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Washington, D.C.

DC is moving on up. Literally. Longtime investment sales brokers Jim Meisel and Dek Potts of GVA Advantis tell us they’ve seen theClass B market growing taller over the last year. It seems offices in downtown Washington are adding floors.

They say it’s primarily happening in Washington’s CBD, south of Dupont Circle along K Street.

Dek Potts

“The economics are out there now. Pricing and rental rates for Class B has gotten to a point where owners can justify adding floors to existing buildings in select locations,” Potts says. In the past, additional floors were added to a very limited group of Class A assets. With a 6% vacancy rate downtown and robust sales market, adding floors has become a new “value-add” play for investors and owners.

As the self-proclaimed “Kings of the Bs,” Potts and Meisel have sold 65 assets in the last 60 months and keep a close watch on what’s happening. In the last three years, building owners at 1909 K (Tower Companies) and 2020 K (Quadrangle and RREEF) added three floors and “really accelerated” the market along K Street, Potts says. “Owners are assessing their buildings today and wondering ‘Jeez, is there a way for me to squeeze more value out of this?’”

Adding floors (often with a building full of tenants), isn’t an easy proposition, and the costs are significant. However, with a tight supply of development sites in the CBD and Washington’s 130-foot building, the benefits can outweigh the risks.

“Some investors are saying, ‘This makes a lot of sense. I can lease it, build it out, and sell it for much more in five or seven years,’” Potts says. And it does seem to be catching on, and not just on K Street. Developers intend to add three floors at 2121 K, 2021 K, and 2175 Kand two floors at 1129 20th Street and 1200 19th Street.
But, say Potts and Meisel, there are many other building owners who don’t want the expense, disruption and bureaucratic hassle of dealing with “moving on up,” so they sell while the selling’s good.

The “King B’s” hint that they’ve got firsthand experience with the growing-taller trend. They say they’re working on an off-market deal “where this very much comes into play.” Says Potts, “7, 8, and 9 stories can now become 10, 11, 12 stories. Each of these stories can add millions in value. Suddenly investors are realizing the value of additional density.” In the last 12 months, investors have paid premiums for buildings because of additional development potential. When Class B buildings were trading at just $200-$300 per square foot, Potts says, adding floors didn’t make sense because construction costs for adding floors were too high and likely rental rates were too low. Now Bs are trading between $425 to $525 PSFand new top floors can rent in the mid to high $50’s PSF full service. Owners also use the additional floors as an excuse to improve the profile and rental rates for the entire building, not just the new floors.

With so many DC buildings in the $30 to $80 million price range, Potts says the range of potential buyers is very broad: institutions of all kinds, local developers, national developers, REITs, and offshore investors. “If you have a $400 million skyscraper in New York or Los Angeles, you only have a handful of potential purchasers,” Potts says.

Potts and Meisel were principals at boutique brokerage firm Morris McNair & Associates, which was sold in 1999 to The St. Joe Company. A publicly traded company, St. Joe was in the process of creating Advantis through a rollup of regional brokerage firms. A year ago, a number of brokers bought the firm back from The St. Joe Company. Today, GVA Advantis is a southeast regional firm with 14 offices from Washington, DC through Florida. Potts and Meisel currently have exclusive sales listings throughout the region including DC, Rockville, Greenbelt, Leesburg, and a major portfolio in Richmond.