Bethesda-based First Potomac Realty Trust announced the sale of a pair of Frederick office buildings, continuing a trend of REITs moving investments from the far suburbs to more urban properties near Metro subway stations.
The company signed a contract to sell Patrick Center, a 66,000-square-foot office building that is 77 percent leased, according to its fourth quarter 2013 earnings report. The property, which generates $1 million in annual rent, sits in downtown Frederick at 30 W. Patrick St.
No price or buyer was disclosed for Patrick Center.
First Potomac expects to complete the sale by April 30. It paid $10.6 million for the seven-story Class A property in 2004.
The company also sold West Park, 28,390-square-foot, Class A office building a few blocks from Patrick Center. Based on the anticipated sales price, the company recorded an impairment charge of $2.2 million.
First Potomac acquired the four-story property for $5.5 million in 2004. The deal is expected to close March 31.
In November, First Potomac sold Worman’s Mill Court, a 40,000-square-foot office building in Frederick for $3.4 million, taking a loss of $500,000.
First Potomac considers all of the Frederick buildings to be non-core properties, part of a category that the firm has been unloading to concentrate on transit-centered investments in and around Washington, D.C.
“The D.C. market demand continues to be bifurcated,” Doug Donatelli, First Potomac’s chairman and chief executive officer, said during a Feb. 21 earnings call. “Tenants are moving to higher-quality properties and older commodity buildings are struggling and I believe this is a trend that will continue.”
First Potomac also sold a nine-building portfolio this month in Gaithersburg. Bethesda-based Finmarc Management Inc. paid $33 million for the 342,000-square-foot portfolio, which flex/office, commercial office, retail and warehouse space.
The firm remains optimistic about the greater D.C. market and predicts that the budget deal will spur new office demand.
“Our acquisitions this year will continue to be focused on multistory office assets in the greater Washington region that are newer are well-located and have access to amenities and transportation,” Donatelli said.
Even while First Potomac is moving away from some far-flung buildings and business parks, it has boosted some core investments. The firm is concentrating on strategic hold properties, such as the Redland Corporate Center, which offers shuttle service to the Shady Grove Metro station in Rockville.
“Redland is a good example tenants moving from older buildings,” Donatelli said.
In June, First Potomac paid $30 million for the third and final office building in the complex, marking its first acquisition in almost two years. The Class-A office park, which totals 483,000 square feet, is fully leased, marking a turnaround from 2010, when Redland II was empty.
The 133,895-square-foot Redland III building is currently 100 percent leased to the federal Department of Health and Human Services through early 2018.
First Potomac boasts that 83 percent of its portfolio was built after 1990, putting it the top ranking of real estate investment trusts in a list compiled in September by Stifel Research Note.
The firm also is investing in “value add” properties, which have been adding tenants. That includes the four-building Cloverleaf Center in Germantown. The 173,766-square-foot complex is 84 percent leased.
After years of “can-kicking” on federal leases, the government faces a wave of expirations on the space it rents, which could create both opportunities and challenges for landlords, according to broker Colliers International.
“GSA has been engaged in a spirited game of can-kicking when it comes to leasing,” due to budget gridlock in Congress, Colliers analyst Kurt Stout notes in his latest Capitol Markets blog posting.
“Without long-term clarity of funding or mission, federal agencies have shifted into triage mode resulting in an increasing number of short-term extensions and holdovers. In a study last year we looked at leases due to expire between June 2012 and June 2013 and found that 42 percent of them were extended for three years or less.”
But now the General Services Administration faces a “pile up,” with one-quarter of all its leases due to expire over the next two years. Nationwide, that means almost 44 million square feet of space is nearing expiration and 52 million square feet of leases are in their soft term, when the government has a termination right.
For the GSA, this is a chance to meet its goals of reducing the federal footprint at lower rents. But the complexity of juggling so much federal space poses problems.
Stout writes: “In order to execute the next generation of leases GSA will need to coordinate with its tenant agencies to plan consolidation, realignment and space reconfiguration. Each such project is a difficult and time consuming exercise and we can expect that thoughtful efforts could take years to execute. That means there will continue to be many more short term leases and, frankly, more burden on GSA.”
He concludes that the budget deal means Congress can approve more leases but continued signs of fiscal responsibility must emerge “before agencies feel emboldened to commit to major lump-sum expenditures for space reconfiguration.”
For landlords, Stout writes that the federal gridlock has been something of a blessing because federal agencies have become “largely captive” to short-term extensions. That has allowed building owners to “maintain occupancy with very little capital input, and higher rents are often achieved in compensation for these extensions. So, purely on a current yield basis, GSA’s plight can provide a financial benefit.”
But that has also complicated efforts for developers to refinance their properties or add value to sell them.
Now that the GSA might look at longer-term leasing, landlords will have other challenges.
Stout writes: “Where agencies ultimately seek to downsize or dramatically reconfigure their space, incumbent lessors could find themselves at a disadvantage. Executing renewals in those circumstances can require phased renovation, swing space and other logistical complications. GSA won’t always be willing to entertain this complexity, structuring its procurements to favor the ‘blank canvas’ offered by competing vacant buildings.”