The Washington D.C. real estate market is experiencing significant turbulence, and recent news highlights the challenges even established developers face. Douglas Jemal, founder of Douglas Development, known for his significant holdings in both D.C. and Buffalo, New York, is now facing a major hurdle: a default on a $51.7 million loan tied to a portfolio of 15 properties in the Washington, D.C. area. This portfolio, consisting of a mix of office and retail buildings, or combinations of both, underscores the pressures impacting the local commercial real estate landscape.
Understanding the Scope of the Default
The loan default involves a collection of properties that includes a 40,000-square-foot office building in D.C.’s Brentwood neighborhood, a substantial portion of Jemal’s D.C. holdings. Retail tenants in these properties include familiar names like Lululemon and Sherwin Williams, showcasing the diverse nature of the portfolio.
The loan itself, originally issued by The Royal Bank of Scotland in 2014 and quickly sold into a commercial mortgage-backed security (CMBS) trust, matured on August 1st. The fact that it was transferred to special servicing in mid-July, just weeks before maturity, suggests underlying issues were already present. CWCapital was the special servicer leading up to August 28, 2024. This isn’t a new development; the loan had been on servicer watchlists since 2017, indicating a history of financial struggles.
The Challenging D.C. Office Market
The default is happening against a backdrop of a struggling D.C. office market. Record-high vacancy rates, fueled by the rise of remote work and amplified by high interest rates, are putting immense pressure on property values. This challenging environment is particularly impacting office loans, with Washington office loans having the seventh-highest rate of default in the U.S.
In fact, approximately 39% of securitized Washington office loans were either in default or at risk in Q1 2024. We’re seeing this play out with other major players as well; in June, a $243 million loan backing Beacon Capital Partners’ Lafayette Centre office complex in D.C. was sent to special servicing. The Jemal default is another data point that confirms the difficulties in the current market.
A Look at Douglas Jemal’s Background
Douglas Jemal’s career is marked by both success and controversy. Before making his mark in real estate, he co-founded the retail chain “Nobody Beats the Wiz.” He’s also faced legal challenges, including a 2008 wire fraud conviction for which he received a pardon from President Trump in 2021. Furthermore, he was acquitted of bribery charges in 2006, although one of his associates was convicted. He’s been criticized for late payments to contractors and high rents.
While the current default presents a significant challenge, Jemal’s extensive experience and portfolio indicate the potential for navigating these difficulties.
What’s Next?
The default on this loan raises questions about the future of these 15 properties and the larger implications for Douglas Development and the D.C. real estate market. How will the special servicer handle the situation? Will the properties be sold, restructured, or managed differently? The answers to these questions will significantly impact the tenants, the surrounding neighborhoods, and the overall health of the Washington D.C. commercial real estate landscape. Keeping a close eye on these developments will provide valuable insight into the evolving dynamics of the market.