The Meridian Group of Bethesda has finalized its $36 million purchase of the 127-unit Morgan Apartments in Rockville, a complex it originally planned to convert into condominiums before the real estate market crashed in 2008.
Meridian secured a $27 million acquisition mortgage on the property, according to Jones Lang LaSalle’s Capital Markets, which arranged the loan from Capital One.
“The property represents a significant value-add proposition for the current ownership as dozens of units have the ability to undergo renovations to luxury, condo-level finishes, increasing the property’s appeal and leasing income,” Jones Lang LaSalle said in a press release.
The deal ends a roller coaster ride for the garden apartment project, which the original owner, AvalonBay, completed in 1996.
A Meridian joint venture bought the property at 12000 Chase Crossing Circle in 2005 for $44.5 million, backed by $41 million in acquisition financing from GMAC Commercial Mortgage Corp. The 154,488-square-foot complex — originally called Avalon Crossing — held a prime corner near the intersection of Rockville Pike and Montrose Road in an area where developers were building luxury condos.
But the Meridian joint venture defaulted in 2006 and the conversion stalled. In 2008, 127 of the units were converted back to apartments.
The property sold for $36 million in a bankruptcy court auction in February and Meridian closed the acquisition in August.
The gated community, a mile north of the White Flint Metro station, is 95 percent occupied.
Meridian plans to upgrade the complex, which is part of one of Montgomery County’s hottest rental markets, according to a new report by broker Marcus & Millichap. The Rockville-North Bethesda submarket had a vacancy rate of 4.6 percent when the fourth quarter began. The average rent was $1,868 per unit, a 1.1 percent increase over the prior year.
About half the units have original finishes dating to the property’s construction, according to Meridian. The rest have condo-grade fixtures and fetch substantially higher rent than the original units.
The bleak news for the local office market continues to roll in from the federal government, which plans no new leases in Maryland in fiscal 2014, which began Oct. 1.
The General Services Administration plans to issue only six prospectus leases for the Washington region, down from 18 in fiscal ’13.
Only two leases were announced for Montgomery County last year. Both were extensions related to Department of Health and Human Services consolidation moves into the Parklawn Building in Rockville, which is undergoing a 935,000-square-foot modernization.
The largest lease was the five-year renewal of 228,020 square feet by the Substance Abuse and Mental Health Services Administration at 1 Choke Cherry Road, Rockville. The agency plans to move to JBG’s Parklawn property at 5600 Fishers Lane in 2015.
Another five-year extension was signed for 133,895 square feet at 540 Gaither Road in Rockville for the Agency for Healthcare Research and Quality, which plans to move to Parklawn in 2017. First Potomac Realty Trust paid $30 million last month to buy 540 Gaither in the Redlands office park.
Having a federal tenant might no longer be ideal for a landlord, according to real estate analyst Kurt Stout with Colliers International. With the ongoing congressional budget gamesmanship, a federal lease suddenly has become less secure than in the past, he wrote in his Capitol Markets blog.
“Property owners are now seeing that exiting their government-leased property investment has become a lot more difficult. Because of the can-kicking, average lease terms are growing ever-shorter and, more significantly, long-term leases are very rare,” Stout wrote.
He noted that in a recent Colliers analysis of federal leases exceeding 75,000 square feet, only 73 of about 8,700 had remaining total terms of more than 10 years. Of those leases scheduled to expire during the past year, more than 40 percent were extended for three years or less.
While that allows landlords to secure short-term rent premiums, “the bad news, of course, is that in this investment market valuation is far more influenced by term than rent,” Stout wrote.
One federal real estate site where the GSA is trying to negotiate a deal is the Nuclear Regulatory Commission’s headquarters complex next to the White Flint Metro station, which the atomic agency announced is the subject of last-minute lease renewal talks.
The 2 White Flint lease with owner Lerner Enterprises expires Dec. 14 and the NRC wants to retain the 295,734 square feet for security reasons. The property is connected by a network of walkways and tunnels to 1 White Flint, which is owned by the government.
“The NRC is working with its federal partners to obtain approval of the lease prospectus that would provide a long-term solution, while reducing the NRC’s real estate footprint. As an interim solution, the General Services Administration is pursuing a short-term lease extension for the Two White Flint North building.”
The GSA is trying to work that deal even while it faces the task of unloading unneeded space at 3 White Flint North, a 14-story property across the street. It sits more than half empty because the nuclear agency didn’t need the space it asked developer LCOR to build. The building’s wasted space has been the subject of bipartisan outrage in Congress.
Dorothy Robyn, commissioner of the GSA’s Public Buildings Service, said in March that the GSA’s preference would be to buy 2 White Flint — an option the agency traded away — but Lerner is not interested in selling. She also said the NRC might need to vacate one of its three headquarters buildings to correct for the excess space.
Now, the GSA and NRC are trying to strike a deal with Lerner and also find other federal tenants to fill the LCOR building.
The NRC announcement said: “The key message, for which Chairman Allison Macfarlane has been very clear, is the NRC continues to work cooperatively with GSA and the Office of Management and Budget on the issue, and to be responsive to Congressional concerns. We do recognize the current lease expires next month, and cannot predict when negotiations will be completed.”
In the meantime, LCOR, of Philadelphia, is looking for a buyer for its 362,000-square-foot building.
The building is triple the size authorized by the House Committee on Transportation and Infrastructure’s Subcommittee on Economic Development, Public Building and Emergency Management in 2007. The NRC — which has real estate authority independent of the GSA — ordered the additional space in expectation of major staff increases to oversee a boom in nuclear power plant construction that never happened.