Earlier this year, BXP’s groundbreaking deal to demolish a 1990s-era office building and create a new trophy tower at 725 12th St. NW has sent ripples throughout D.C.’s commercial real estate arena.
The new development, which includes approximately 320,000 square feet of office space and is already 90% preleased, mainly to law firm McDermott Will & Emery, serves as a potential beacon of hope for future office projects in today’s challenging market.
As a testament to the project’s significance, Pete Otteni, co-head of BXP’s D.C. region, shared that his phone has been buzzing with congratulatory and inquisitive calls from other developers.
“I’ve had conversations with other developers about how this all came together and how they could either replicate this kind of success themselves or partner with us,” Otteni said.
Local office brokers affirm that major law firms and developers are now eager to discover new opportunities similar to BXP’s project.
“Every developer in town is clamoring for that kind of site, and every law firm tenant is clamoring for that,” said Doug Mueller, Vice Chairman at Newmark.
This market dynamic is unprecedented in his career.
With many of the city’s significant law firm leases set to expire within the next six years and a limited supply of trophy office spaces, ground-up developments may emerge as one of the few viable options.
“There’s this wave of demand with really no place to go right now,” observed Phillip Thomas, Executive Vice President at CBRE.
According to CBRE, the trophy vacancy rate stood at 12.2% in the first quarter, with rental rates reaching new heights.
Out of the 47 trophy buildings in the city, only eight offer more than 50,000 square feet of contiguous space — and only one, at 801 17th St. NW, has a top floor available.
As the remaining inventory continues to dwindle, demand is expected to escalate further.
“There’s no question that firms want trophy, especially large blocks. Very few options exist now, and fewer still will be available soon,” noted Lou Christopher, Vice Chairman at CBRE.
Many of D.C.’s largest law firms inked leases during the mid-2010s, often for 15-year terms, which means that these leases are due for renewal in early 2030.
Newmark has tracked 21 law firms looking to renew their leases between 2026 and 2031, seeking almost 1.3 million square feet of office space.
Some of these firms are substantial enough to potentially initiate new developments looking ahead.
For instance, two firms whose leases expire in 2029 are seeking a combined 245,000 square feet.
Another firm with a 2030 expiration is in the market for 150,000 square feet, and two firms looking for a total of 340,000 square feet have 2031 expirations.
Notable examples include Sidley Austin, which has a lease of 289,000 square feet expiring in 2031 at 1501 K St. NW, and Latham & Watkins, with 241,000 square feet leased at 555 11th St. NW expiring in January 2031.
Some firms, like Blank Rome and White & Case, also have leases expiring within the coming years.
“If you’re larger and current buildings aren’t meeting your needs, you’re considering new construction,” stated Tom Fulcher, Vice Chairman at Savills.
Another site that the market has been eyeing for potential new office development is 2100 M St. NW.
BXP’s recent announcement regarding their project at 725 12th St. NW is being hailed as a benchmark for how to successfully initiate new construction in a challenging financial landscape.
However, it required multiple favorable conditions for BXP to bring this project to fruition.
The building was vacant when BXP acquired it, eliminating the need to buy out existing tenants.
Initially under contract for a live-work conversion, those plans fell through at the end of 2023, allowing BXP to secure the site at a favorable price of $34 million for the 302,000 square foot office building.
Being a REIT, BXP had the unique advantage of self-funding the acquisition and development, facilitating the deal.
In January, BXP secured McDermott as an anchor tenant for 150,000 square feet — nearly half of the building’s total area.
Shortly after, conversations progressed with another significant tenant, Cooley LLP, which ended up preleasing 126,000 square feet.
These tenants were prepared to pay premium rents, which brokers agree are essential for financing new developments today, especially amid rising construction costs and interest rates.
The strong performance of significant law firms in recent years has provided them with the financial flexibility to opt for higher-priced, high-quality spaces.
Linda Mangini, Chief of Administration for McDermott, commented that the firm evaluated virtually every available building in the D.C. market before deciding on a ground-up development.
“We’re building a space for how we work today,” she said.
“While the cost per square foot is higher, we are also reducing the total space we pay for, making it more economical.”
Although McDermott and Cooley were able to navigate the financial considerations associated with higher rents, many other firms may lack the ability to do so.
Additionally, finding suitable sites for new projects poses a challenge.
Brokers discussed 2100 M St. NW as another prime candidate for new office development, given its vacant status and prime location.
Post Brothers had originally planned for a residential conversion of the 300,000 square foot building, but after facing foreclosure challenges, they managed to repurchase the project.
“This is one of the few closest viable development sites in downtown D.C. right now,” noted Randy Harrell, Vice Chairman at CBRE.
Another site drawing interest is the 900 New York Ave. NW, once intended for a larger office building, which has begun to garner conversation surrounding its development potential post-BXP deal.
Thomas, representing the owners of 900 New York, noted that the high rent levels achieved by BXP’s leases have made the economics of new developments more enticing.
Despite the prevailing interest in distant future developments, the majority of law firms with leasing expirations are expected to renew their leases or move to slightly lower-tier properties if trophy spaces remain scarce.
Nonetheless, if all criteria align, including a major firm needing space, a developer with financial backing, and a suitable development site, the existing demand might result in the initiation of several more development projects.
Christopher speculated that one or two additional office development projects could emerge within the next 18 months.
“Everyone wants to chase this opportunity, right?” remarked Kyle Luby, Executive Managing Director at Stream Realty Partners, who noted that many leading developers in D.C. are actively on the lookout for similar opportunities.
As BXP looks to capitalize on its recent success, Otteni mentioned that the REIT is exploring discussions with tenant brokers and assessing other potential development locations.
“We would definitely like to be the developers working on the next project similar to 725 12th St.,” Otteni concluded.
image source from：https://www.bisnow.com/washington-dc/news/office/bxp-deal-fuels-appetite-for-law-firm-anchored-trophy-office-129559
