The Making of Washington’s Biggest Deal: Constitution Square and the Art of Urban Development Today

It took a Canadian bank without exposure to the U.S. subprime mortgage market to save the biggest real estate deal in Washington, D.C., during the darkest days of the credit crisis, according to a panel of the principals involved in the $500 million, 1.6-million square foot first phase of the Constitution Square mixed-used development.

The LEED-Platinum certified project, which includes office buildings for the U.S. Department of Justice (DOJ) and General Services Administration, as well as a 50,000 square foot Harris Teeter grocery store, 204-room Hilton Garden Inn, and 440 apartments, is located in the emerging NoMa (north of Massachusetts Avenue) submarket between M, N and 1st streets NE and the railroad tracks just north of Capitol Hill. The presence of an infill Metro Station at New York and Florida avenues along the Red Line in 2005 caught the eye of developer StonebridgeCarras and Chicago-based investors Walton Street Capitol, who wanted to get in the mixed-use development game in a strong market like DC. The submarket includes a new FedEx facility, XM Satellite Radio’s headquarters, a new federal Bureau of Alcohol Tabaco Firearms and Explosives headquarters, and a planned new office for National Public Radio.

Despite a 15-year lease with the DOJ, an anchor grocery tenant and a huge amount of equity, Walton Street could not find financing in the fall of 2008, when the global credit markets collapsed. While conversations with President Obama and Lawrence Summers by managing director Neil Bluhm helped alert the administration about the seriousness of the credit market dysfunction, it was Walton Street’s relationship with the Canadian TD Bank that enabled it to get the financing it needed to save the project.

Walton Street achieved returns of 6.5% on the first office building, 8.5% on the second, and 8% on the residential/mixed-use building. In June, due to its large equity in the building, it decided to sell 2 Constitution Square—the DOJ office—to Northwestern Mutual Life Insurance Company—for $310 million. Northwestern Mutual viewed the building as an amazing opportunity—LEED-Platinum, mixed-use district, on the Metro, with a 15-year federal lease—and it helped ease its tax liability on a recent sale of a Honolulu-based asset. One interesting sidenote: since insurance companies think hard about risk, Northwestern got a fully amortizing 50% loan at the low, low price of 4% to mitigate its concerns about potential losses from terrorism in the DC market.