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An Interview With: Peter Johnston

Washington, D.C.

Mention Boston Properties in Washington, and aficionados think of Ray Ritchey, who is EVP, national director of leasing and development, and “head” of the Washington office. But operationally, everyone in the region reports to Peter Johnston, who is SVP and Regional Manager. BP owns over eight million square feet of space in the region (out of a 40 million REIT portfolio nationally), almost exclusively in Class A office buildings. It has 195 employees here, many of whom are in the property management end of the business. Johnston, 47, took over from Mitch Norville, who moved to Boston as EVP for operations. He’s a graduate of Roanoke College and the University of Virginia business school, who joined Boston Properties in 1987. He grew up in New York, Pennsylvania, New Jersey, and Virginia because his father was transferred frequently working for GE Capital.

Bisnow on Business: You’re putting a lot of effort into Reston Town Center. What are you doing there?
We have developed six office buildings in the town center since 1999 totaling approximately 1.8 million feet. We have delivered it, and it is effectively 100 percent leased. Just last month we broke ground on a three-building complex which we’re referring to as “South of Market,” since the main east-west spine there is Market Street. There will be two 10-story buildings flanking a smaller six story building right on Market Street sitting across from One and Two Freedom Square, two of our earlier buildings.

What used to be there?
A surface parking lot, across from Morton’s. If you go there today, you’ll see lots of earth-moving equipment and a big hole being dug and a fence around it. That complex is going to be over 600,000 feet in those three structures, including all ground floor retail, and offices above. We’re already about 130,000 feet committed in the first building, and we’ve got extraordinarily strong interest in the retail, which does very well there.

What kind of retail?
Right now we’re waiting on ICSC, which is the big retail shopping center organization that has an annual conference out in Las Vegas every May. Our broker’s going out. We have the expectation that later this spring we’ll be able to start announcing a number of retail deals, but we’re looking to put in some high end restaurants, and fashion and home furnishing stores, something on the magnitude of 70-75,000 feet.

Do you feel they can use more restaurants?
The reality is that the Reston Herndon Market has as much office space as Tyson’s, but there’s only one restaurant of the quality of Morton’s. So if you want to go to a really nice sit down place, if you’re doing a closing dinner or you’ve got a client in town who’s staying in the Town Center or anywhere out that way, you have limited choices.

Do you think of your development in Reston as a model?
You can pick up any real estate publication, and you can see that some company out in Haymarket or Stafford or Clarksburg is doing a “town center,” and I’m sure they are all really nice, but they’re all basing their development model on Reston Town Center. It’s been recognized by the ULI. It’s won national awards. We have people flying in from all over the world to have us walk them through the master plan – what works about it, what didn’t work, the design features, the mix of retailers, the merchandising plan, the ratio of office to retail and housing. They want to understand the transportation issues, the public space issues, all the way down to the brick pavers, the granite curbs, the planters, the light fixtures, and the street atmosphere. What bears this out is we don’t have any vacancy there.

How are the rates?
One of the deals we’ve done is, we believe, the highest rate ever paid for a suburban lease in northern Virginia, for a building that we’re not going to deliver until the first quarter of 2008. If you want to be out there, this is really the last opportunity because they’re not making any more of it. There just isn’t any more available developable land.

So what is it that makes this a model?
The planning. Reston is a planned community dating back some 40 years, and the Town Center was kind of the end game. Reston itself is about 6,000 acres, and Bob Simon had the vision of a true planned community where people could live, work and play, where you had all different economic strata and you had a quality of life in a natural setting. If I want to go out and buy 200 acres or 300 acres and do a town center, I can do all that, but that isn’t the nucleus of something much larger like Reston, and that’s what differentiates it. The developers like Boston Properties who are coming in during the last phase to execute the plan, or the tenants who are reaping the benefits of it, all of those folks are the beneficiaries literally of the decades of planning that went into it.

How do you compare it with Tysons?
You can contrast it quite easily with Tyson’s Corner. Those two areas developed over time, and the quantity of office space isn’t a whole lot different, but just look at the transportation network. If you look at the grid that Reston’s laid out on, you would see that to the east of the Town Center you’ve got Reston Parkway running north-south, and on the west you’ve got Fairfax County Parkway. On the south you’ve got a series of roads running east west from Baron Cameron to New Dominion to Bluemont to Sunrise Valley to the Dulles Toll Road. It’s a true transportation grid. So if there’s a traffic jam on one end, I can go out the other end and still get to my destination. The plan was that if you were in the center of Reston Town Center, which is 460 acres, you could get to any part of that with a 10 minute walk. If you were in the urban core, which is the Market Street area, you could get to any place there with a 5 minute walk. It was really planned around a pedestrian experience.

What you have is an urban setting in a suburban environment. What’s the lease record previously in the Reston area?
We had done deals prior to the tech bust in the low 40’s. I think the PwC deal that Lerner did in Tyson’s a couple of years ago in the building they just delivered had a face rate [before discounts] that probably started with a 4.

How do the rates compare as you move out from the Town Center?
If you draw a concentric circle from the urban core, that would be ground zero as far as the highest rate. If you then go to just outside the urban core, there’s a drop off of maybe 10 percent. If you go outside Reston Town Center, there’s probably a drop off of another 10 to 15 to maybe 20 percent. So if we can do deals in the urban core today at 40 plus dollars, there are suburban buildings out in the Reston-Herndon quarter in the high 20’s. People will pay not only for the quality of the building, but for that environment and amenity base.

What is Tyson’s rate structure compared to Reston’s today?
Well, in the better buildings in Tyson’s they’re doing deals probably in the mid 30-dollar range.

What kind of buildout allowance do these rates usually include?
Downtown it’s going to be a number that’s in the 60 to 65 dollar range, and in the suburbs it’s going to be in the 45 to 50 dollar range.

And what do they actually need for a buildout?
If they scrimp, they can do it for 60 bucks or 65 all in, but for a nice law firm, you could spend easily a hundred bucks a foot by the time you design it, buy some furniture, outfit the space and build it out.

Do you ever develop buildings for third parties?
Typically no. The most recent one we did for a third party was over a nine-year period developing the Clinical Research Center at NIH.

Why do you not do that usually?
Because if we’re going to deploy our resources, we’d just as soon do it on an equity deal that we’re building for our own account. In our industry there’s a lot of merchant builders who are building with the intent to sell the finished product. There are builders such as ourselves who typically want to build to own those buildings for some reasonably long period of time and make money on the operating property as well as from the fees that we generate. And then there are REITS that are more just in the business of buying and selling existing office buildings but don’t do development. We happen to be a REIT that’s focused on development. I think one of the things that has really differentiated our company both in how the market perceives us and ultimately how it’s rewarded us in terms of the performance of our stock is the fact that we are still very much a development company, and that the value that we can create for ourselves and our shareholders doing new development greatly exceeds that which you can create simply by buying and selling office buildings. :)