Thanks to the presence of the federal government, an expanding higher-education sector, and a robust medical industry, America’s Mid-Atlantic region and the Carolinas are reporting steady real estate activity.
“The Mid-Atlantic region has benefited—and we expect it to continue to benefit—from its proximity to the U.S. government and the private contractors that work with the government in defense, public health, biotech, and high tech,” says Timothy Dugan, a lawyer in the Potomac, Maryland office of the Shulman, Rogers, Gandal, Pordy & Ecker law firm. “The region’s economy still enjoys relatively stable nonresidential and residential property values, based upon the relatively stable job market. We have seen more multifamily development investment dollars coming to the D.C. metropolitan area, for example.”
Jonathan B. Eisen, managing principal of the Eisen Group, a Washington, D.C.–based development consulting, urban planning, and architecture firm, says the Mid-Atlantic real estate market will remain robust this year and next because of its location, ongoing government activity, the need for contractors to have a presence in the area, and expansion of medical and higher-education institutions. “We’re also experiencing a lot of pent-up real estate demand,” Eisen says. “We’ve had three years—almost four—of little development activity, so the market has done a lot of absorption, and new demand is there.”
While government continues to be the primary economic driver in the area, federal budget cuts could cause some uncertainty about the potential for continued growth, says Jay Arvai, TD Bank senior vice president for the Washington, D.C., metro area. “That said, the federal government has provided the region with some downside protection during the recent economic downturn,” he adds. “While there have been significant discussions surrounding budget cuts, historically the federal government continues to grow during these times of austerity, albeit at a much slower pace.”
The interiors of Southern Management
Corporation’s Palisades of Towson
development in Towson, Maryland
Economic fundamentals in the Mid-Atlantic region are solid, points out Esko Korhonen, managing partner of Federal Capital Partners, a long-term investor in the area. “While we invest in all property types, we have been most actively investing in multifamily, and it’s been a great multifamily market,” he says. “We continue to see very attractive opportunities in Class B and C value-added multifamily properties where we undertake extensive common-area and in-unit rehabilitation. Now is a great time to acquire B and C properties because there is virtually no new inventory delivering, and the major demographic shifts of declining homeownership and younger people renting longer before opting to purchase homes translates to a deeper universe of renters,” he says. Korhonen notes that Washington, D.C., Philadelphia, and Raleigh-Durham, North Carolina, all have universities, making them a magnet for young people.
With political gridlock expected until the November election, Korhonen says the Mid-Atlantic commercial office market has exhibited leasing activity that is more anemic than in the past. “Business leaders are hesitant to make any decisions as to growth needs until they know who’s going to be leading the country,” he says. “Washington, D.C., continues to attract investors looking for yield who are buying Class A trophy assets at low cap rates.”
Experts expect continued development activity inside the Washington Beltway, primarily in areas near Metrorail stations, says Arvai. “Traffic in the Washington area continues to be a significant problem, and real estate developers are providing multifamily and mixed-use projects in close proximity to areas where people can live, work, and play without spending an extraordinary amount of their lives commuting,” he explains. “Financing for these projects is somewhat easier than for projects located further out in the suburbs or in areas that do not have the benefit of public rail transportation.”
TD Bank is the lead lender for a large Class A multifamily project for the JBG Companies in the Rosslyn area of northern Virginia, just across the Potomac River from the District of Columbia. “The two-tower project with 474 apartment units is within easy walking distance to the Rosslyn Metrorail station,” Arvai notes. “The Rosslyn-Ballston corridor in the northern Virginia suburb of Arlington County is one of the strongest submarkets in the country, with low vacancy rates for both office space and apartment projects due to its close proximity to Washington, D.C.”
The multifamily sector in the nation’s capital remains strong because of tremendous pent-up demand, says Eisen. “Some reports are saying the area needs 30,000 to 50,000 additional multifamily units, and half that amount is ready to go with entitlements in place, contractors already waiting to start, or the development is already under construction,” he says. “This activity is keeping a lot of architects, engineers, and contractors in the area busy.”
H&A Architects & Engineers developed
a master plan for Rocketts Landing in
Eisen’s firm is working on two large master-planned communities under construction—in Gaithersburg, Maryland, and Ashburn, Virginia. “They are in suburban locations, each with a large mixed-use component,” he says. “They are two of the few projects of this scale built in this area in many years.”
The Mid-Atlantic area continues to experience strong multifamily activity, says Bernard V. Holnaider, principal in the Washington, D.C.–based interior design and architecture firm RD Jones. “We are working on about 11 new multifamily construction projects at this time,” he says. Some of these projects are adjacent to Metro stations in the D.C. metropolitan area, including downtown Washington, and in suburban locations, such as the Clarendon area of Arlington, Virginia, and Bethesda, Maryland. “Some have anywhere from 3,800 square feet [350 sq m] of amenity space to upward of 20,000 square feet [1,900 sq m]. We are working with some of the major developers in the Baltimore/D.C. area, including Bozzuto Development, ZOM, and USAA Real Estate.”
Holnaider’s firm has just completed a 368-unit multifamily project in the White Marsh community of Maryland. In less than five months, half the units have been rented, he notes. “There seem to be some new hotels being constructed as well,” he says. “We have submitted proposals for numerous boutique-type hotel properties in areas such as the D.C. metropolitan area.”
With mobility in the region continuing to be a concern, Maryland in February 2011 opened the first six miles (9.6 km) of the 18-mile (19 km) InterCounty Connector, an all-electronic toll road linking Montgomery and Prince George’s counties in the D.C. suburbs and intended to cut peak-hour trip times in half, points out Dugan. “A research scientist, for example, now can drive from Shady Grove in Montgomery County to BWI [Baltimore/Washington International Thurgood Marshall] Airport [near] Baltimore in about half the time,” he says. “Thus, accessibility is enhanced significantly, which makes a more attractive area for research and development.” Completion of the roadway is slated for 2014.
