An Interview With: John Donovan Part 1

John Donovan, long considered the dean of Washington commercial real estate, was head of Washington operations for CarrAmerica until his retirement June 1. He continues in a consulting role for the remainder of the year, dividing his time between Virginia and Massachusetts. A graduate of Georgetown University, he started as a leasing agent in 1976. These days he returns to Washington mainly to visit his barber at the Metropolitan Club.

Bisnow: What have you been doing? During the summer in Massachusetts, I did nothing of real significance. I sailed my boats, I read, played tennis, and the last month or so rode horses, getting ready for the fox-hunting season. I’ve found myself extremely busy, doing nothing but pure recreational stuff.

Have you been reading anything in particular? I’ve been reading a mixed bag of non-fiction, and whodunits, including The Tears of Autumn by Charles McCarry, The Winter Queen by Boris Akunin, and The City of Falling Angels by John Berendt, among others.

Where will you be fox-hunting? To kick off the season, earlier this month, I shipped one of my horses down to Bath County, Virginia and with about a half dozen members of my hunt, spent several glorious days in the Appalachian splendor, hunting with the Bath County Hounds. Now I’m back around my home in The Plains.

What kind of horses do you have? They’re both what are called draft crosses, part thoroughbred, and part draft horse. A lot of people use them in the hunting field. They are not as fast as thoroughbreds but sturdy and saner.

People say that being in real estate is addictive. Have you had any withdrawal symptoms? To my own amazement, I have had very few. That is particularly surprising, since my phone, email, and Blackberry are still hooked up. I’m in touch with the office increasingly more loosely, but intuitively you would say that if you don’t really cut the cord with the business it’s harder to separate from it psychologically. I had two or three weeks in June where I was a little irritable and difficult to be around, and then by the fourth week I was really starting to thrive on this new frivolous lifestyle. I would have to say that I miss a lot of the people that I loved doing business with, but I’m not looking for ways to get back in, at least not like the last three decades, as much as I enjoyed it. I am becoming a director of a privately held bank, which will be interesting, and I am also likely to get into ‘real estate lite,’ and to do a bit more volunteer work.

So you don’t feel any compulsion to go find a little town and check out the office space there and how the rents are going and the price per square foot?
No, but if you could see where I spent the summer you would find it very easy to believe that even if I was pining away for the business it’d be pretty hard to get excited about how the office market is in New Bedford, Massachusetts. Now that I am back in Virginia, the same could be said about Middleburg and Warrenton.

Do you sense that Washington is at the height of the commercial real estate market? In terms of investment sales, buying and selling of commercial buildings, I can’t imagine how prices can be rationalized to go much higher, although people have been saying that for the last four years. My sense is that things are starting to plateau, but whether prices will actually drop remains to be seen. There have been some astonishing prices paid for office buildings, and not just for the trophy-quality buildings. The garden-variety buildings are fetching these relatively huge prices. There is enormous demand, enormous amounts of capital dedicated to investment in commercial real estate situated in the preferred markets, which are few.

Where is the money coming from?From overseas, domestic pension funds, private equity funds. Morgan Stanley, J.P. Morgan, and countless other institutional players are all putting together these real estate funds and having no trouble getting them hugely subscribed. The appetite is voracious!

How are they going to turn around and sell for a profit?If indeed now is the peak, they’re not going to sell any time soon for a profit. For some, that’s not particularly a problem. They’re buying quality real estate to put into their portfolios and hold, operate, and over time to realize the appreciation in value. Others have medium to short-term hold as their mode, so flipping profitably will become increasingly difficult. When the music stops, some investors are going to get hurt.

Is DC the most frenzied market in the country, does it compare to New York or Los Angeles?  I don’t think any place has been any hotter than Washington D.C.

Were you surprised that since 9-11 everybody wanted to be in here even more, despite the obvious fear that Washington D.C. is a target?
The first year after 9-11 there was some real trepidation about where the next bombing would hit, and we felt that with our tenants because most of the buildings are in the heart of downtown DC, including five almost on the apron of the White House campus. We had some very troubled tenants, and some very high drama periods where there were lease negotiations for new occupancies and renewals in the home stretch, and the tenants started re-thinking whether they really wanted to be in Washington, or if they wanted to be in Washington, whether they wanted to be that close to something as prominent a target as the White House. It did dissipate over the course of 6-9 months, in some cases a year. I think part of it is the robust American optimism which refuses to concede that terrorists are going to tell us how to run our lives.

What would explain why people started this frenzy of bidding up the prices?  Well, as soon as the tenants gave the signal that they weren’t bailing out on downtown, investors said, “Why should we be turned off on Washington DC as an investment target?” If what you’re doing when you’re buying DC buildings is buying solid fundamentals and strong, stable rent streams, and if the tenants are still ready, willing, and eager to lease the space and indeed to pay high rent for it, then we as investors should be just as interested in those buildings because it looks like business as usual.

And yet, even if they were willing, why wouldn’t there have been a cloud? It only takes one terrorist act to change the psychology again.I think that people have just decided that, with the expectation that the Homeland Security apparatus and our intelligence capabilities are being improved, they are going to be resilient. This is not just law firms and trade associations willing to lease the space or investors willing to buy the office buildings in which the space is available. Look at the astonishing influx of residents in downtown Washington, all the new condominiums and rental apartment buildings running up and down Mass. Avenue, and around the MCI Arena, as well as the booming retail and entertainment initiatives. People really want to live in and work in what they see as an increasingly cosmopolitan 24-7 urban environment, in the capital of the free world.