One of Washington, D.C.'s prominent office properties has sold as part of the largest transaction to close in the city in nearly two years. Yet the deal is bittersweet, underscoring how far valuations have fallen since the pandemic struck and mounting financial challenges across the market.
PRP Real Estate Investment, a local real estate investment firm, acquired the two-building Market Square complex along Pennsylvania Avenue for $323 million, or roughly the amount remaining on the former ownership's loan. The deal, confirmed by CoStar News, closed through a joint venture partnership with Boca Raton, Florida-based Morning Calm Office Finance.
Columbia Property Trust and Blackstone, both based in New York, were the sellers in the deal to the PRP-led venture. Columbia initially acquired the roughly 690,000-square-foot office complex for $615 million in 2011, according to local property records. Blackstone then purchased a 49% interest in the property in late 2015 in a deal that valued Market Square at $595 million.
Market Square, which was built in 1990, is about 85% occupied with a tenant roster that includes companies "immune from a downturn," Paul Dougherty, the president of PRP, told Commercial Observer. "They have to be downtown, they have to be near the White House and the Capitol. If this was about a building on K Street, it would be a different deal.”
Powerhouse companies such as Visa, Pepsi, Cigna, Prudential and UnitedHealthcare all lease space at the complex, according to CoStar data, along with a mix of federal agencies.
Along with repositioning the 40,000 or so square feet of Market Square retail space, PRP will invest in upgrades and improvements, according to Commercial Observer, to what Dougherty described to the publication as "a trophy building in an amazing location and [with] a marquee rent roll."
The deal for the properties at 701 and 801 Pennsylvania Ave. NW is the priciest to close in Washington since Mori Trust Co.'s more than $530 million acquisition of 601 Massachusetts Ave. NW about half a mile away.
The Market Square property also includes 33 condominium units that were not part of the transaction.
Shift From Office
A spokesperson for Blackstone said the investment giant's focus has shifted away from office to better-performing real estate sectors such as logistics, student housing and data centers "that are experiencing strong year-over-year market rent growth."
Traditional office space in the United States now accounts for less than 2% of Blackstone's real estate portfolio, the spokesperson told CoStar News. “We aim to invest in sectors with strong fundamentals propelled by macro-demand trends."
A Blackstone affiliate also sold off a downtown Boston office building this month to real estate firm Synergy, again for a price far less than the private equity giant's initial investment. Synergy agreed to assume the $76.5 million in mortgage debt for the 221,475-square-foot property at 179 Lincoln St. Blackstone purchased the building for about $155.7 million in January 2020.
Columbia Property Trust did not respond to CoStar News' emailed requests for comment.
Similar to other markets across the country, office valuations in Washington have collapsed under the pressure of the impact of flexible work trends, depressed leasing volume, bleak refinancing conditions and high interest rates. The fall in office values could match or surpass the depreciation reported throughout the Great Recession, credit rating agency Fitch Ratings wrote in a recent report, adding that prices have yet to bottom out.
Office values have fallen to a near four-year low, and any recovery effort is expected to stretch far beyond the time it took for the market to bounce back from the 2008-era crash. Average valuations are down by as much as 15% since the end of 2021, according to CoStar analysis, with larger, institutional-grade properties dropping by about twice the rate.
Properties in Washington — where vacancy rates have climbed to a record high of nearly 17% — have been selling at a loss of 60% or more, according to CoStar analysis, deep discounts that spotlight the challenges in underwriting office buildings in the current environment.