Akridge Sells Building Fully Leased To WeWork For Over $1K Per SF

UPDATE, JULY 8, 6:30 P.M. ET: This story has been updated to include details from Akridge's announcement of the deal.  

A new office building fully leased to WeWork has just sold for over $1K/SF, a threshold few D.C. buildings have topped, none of which have large coworking components.

Akridge sold the building at 1701 Rhode Island Ave. NW to an entity connected to Miami-based Exan Capital for $105.7M, according to documents posted July 1 to the D.C. Recorder of Deeds.

In a Monday release confirming the sale, Akridge said it was represented by Eastdil Secured and that the property went under contract in April. The total sale price came to $119M, Akridge said, with the additional $13.3M beyond what was recorded representing the amount it credited to Exan to help WeWork build out its space.  

The sale of the 104K SF building pencils out to $1,016/SF, putting it among the priciest D.C. office building sales ever. The deal that holds the record price also sold to Exan Capital, which advised Masaveu in its January 2018 purchase of 900 G St. NW for $1,278/SF. Exan also bought 1399 New York Ave. last year for $939/SF. 

WeWork leased the entire 1701 Rhode Island building ahead of its February delivery and plans to open the coworking space this fall.

Akridge, in partnership with Alcion Ventures, broke ground speculatively in March 2017 on the project, a redevelopment of a former YMCA building. EagleBank financed the project, Hickok Cole designed the building and Whiting Turner was the general contractor. 

The building sits at the corner of Rhode Island Avenue and 17th Street NW, less than a half-mile from the Farragut North and Dupont Circle Metro stations. It features a two-story lobby, a landscaped entry plaza, floor-to-ceiling glass and a copper facade that distinguishes it from standard glass-box buildings. Its amenities include a fitness center with locker rooms and a rooftop terrace. 

The hefty sale price appears to buck the trend of investors exercising caution when pursuing buildings with coworking providers as major tenants. A recent CBRE study found that 64% of building sales with more than 40% of a property’s footprint devoted to coworking or shared office space traded at less favorable cap rates than their peers, an indication that coworking could cause downward pressure on value.

“The common opinion is it’s still something investors and underwriters are watching, they want to have some sort of threshold for a portfolio whether it’s 20% or 30%, but they want to manage their exposure to it,” CBRE Senior Manager of Research Wei Xie said.

Lenders have also expressed skepticism about buildings that have large coworking components.

“From a lender perspective, they are looking at [coworking exposure] through a pretty focused lens," Tishman Speyer Senior Managing Director Chris Shehadeh said at a recent Bisnow event in New York. "I think if you are over 25%, a lender is going to start to get itchy.”

Xie, who had not analyzed the 1701 Rhode Island deal prior to speaking with Bisnow, called the pricing “remarkable.” She said it could signal that the buyer believes there is runway for additional growth in the coworking sector, given that coworking still comprises less than 2% of D.C. office space. She also said the size of the building could have played a role, as boutique office buildings with around 100K SF have different pricing dynamics than larger properties.

Savills Chief Economist Heidi Learner said having a coworking provider anchoring an office building presents a risk of default as most of the companies occupying the space have a short-term membership agreement rather than a lease. She cited Regus' 2003 bankruptcy filing as precedent for the risks involved with a shared workspace provider. 

"What I think is more interesting about this sale is not that WeWork is a tenant, but that WeWork is the only tenant in this building," Learner wrote in an email. "While a default by WeWork in a downturn would give the building owner the opportunity to have a completely vacant building, a vacancy rate of 100% in any type of downturn is not what a landlord wants to see."  

WeWork has continued to rapidly increase its footprint in the D.C. area with multiple 100K-plus SF deals in recent months. The coworking provider signed a 110K SF at Midtown Center in April and in May it signed a 111K SF deal at Capitol Crossing. Last week, it reached a deal to expand its space at 1775 Tysons Blvd. from 93K SF to 154K SF.

Newmark Knight Frank Research Director Bethany Schneider said many landlords want to keep coworking at less than 30% of a building’s footprint to manage risk, but given the softness of the D.C. office market, owners have a hard time turning down a major lease with a coworking provider.

“In D.C., leasing is just tough right now,” Schneider said. “If there’s a big fish there that’s ready to go, it’s kind of difficult to say no, even if there is some risk to it. If it was a stronger landlord market there may be a little more pause, but there aren’t a lot of big tenants out there."

UPDATE, JULY 2, 1:55 P.M. ET: This story has been updated to include additional comments on the deal and the coworking market.