Downtown D.C. Office Building Sells For $42M Amid 'Challenging' Times
A New York real estate firm acquired a Downtown D.C. office building this week in a deal the broker said was made more difficult by the coronavirus pandemic and the ongoing economic crisis.
Marx Realty acquired the 1307 New York Ave. NW building from a group of education associations in a $41.5M deal posted Tuesday morning to the D.C. Recorder of Deeds.
The investor plans to spend another $41M renovating the property, Marx Realty CEO Craig Deitelzweig tells Bisnow.
The 106K SF office building was sold by a joint venture of the American Association of Colleges for Teachers Education, the American Association of State Colleges and Universities, the Council for Advancement and Support of Education and the National Association of State Universities and Land Grant Colleges.
The buyer secured a $25.6M loan from Ares Commercial Real Estate Management along with the acquisition, deed records show. Marx now owns four buildings in D.C, including the 819 Seventh St. NW property it acquired in September 2018. It also owns five properties in Northern Virginia.
"We want to buy more in D.C.," Deitelzweig said. "We find D.C. attractive in terms of the jobs least likely to be impacted by COVID-19."
Savills' Parker Lange, Vernon Knarr and Ben Plaisted teamed up with CBRE's Manny Fitzgerald to broker the deal on behalf of the seller. Lange said the economic uncertainty created by the coronavirus forced the team to work extra time to get the deal over the finish line.
"It was very challenging, to say the least," Lange said. "The last three or four weeks there were countless hours spent with our client and the brokerage team and the attorneys trying to navigate through this."
Deitelzweig said the property was under contract prior to the pandemic, and Marx and its financial partners remained confident in the acquisition despite the uncertain economic environment. He said closing the deal did present some logistical challenges, including a notary having to drive up to his house with a mask on so he could walk out of his front door and sign the documents.
"The lender believed in Marx. We've been in business for 105 years, we tend to be underlevered and we've never defaulted, so I think they felt good about us," he said. "In terms of aquiring the property when people are working from home, that was not easy."
The group of associations acquired the property in 1998 from Akridge after the developer renovated the historic building. It was constructed in 1923 and previously served as the headquarters for the Washington Times-Herald newspaper.
As part of the deal, the four associations signed short-term lease-back agreements to keep them in the building while they search the market. Lange said each of them is seeking a new lease and will likely relocate. He said the group decided to sell the building because the leasing market has shifted significantly in the tenants' favor since they acquired the property, giving them the opportunity to cash out and sign an attractive lease deal.
The office building still has one tenant remaining, the National Association of International Educators, which was not part of the ownership group and leases two floors.
Deitelzweig said Marx reached deals will all of the tenants to vacate by the end of this year, giving the owner the opportunity to land a full-building tenant. He thinks the property will be attractive to associations, law firms and government affairs offices.
The property's history and its high ceilings, ranging from 12 feet to 18 feet, drew Marx to buy the property, and Deitelzweig believes it will attract tenants. Marx has brought on JLL's Evan Behr, Doug Mueller and Nathan Beach to lease the property.
While the coronavirus has slowed D.C.'s office leasing market, Deitelzweig said he thinks the project is well-timed to benefit from the recovery. Marx plans to begin renovations in October and the building becomes available at the start of next year. He also said he thinks the pandemic will force tenants to rethink the way they use their space, leading to more relocations.
"We're getting revenue from the existing tenants through the end of the year, so it's really perfect timing," Deitlezweig said. "If tenants are deciding between renewing and leaving, they really need to leave because they need to rethink how their space is being used."
Marx's renovation aims to make the common areas feel like a hotel to make the office building more attractive to tenants. The renovation plans include an updated entrance, lobby and lounge. It will also feature a library area, a 40-seat conference room and a café with outdoor seating. Marx will seek rents in the $60/SF to $72/SF range.
Studios Architecture is designing the renovation project. Marx first introduced its hospitality-focused approached at New York's 10 Grand Central, which Studios also designed, and Deitelzweig said it led to improved leasing velocity and increased rents. He thinks the strategy will be particularly attractive for D.C. office tenants.
"It will have the type of elements you'd typically see in a hotel as opposed to an office building," Deitelzweig said. "It's the antithesis of a white marble corporate office building, yet we've found these tenants you'd think would want that environment really want warmer and more beautiful space."