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First Potomac focuses on core markets, properties

Bethesda-based First Potomac Realty Trust is trying to strengthen its position in a tough market by refocusing its portfolio and divesting itself of its Richmond, Virginia, holdings and placing an emphasis on high-quality properties in key markets.

The greater Washington, D.C., office market was hit hard by sequestration, and the demand for office space from the government and contractors has drastically slowed down. Despite those challenges, Douglas J. Donatelli, the company’s chairman and CEO, is confident the business is in a good place to adjust to the changes in demand.

“Both the government, and government contractors, are seeing a real decrease in demand for office space, and that’s sort of creating a negative ripple effect on the market. But for us, our focus on multi-tenanted buildings in D.C. and on high-quality, newer, more energy-efficient properties in the suburbs has really paid off,” Donatelli said.

An example of the company’s refocusing is the $89 million acquisition last week of the nine-story mixed-use property at 11 DuPont Circle in Washington, D.C. The building, which is located about one block from the Metro Red Line, is 100 percent leased with 155,713 square feet of office space and 11,692 square feet of retail space.

Meanwhile, the company announced it is selling all of its properties in Richmond, including the Chesterfield Business Center, Hanover Business Center, Park Central and Virginia Technology Center. The sales are expected to be complete in the fourth quarter of this year or early 2015.

“We have been selling some of our non-core, non-key markets and non-key properties. We sold about half of our Richmond holdings last year when we sold a portfolio of industrial properties to BlackRock, and then we intend to sell the rest of the properties that we have in Richmond, which consists mostly of flex properties and low-rise office buildings,” Donatelli said.

In the second quarter of this year, Potomac Realty posted solid results despite the weak market in the Washington, D.C., area. It reported $14.5 million in Core Funds From Operation and increased its leased percentage in its consolidated portfolio to 89.5 percent, up from 86.5 percent on June 30. According to Nasdaq, the company’s shares sold at a 52-week high of $13.61 and a low of $10.96. On Monday afternoon its stocks were trading at $11.79 a share.

The re-focusing of the company’s portfolio comes as the office market has struggled, particularly in the suburban Maryland market. Transwestern’s third-quarter report called market conditions weak in part because net absorption was a negative 338,000 square feet and the direct vacancy rate is at 15.1 percent in September compared to the 15-year average of 10 percent.

As a result, Donatelli wants to position his company to take advantage of an expected flight-to-quality in submarkets that have an urban-like atmosphere with nearby retail and easy access to mass transit, particularly Metro stops. He said there’s already been a pronounced bifurcation of the market where new, high-quality developments with greater energy efficiency are doing well. On the other hand, older properties that are not Metro accessible and located in more remote suburban settings are struggling.

“It think that by focusing our portfolio on extremely high-quality, very well-located office assets that we’ll be setting ourselves up really well for the future and that’s the goal,” Donatelli said.

About Adam Bednar

Adam Bednar covers real estate and development for The Daily Record.