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REA
December 11, 2019  

2 More Deals Struck in Revived DC Market

Two more Washington office buildings have found buyers, capping a busy second half for investment sales in the nation’s capital.

Boyd Watterson Asset Management has agreed to acquire the 413,000-square-foot Sentinel Square 1, at 90 K Street NE, for roughly $180 million, or $436/sf. Cushman & Wakefield is brokering the sale for Utah State Retirement.

Meanwhile, State Street Global of Boston will team up with local shop Polinger Co. to buy the 235,000-sf building at 99 M Street SE for about $170 million, or $723/sf, from the U.S. unit of Swedish developer Skanska. Newmark is handling that transaction.

Washington’s office investment-sales market got off to a relatively slow start this year. Just $1.1 billion of trades closed in the first half, down 30% from a year earlier, according to Real Estate Alert’s Deal Database, which tracks sales of $25 million and up.

But activity has spiked in the second half. Since Aug. 1, $1.9 billion of properties have sold — more than doubling the first-half total. And another $1.2 billion of deals are pending, including 90 K Street and 99 M Street, although it is unclear if those two transactions will close by yearend (see Market Spotlight on Page 11). Still, activity is likely to fall short of last year’s $4.6 billion total.

The Boyd Watterson agreement to buy 90 K Street comes on the heels of two other purchases in the district in September. The Cleveland investment manager acquired the 330,000-sf One Constitution Square from a Walton Street Capital partnership for $141.9 million, or $430/sf, via Cushman. And it paid $106 million, or $337/sf, for the 315,000-sf building at 950 L’Enfant Plaza SW. JLL brokered that sale for Normandy Real Estate of Morristown, N.J.

The building at 90 K Street is 98% occupied by multiple federal agencies. But leases on 85% of the space expire within three years, making the investment a core-plus play. The rents on those leases are projected to be some 18% below the market rate upon rollover.

The tenants include the Bureau of Alcohol, Tobacco, Firearms and Explosives; Customs and Border Protection; the Parole Commission and the Department of Veterans Affairs. Those agencies are viewed as having a high probability of renewing, because the 12-story building meets government requirements for security infrastructure.

Utah Retirement developed the building in 2010 via a partnership that also included CBRE subsidiary Trammell Crow and family office Crow Holdings, both of Dallas. In 2014, the pension system bought out its partners’ aggregate 55% stake in a deal that valued the property at $196.2 million, or $475/sf.

The building has a two-story marble lobby and three underground parking levels. It’s part of the Sentinel Square office complex, which will encompass 1.3 million sf when the third and final building is completed.

State Street’s acquisition of 99 M Street is more of a core play. Skanska completed the 11-story building last year. The occupancy rate was 76% when marketing started in September, with a weighted average remaining lease term of 11.2 years. But Skanska has lined up additional tenants that will lift the occupancy rate to 91% by the time a sale closes.

That’s in line with the 92% Class-A average in the surrounding Capitol Riverfront submarket — which is benefiting from a wave of tenants seeking a discount to higher rents in more-established locations. An ongoing wave of construction in the submarket is expanding the supply of retail space and residences. There are currently 530,000 sf of shops and restaurants, and another 400,000 sf of space is under construction. Some 5,200 residential units are also in the pipeline.

The free-standing building at 99 M Street, which is designated LEED gold, has trophy-level finishes, including a marble lobby and “spa quality” restrooms. There’s also 11,000 sf of retail space, a fitness center, bike storage and a rooftop terrace that includes a glass-enclosed meeting space and a catering kitchen.