March 5, 2009 - New Commercial Construction Nations Capital, Washington DC

Cranes Are Ready, Financing Isn't

D.C. Office Construction at a Standstill as Credit Crunch Hits Downtown

Not a single office building has been started in the District since October, a sign that the slowdown that began in the far-out suburbs has now reached prime city locations.

"Things are frozen. Nobody's doing anything," said Gerry Widdicombe, director of economic development for the city's Downtown D.C. Business Improvement District. It is the first time in nine years that there's been such a long period with no groundbreakings, according to the brokerage firm Cushman & Wakefield.

The construction cranes that still thrust above the skyline belong to buildings financed before the money for commercial construction disappeared. A few small deals are still getting done, but they often require owners and investors to put more money into the project than before.

The construction slowdown is rippling through the region, where many depend on commercial development for work. Ambitious revitalization plans have stalled, and tax revenue is likely to dry up soon, too.

Longtime developer Douglas Jemal has tried to get $400 million in financing to turn several blocks next to the new convention center into restaurants, shops, offices and housing, but says he can't get a loan. "I went to everyone out there," he said. "It's ugly."

Developer Jim Abdo is scaling back the size of his $1 billion, long-term plans to turn a run-down area of auto-body repair shops, a taxi cab company and a strip club along New York Avenue into a mix of shops and housing after not getting $150 million from two large equity institutions, which he refused to name. The partners backed out because of their own financial troubles and were reluctant to put money into new deals, he said.

For a project to move forward, it has to get money from investors and lenders. In contrast to past downturns, it's not just over-the-top projects in far-out suburbs that are hurting. Well-located projects with deep-pocketed developers are having trouble getting financing, according to analysts, brokers, lenders, investors and developers.

At 17th and H streets NW, developer Vornado and PNC, the bank that will occupy part of a roughly $200 million office building that's under construction, have put more cash into the deal after the terms of a loan became too onerous. And at Connecticut Avenue and K Street NW, one of the city's premier corners, the owners had to go to multiple lenders to find money.

"If anything could get money, it is trophy projects, but now you're seeing projects at Main and Main in good locations that aren't getting money," Widdicombe said.

Well-heeled Hines, and its partner, Archstone-Smith, may have to reach out to twice as many investors as usual to try to get equity for their $800 million mega-project at the old convention center site -- the last huge piece of undeveloped land downtown, at Ninth Street and New York Avenue NW. "We're trying to do this in a tremendously challenging market," said Bill Alsup, who runs the Washington office of Hines.

Even with the Department of Justice -- a gold-plated tenant -- signed up for part of a 2.2 million square-foot project at First and N streets NE, it took Bethesda-based developer StonebridgeCarras more than seven months to close on a $193 million construction loan.

Cities in particular depend on commercial and residential property taxes to pay for roads, schools, fire trucks and other services. On average, such properties account for 70 cents out of every dollar that a city brings in, according to the Real Estate Roundtable.

The impact of the slowdown has trickled to many corners of the local economy. One prominent architect said he's trying to collect $3 million on bills that are four months late from developers. Layoffs are becoming more widespread at development companies, brokerages and law firms. Locally, more than 200 architects and engineers have been laid off, according to trade groups. And 25,000 construction workers in the area are out of work.

"It used to be it was hard to find enough people," said Jon Couch, a principal of Rand Construction, which builds out office interiors. "Now you can pick who you want, but you don't have that much work."

Ezra Weinblatt, a real estate broker for tenants, said he now spends much of his time culling through Rolodexes in search of possible clients.

"Half the deals I was going to do aren't there anymore," he said. "I've had nonprofits not get their funding, so they're not moving anywhere. Others aren't expanding. Now I'm really, really busy trying to be busy."

Attendance at networking events is up, as people want to hear about who else is struggling and laid-off workers search for jobs, event organizers say. Some joke that the pastry sizes have shrunk, shrimp cocktails are being replaced with more veggie trays, and instead of bottled water there are large pitchers of tap water.

"It is comatose," said Trip Howell, regional managing director at Jones Lang LaSalle, who represents tenants and landlords. "I'm getting calls from one building where the deli guy isn't selling as many sandwiches. In another, the eyeglass man isn't making as many frames, and in another spot a picture frame shop isn't doing as many pictures and a printer isn't doing brochures." Small to mid-size companies are banking on two of the city's biggest pending projects to keep them in business -- the Hines-Archstone redevelopment of the old convention center site, and a 1,100-room hotel that is supposed to be built next to the new convention center. But the finances for both of them are still uncertain.

Engineering and architecture firms, including Thornton Tomasetti, TOLK and Shalom Baranes Associates, could lose jobs, if the Hines/Archstone-Smith project doesn't get started soon. Nigel Parkinson, president of D.C.-based Parkinson Construction, said he's down to 70 employees, from 300, and expects his roughly $20 million annual revenue to fall by half if business doesn't pick up. He said he hopes to land a job as a subcontractor on the hotel and Hines team project.

"If those start up, we could hire back employees," he said. "We can get started having cash flow come back."

Original Story - Washington Post