Shulman, Rogers is obtaining development approvals for a 470-unit multifamily apartment project as a representative of Camden USA, an affiliate of the Houston-based Camden Property Trust multifamily housing firm. The development would be at Montgomery County’s Great Seneca Science Corridor next to a planned stop on the Corridor Cities Transitway, proposed by Maryland as a bus rapid transit or light-rail line running from the end of the Metro Red Line in Rockville through the Great Seneca Science Corridor and then along Interstate 270 to Clarksburg. “We are representing a client regarding another multifamily project within walking distance of the Twinbrook Metro station along the Red Line,” he says.
WVS Companies’ Rocketts Landing,
revitalizes one of Richmond’s oldest
and most significant districts.
Michael W. Matthews, president and CEO of H&A Architects & Engineers, based in Glen Allen, Virginia, expects to see improvement in the region’s real estate development business this year. “As a Virginia design firm focused on commercial real estate, we are already seeing signs of increased work. Logically, real estate development will follow,” Matthews says. “We are seeing a continued emphasis on mixed-use development. That includes repurposing dated properties with great urban and suburban locations. We are not quite to the point that developers are pulling the trigger on new projects, but they do seem to be aligning themselves for the inevitability of their progress in the not-too-distant future.”
The overall sentiment in the region is that banks are not lending, says Matthews. “The reality is banks have billions to lend and they are eager to do so for the right business, project, or development. Banks are not lending money on high-risk propositions. The challenge today is finding those avenues where the banks can envision success. That means designers, developers, and owners must create projects with a high likelihood of success. I think we are all tired of sitting on the sidelines waiting for something to happen.”
North Carolina is seeing increased demand for multifamily housing, but at the middle to lower end of the spectrum, says David J. Segmiller, principal in the Charlotte, North Carolina, office of the Perkins Eastman international design firm. He sees some potential for increased demand for urban housing, but primarily in the rental sector.
“Higher education seems to be strong, particularly with growing student demographics and needs for student housing and health projects,” he says. “Our senior living practice is holding its own with repositioning of existing communities, as well as new nursing and assisted living products. There continues to be some corporate relocation to North Carolina for companies, but this has slowed. The health of the banks, notably Bank of America, will be a major driver in North Carolina real estate. The market will continue to be driven by the availability of capital and a weak housing market tied to oversupply and no job creation.”
Perkins Eastman is hopeful that the K–12 school market will come back this year, Segmiller adds. “We are working on a number of projects, including new student housing at High Point University, a new student dining hall at UNC [the University of North Carolina] Charlotte, a new mixed-use development and retirement community in Annapolis, Maryland, and various repositionings of existing retirement communities in the Carolinas,” he says.
Armada Hoffler’s Town Center of Virginia Beach
in Virginia Beach, Virginia.
In South Carolina, targeted real estate activity is producing economic stimulus, as has been seen with the 2010 opening of a 1.2-mile-long (1.9 km) oceanfront boardwalk in Myrtle Beach. “The boardwalk immediately inspired many investments in existing adjacent and nearby properties and businesses,” says David A. Sebok, executive director of the Myrtle Beach Downtown Redevelopment Corporation. The projects include a major new Second Avenue North Pier project, which has a new restaurant in its first phase; a $12 million, 200-foot-high (60 m) SkyWheel and Jimmy Buffett’s adjacent LandShark Bar and Grill; and the planned purchase and redevelopment of three vacant motels to be replaced by a new entertainment-oriented restaurant and boardwalk extension. “In addition, we’re seeing private investment in oceanfront properties looking toward a recovering accommodations real estate market,” Sebok says. The boardwalk has breathed new life into the community, helping downtown merchants achieve record seasons in 2010 and 2011, he notes.
“The creative design of the boardwalk has been the catalyst for bringing the goals that are at the heart of the vision for the Myrtle Beach downtown area to life,” says James M. Wooten, president of DDC Engineers Inc. a civil engineering firm in Myrtle Beach. “This amenity not only connects a large portion of the oceanfront tourism and retail businesses; it also provides a safe family venue and has helped to reverse the decline of the downtown area. Some businesses have reported as much as a 400 percent increase in their gross receipts during the first summer.”
Industrial development is also a bright spot in the region, says Ed Hughes, head of real estate at Nexsen Pruet, a business law firm based in Columbia, South Carolina. “Charleston now has the new Boeing assembly plant operation. In October, Clemson University broke ground for the construction and development of the world’s largest wind turbine drive-train test plant,” he says. In addition, with the expansion of the Panama Canal, the ports of Charleston and Savannah, Georgia, are preparing for the new, larger Panamax ships that will be able to transit the enlarged canal. “Assuming both ports are successful in expanding their respective harbors, there will be two Southeast ports within 100 miles [160 km] of each other, and both being along the I-95 north–south corridor,” he says.
Nexsen Pruet has been involved in a number of transactions involving the purchase and sale of distressed property. “Recently, we handled the acquisition of the Daufuskie Resort assets for an investment group in Salt Lake City, Utah,” Hughes says. “These assets included a 54-room hotel, golf course, tennis facility, beach club, beach cottages, and some undeveloped parcels.”
Overall, the Mid-Atlantic region and the Carolinas are experiencing growth. That growth is not as robust as it was in the past decade, but neither is the area experiencing the doldrums seen in many other areas of the country.