will start to build, and I think that the tenants will have to pay. They’ve paid it in the past. We had a decrease in rents as we had the sublease space come back on the market from the tech bubble that occurred here, and we’re now just getting back to the point where we were prior to 2001. So when I talk about spikes I’m not talking about all-time highs, I’m talking about returns to where we once were, and only a few years ago, 2001-2002. At that point in time the construction costs were a little bit less, but also at that point in time interest rates were higher. If inflation is not pushing us to the point where we have to increase the rates, they all may factor in keeping the rents where it makes sense.
You are talking about a tightening market, yet we hear about base realignment and the idea that “oh, no, we’re going to lose jobs.” What’s the real deal with BRAC? Well, no one wants to see people leave the region and no one wants to see leases go away. But at Jones Lang LaSalle, we feel that BRAC may have been a bit overstated in the media. I’ve been in the business for over 23 years now and have been through two BRACs previously. The first one wasn’t that great, but the second one, when NAVSEA and NAVAIR left Crystal City, it was a big vacancy that occurred in that market and there were nay-sayers saying it was going to take years to recover from that. But it didn’t. It took about 18 months. And this time, we have the majority of the vacancies occurring within Crystal City again, but occurring in pre-1980 buildings, ones that need some love and care, that need some renovation anyway. The residential market is so strong now, they could very profitably be converted into residential. You also have a situation where that market is very supply constrained. It’s not like you can add millions and millions of square feet.
You’re talking about the potential revitalization of Crystal City. What could you imagine? What Crystal City has done recently is bring what was a below-grade mall up to grade and change the street-scape. So I think you’re going to see more of a 24-hour atmosphere, one that’s on the street and vibrant. We’ve seen a number of new restaurants opened over there and they’re doing well. In Crystal City we show a large vacancy, 20% plus, but also we’ve been reporting two or three of the largest deals being done in that market that can’t show yet because they haven’t taken occupancy. So you have good momentum already with NPR, Halliburton, KBR moving over there.
First of all describe, what is Jones Lang LaSalle here in this region? Well, it comprises about five different divisions. We focus on agency leasing, representing investors who buy and own office buildings, on their marketing, leasing and property management of those buildings. We are the largest third-party property management firm in the region, about 10 million square feet of property management. We do not own anything, we are purely a third-party property manager. We have a very large and thriving capital markets sales group for investment sales, selling of investors’ assets in the marketplace, most recently we represented Lowe Enterprises in the sale of the Chevy Chase Pavilion to ING/Clarion.
How much does something like that cost? 215 million dollars. It’s a big number.
So you’re happy with that…and your client is happy, more importantly! Hopefully everyone is happy. I think it gives Clarion/ING a great opportunity to take what Lowe had already started and really re-work some of the retail up there. The office building is a very stable office building, my colleagues in the capital market group did a great job in marketing that to a whole host of people, not just helping Lowe get the best price, but also helping the buyer understand what the potential for that asset may be.
Other projects? Our capital market’s group is very active in all types of assets. They also recently sold President’s Plaza out in the Reston/Herndon market, and we’re overseeing the construction management for the Washington Capitals ice skating practice facility in Ballston that’s going on top of the Ballston Commons parking lot. It’s going to have three rinks there with community service for some of the high schools, and colleges and community groups can use it. This is part of the Capitals giving back to the community. It’s going to have their offices and a small restaurant, so speaking of the vision for Crystal City and what Ballston has already been able to do, they are adding to the 24-hour atmosphere.
And you manage all the construction? We are the owner’s rep, we are representing the Capitals in overseeing what the contractors may be doing. We’re not a brokerage firm that is getting paid on our commissions and things that are done, but we ask our clients what’s most important to them, and that’s how we are judged as employees for our company. We also foster other enterprises. For example, some of my colleagues got together about 3-4 years ago and decided they wanted to continue the growth of a group called our Public Institutions Group. And they’ve done a phenomenal job, and have become one of the prime contractors for the Army, Air Force and the privatization of the rebuilding of the housing on Army and Air Force bases. And over at St. Elizabeth’s, we’re involved in what we think will be a pretty exciting redevelopment of a beautiful piece of land, a master plan for what’s the best use of that land in the future.
And if I’m not mistaken, you’re representing DC in figuring out how to redevelop the old convention center site? That is correct. Our public institutions group was hired by the District of Columbia to negotiate with Hines, which is going to be the developer of the old convention center, and how best to structure and deliver different products. It’s going to be great.
But it’s been going slow. Is that going to be in our lifetime? Yes, it definitely will be in our lifetime. :)