Union Station Lures a Kaiser Unit

Kaiser is leasing close to half of an approximately 507,000-square-foot building developed by Property Group Partners, the real-estate arm of French Louis Dreyfus SAS, and Fisher Brothers of New York.

Washington’s acclaimed redevelopment of Union Station roughly two decades ago was a catalyst that helped transform an area north of Massachusetts Avenue from a patch dotted with low-rise industrial buildings and empty lots into one of the city’s hottest office destinations.

Now health provider Kaiser Foundation Health Plan Inc., of Oakland, Calif., has signed the city’s biggest lease of the year in a speculative office development in that area, a sign Union Station’s crowded corridors of shops and restaurants still have drawing power despite the recession.

The developer also signed an earlier lease with the American Chemistry Council to occupy about 90,000 square feet. That makes the building about 60% leased, a level that would give comfort to most developers hitting the market with space during the worst recession since the end of World War II.

The deal is in part a testament to the continued draw of the location and the appeal of its connection via an underground walkway to Union Station, says Bruce Pascal, executive vice president of CB Richard Ellis in Washington, who represented Louis Dreyfus in the transaction. “Large deals are still happening in our city,” Mr. Pascal says.

In a better market, Kaiser might have had a harder time beating out more-traditional office tenants for such prime space. Many landlords prefer not to mix consumer-oriented companies like medical offices with more traditional office users, brokers say.

These days, however, nearly any tenant is a good tenant, and large, credit-worthy companies like Kaiser are in the driver’s seat. Jeffrey Sussman, president of Louis Dreyfus Property Group, says the company would be pleased to have leased the space to Kaiser in any market.

The building, designed by Pritzker Architecture Prize-winner Kevin Roche, is a short walk from the Capitol building and is part of the Station Place development complex that also includes the Securities and Exchange Commission headquarters. Kaiser says it will open the company’s Capitol Hill medical office in the space in 2011. Patients will be able to visit primary and specialty-care doctors in the building, and pharmacy, laboratory and imaging services also will be available.

The deal comes as Washington’s office-vacancy rate has risen to a second-quarter rate of 11.7%, from 9.4% in the year-earlier period, the first time it has risen into the double-digit range in about 10 years, according to property consultant Cushman & Wakefield.

Landlords in the submarket that includes the Station Place property have even more headaches, as the area posted a second-quarter vacancy rate of 17.4%, partly because of the surge of new projects conceived in better times, Cushman & Wakefield says.

Rents for prime space like the kind leased by Kaiser have fallen to the high-$40-a-square-foot range, down from the mid-$50 range that some buildings fetched in the area at the peak of the market a year or so ago, says Sigrid Zialcita, director of research for Cushman & Wakefield in McLean, Va. Louis Dreyfus and Kaiser declined to comment on rental rates.

The north of Massachusetts Avenue office market, dubbed Noma by brokers, has grown in recent years as developers, facing rising prices and height restrictions in the traditional central business district, have pushed out from Capitol Hill.

The image of the area has been changed by the renovation of the city’s beaux-arts Union Station in 1988, improved transportation connections and the companies and agencies that have moved to the area.

“People said nobody would ever want to live or work here,” recalls Sam Rose, a partner in the development firm of Greenebaum & Rose Associates. “They were wrong.” Last year, National Public Radio announced it would move its headquarters to the area.