NoVa Landlords Relieved As TSA Takes Victory Center

ALEXANDRIA, VA—The US General Services Administration finally selected the new headquarters for the Transportation Security Administration: it is taking 625,000 square feet at the Victory Center Building, an empty office located at 5001 Eisenhower Ave. A deal of this magnitude naturally will disappoint some and delight others. One group that one wouldn't expect to fall in the latter, however, are property owners in the submarket that have had to compete against the low rates that Victory Center was presumably offering in various bids.

Let's start at the beginning.

Disappointed Contenders

Those in the disappointed camp include the few competitors for the bid, including Boston Properties, which had been hoping to secure the lease for its build-to-suit in Springfield, VA. Brookfield, which owns 601 & 701 South 12th St., in Pentagon City, cannot be too pleased.

The decision to pick Victory Center may also disappoint some metro-commuting TSA workers, who now have a quarter-mile or so trek to the building from the nearest metro stop, rather than on site metro access and the across-the-street amenities of Pentagon City Fashion Centre Mall.

A Building Finally Leased

Those pleased with the deal include, of course, the building's owner Eisenhower Real Estate Holdings, LLC, which has been trying to lease the building for several years after the last government tenant departed in 2004 and the building was renovated in 2009.

The City of Alexandria is certainly thrilled. It plans to create the Eisenhower West Victory Center Redevelopment District -- and a new tax district -- because of the bid.

Two Years of Free Rent

The government is thrilled: it is saving a lot of money with the deal -- some $95 million over the lease term.

The rental rate is $36 per square foot, according to GSA, which notes is more than 25% below projected market rents. The agreement also provides the government with over $50 million for tenant fit-out costs and other transition-related expenses.

Some back-of-the-envelop math along with another data point the government did not provide in its press release announcing the deal, but did publish in FedBizOpps.gov two days later, suggests that the property owner also threw in about two years of free rent.

According to the award notice, which was posted on Thursday, Aug. 13, the total value of the lease is $292.5 million. If you divide the lease value by 15 years, divide that by 625,000 square feet, you get $31.20 effective rate. If the face rate is $36 per square feet as the GSA said, that equals two years of free rent.

GlobeSt.com contacted JLL to ask if this reasoning was accurate; the broker, which represented the government in the deal, declined to comment on the transaction's pricing. Brian Sullivan, Lucy Kitchin and Joe Brennan represented JLL.

Nearby Building Owners

This low rental rate surely confirms the worst suspicions of property owners of comparable buildings in the submarket. Sources tell me that the Victory Center Building's suspected low offering rates have tamped down competing building owners' bids as well over the years to stay competitive. Indeed, one source says there is a rumor that one REIT declined to participate at all in the bidding when it learned that the Victory Center would be participating.

All of this is speculation based on sources that did not want to go on the record. Still, it will be interesting to see where the bids come in now that Victor Center is finally off the market.