Next Phase Of 2.2M SF D.C. Megaproject Put On Ice With 'No Demand' For New Office, Retail

The next phase of D.C.'s Capitol Crossing development is being further stalled as its owner says it sees no new demand for the space.

The developer of the mixed-use project on Massachusetts Avenue is asking the D.C. Zoning Commission to extend its approvals to start construction on its next office building for two years.

The next office building is planned to total 714K SF on the southern portion of the development site, which was created by building a deck over I-395. 

Part of the reason for delaying the next phase is the slow leasing at the office and retail buildings that delivered in 2019, according to the Zoning Commission application filed by Holland & Knight.

The filing says the 414K SF building at 200 Massachusetts Ave. NW is 84% occupied and the 559K SF building at 250 Massachusetts Ave. NW is 22% occupied. 

The combined ground-floor retail is 50% occupied, it says, “even after a $25 million investment by the Applicant to promote and finish out the new retail space.”

“Based on these figures, it is clear that there is no demand for new office or retail space at Capitol Crossing at this time,” the application says.

The filing also cites construction costs, labor and supply chain issues, inflation, rising interest rates and a weak lending market.

The owner, Capitol Crossing Advisors, and its parent company, W.R. Berkley Corp., didn't respond to a request for comment. 

Property Group Partners was the original developer of Capitol Crossing, but in 2022, it transitioned out of its role as developer and manager.

The project suffered from slow leasing out of the gate. In July 2018, PGP parted ways with leasing representative Cushman & Wakefield and brought on a JLL team. 

PGP President Jeffrey Sussman told Bisnow in August 2018 that the leasing had been “slower than I had expected and hoped,” as it had only inked one tenant for 75K SF at the time. And he said the leasing team switch came because the project “needed new blood.”

The 250 Mass building inked its first lease with a law firm in November 2021, two years after it delivered. 

Its latest office lease was with Children’s Law Center, which plans to move into 15,600 SF at 250 Mass in November. JLL’s Evan Behr, Nathan Beach and Thomas Myers lease the office space. 

The buildings’ ground-floor retailers include L’Ardente, Tatte Bakery & Café and Japanese food hall Love, Makoto. 

Plans for the next phases of Capitol Crossing include a hotel, residential and two more office buildings, for a full-build-out total of 2.2M SF. The overall project when it started construction was estimated to cost $1.3B. 

The team said in the filing that $1.3B has already been invested in the project, before starting the next phases, with costs including legal, architectural, engineering, permitting, construction and consulting.

The filing says that prior to the pandemic, the ownership was working with brokers to prelease the south block as a build-to-suit for a “large office headquarters.” That strategy shifted in light of the new office market reality to focusing on leasing the already completed office buildings.

The filing says Capitol Crossing Advisors has financial incentives to complete the project, based on the money it has already invested on its infrastructure. It says the applicant has spent about $200M in public space infrastructure improvements associated with the site.

“Recent and upcoming return-to-office mandates across multiple industries” could yield an improvement in the near-term office market outlook, it says. But if that doesn’t come to fruition, the developer would modify its plans to “reflect a marketable and realistic development proposal.”

In addition to the two completed office buildings, Capitol Crossing built a new rectory and annex for the Holy Rosary Church on the development's center block and coordinated a new Jewish museum on its south block.

There is only one office building under construction in the District: Stonebridge and Rockefeller Group’s 398K SF redevelopment of the former WMATA headquarters next to the Capital One Arena, expected to deliver next year. 

BXP plans to build a new office building at Metro Center, after securing a law firm prelease for just over 50% of the property. It aims to deliver the property in late 2028. 

Office vacancy in the District was at 22.6% at the end of the first quarter, according to CBRE’s report. The trophy office segment has been much lower than the overall market, falling to 12.2% last quarter as rents hit new highs.