The $1,000 question: What the sale of 800 17th St. NW means for D.C.'s office market

PNC Place
800 17th St. NW
Year: 2014
Price per square foot: $1,075

D.C.'s multibillion-dollar commercial real estate industry need not have an inferiority complex when compared with other major cities such as New York or San Francisco.

Anyone who doubts that must have missed Monday's blockbuster news that 800 17th St. NW sold for roughly $1,075 per square foot, a new record for D.C., putting it on par with the best real estate markets in the nation.

To be sure, the past few years have been tough on D.C. landlords, and that's something investors have kept a keen eye on. Factors such as sequestration and a major reduction in space by some of this city's largest office users hasn't helped. In the face of that, naysayers might argue D.C. was bound to hit that mark eventually, if for no other reason than inflation. And in a sense they're right — but in another very important sense, there's a whole lot more to it.

For starters, TIAA-CREF is just about as savvy a real estate investor as anyone out there, and it demonstrated its faith in D.C.'s office market by making one of the very first post-recession deals with its acquisition of the Evening Star Building at 1101 Pennsylvania Ave. in June 2010. What's more, it bought PNC Place with Norges Bank Investment Management as part of a major commitment forged in 2013 to acquire top-tier properties in major U.S. markets including D.C., New York and Boston.

While there's a lot more vacant space in aging D.C. office buildings on the market these days , Eastdil Secured Managing Director John Kevill said this city's high-end trophy buildings still command a premium among investors that could just as easily park their money in Manhattan or Boston instead.

"There's capital from all over the world that wants to be in the gateway cities and the best properties," Kevill said. "Despite the slow growth of the government, D.C. remains one of the top."

It's not surprising that if a D.C. office building was going to pass the $1,000-per-square-foot mark, it would be 800 17th, Kevill added. While other landlords might not admit it, the building's tenant mix is made up of high-caliber companies paying market rent rather than companies offered a discount to lease space or with leases expiring in the near future. Those buildings, too, will likely cross the same threshold when they trade hands in the future.

"The dirty little secret is this is the first true trophy property to trade with market rents," Kevill said.

There's another key point to consider, said JLL Senior Vice President Jim Molloy, one that speaks to the current cycle of D.C.'s office market. The city's biggest occupiers of leased space, law firms prime among them, have been shedding large blocks of space as their leases come up for renewal. That's in part a reflection of a change in how those firms use their space, but Molloy noted that churn is coming to an end. About 82 percent of firms have already moved to new buildings or made the reduction. That reduces the anxiety that a building might struggle to keep its space filled.

"I think the downtown market is still strong," Molloy said. "When you look at the law firm tenancy, the majority of firms have reset their space already."

All that begs the question: Can D.C. top $1,100 per square foot? Molloy believes it's in sight with building sales.

 Other Buildings and Sales in the D.C. marketplace:

Warner Building
1299 Pennsylvania Ave. NW
Year: 2000
Price per square foot: $400

Investment Building
1501 K St. NW
Year: 2002
Price per square foot: $427

Evening Star Building
1101 Pennsylvania Ave. NW
Year: 2003
Price per square foot: $527

1900 K St. NW
Year: 2004
Price per square foot: $633

1601 K St. NW
Year: 2005
Price per square foot: $752

1801 Pennsylvania Ave. NW
Year: 2006
Price per square foot: $816

2099 Pennsylvania Ave. NW
Year: 2008
Price per square foot: $866

1225 Connecticut Ave. NW
Year: 2010
Price per square foot: $900

Market Square
701 and 801 Pennsylvania Ave. NW
Year: 2011
Price per square foot: $905

Lafayette Tower
801 17th St. NW
Year: 2014
Price per square foot: $948 (for 62.1 percent of building)

PNC Place
800 17th St. NW
Year: 2014
Price per square foot: $1,075

Source: Washington Business Journal