PGP President Jeffrey Sussman Aims To Pick Up The Pace After Capitol Crossing's 'Slow' Leasing Start

Property Group Partners is gearing up to deliver nearly 1M SF of trophy office at Capitol Crossing, its $1.3B megaproject being constructed on a deck above Interstate 395, but less than 10% of that space is leased. In an interview with Bisnow, PGP President Jeffrey Sussman identified "errors" the developer has made in its leasing efforts so far, and he previewed his plan to improve the pace of leasing activity. 

"The leasing has been slower than I had expected and hoped," said Sussman, who will speak Sept. 26 at Bisnow's Greater Washington State of Office event. "But hopefully we will overcome and prevail."

PGP has landed one tenant so far, signing oil lobbying group American Petroleum Institute in October for 75K SF at 200 Massachusetts Ave. NW. The rest of that 414K SF building remains available, and PGP recently delivered it to the tenant for interior work. No leases have been signed at the 559K SF building at 250 Massachusetts Ave. NW, which Sussman said will deliver by early summer 2019. 

The developer last month announced it was parting ways with its Cushman & Wakefield leasing team and bringing on JLL's team of Doug Mueller and Evan Behr. 

"With the best respect for everybody at Cushman & Wakefield, they had been with us since we started the process close to 10 years ago, and I think there was a bit of deal fatigue," Sussman said. "All of those people were wonderful to work with, but I think we just needed new blood."

Part of the problem so far, Sussman said, is that potential tenants had a difficult time envisioning how the development would look and feel. The project is creating three new city blocks on a deck built atop I-395, making it more challenging to visualize than a typical ground-up development. 

"I think our team and I may have overestimated the ability of the leasing public to understand what this project was going to be," Sussman said. "I think we made a marketing error in how we presented the project in [the] first place. Now we’re trying to market it a bit differently."

Sussman said the team plans to relaunch its marketing efforts soon with a greater focus on the individual buildings, rather than presenting the project in its entirety. 

"I think one of the things we didn't do properly in our marketing was we were always marketing 'Capitol Crossing' because we felt it was important because of the size and the fact there's nothing there now, you need to call it something so people can identify it," Sussman said. "But I think we took our eye off the ball in terms of the buildings and what we have to offer." 

D.C. is experiencing a record surge in new office construction, with the 2.1M SF of new office space delivered in Q2 pushing the vacancy rate to its highest point in five years. Sussman does not blame market conditions for Capitol Crossing's leasing pace, pointing out that new trophy developments near transit have outperformed the rest of the market, but he said the location has presented a challenge. Despite the trend of office users spreading out from the traditional central business district, Sussman said it has been difficult to get law firms to move east. 

"I had hoped law firms would be more interested in this quite frankly, but they haven't been," Sussman said. "I think there are those in Washington who still refuse to move further east." 

Sussman said interest in Capitol Crossing has picked up in recent months now that prospective tenants can tour the buildings and see the space firsthand. 

"Now that you can go up in the buildings and see the quality, I think people are starting to see it now and there is becoming more activity," Sussman said. 

He said the company is in talks with a number of tenants and is willing to be flexible about square footage and lease term. 

"We don't need somebody to kick off the project; it's kicked off," Sussman said. "We're talking to a number of tenants in the 20K to 40K SF range and are happy to do so. We're also going to be more flexible — if tenants want five-year leases, we can talk five-year leases." 

The developer is also creating incubator space and built-out suites for smaller tenants, Sussman said. Mueller and Behr plan to unveil more details about their leasing strategy in the coming weeks. 

The development will eventually feature five buildings. PGP had included one residential building as part of its initial plan, but Sussman now said it intends to return to the Zoning Commission to switch the multifamily parcel to hospitality. As part of that arrangement, it would agree to build affordable housing off-site in a location that has yet to be announced. 

"We have gotten a great number of people who we have talked to as potential users who have inquired about 'where are the hotels around?'" Sussman said. "We think it is time for an upscale hotel in that neighborhood, and we think it will add to the project. We think we should have done it perhaps from the get-go."

The remaining two buildings are planned for office, but Sussman said PGP does not intend to break ground speculatively on a third office building, as it did for the first two. The first two office buildings also have about 70K SF of combined retail space. The developer signed a deal with Danny Meyer to anchor the 200 Mass building's retail with Union Square Cafe, the first location of the popular restaurant to open outside New York City, and a coffee shop. Sussman said PGP is in negotiations with other retailers and hopes to bring a wide mix of users to the project. 

"We need to serve all customers from a white tablecloth restaurant to a sandwich to-go to a pizza to a burger," Sussman said. "We think that makes for vibrancy." 

Sussman will discuss Capitol Crossing at Bisnow's Greater Washington State of Office event, Sept. 26 at 600 Massachusetts Ave. NW.