The real estate development sector in the U.S. Mid-Atlantic region is clearly bottoming out, says Henry Lucas, a founder and chief executive officer of Chantilly, Virginia-based ECS Group of Companies. “This year, we’re seeing mixed signals—some trends upward and some trends downward—which are classic ‘bottom-of-the-market-indicators,’” he says. “We’re definitely at the bottom, and the trend we are seeing is up.”
The Mid-Atlantic is adding professional sector jobs, which could spur real estate activity, adds Mark Sharer, commercial real estate region executive in the metropolitan Washington, D.C., office of Bank of America Merrill Lynch. “This has brought about a noticeable increase in leasing activity in office and warehouse space,” he says. “The lodging sector is benefiting from businesses’ feeling more comfortable about travel expenditures, business growth created by the federal government, and the seasonal impact of tourism that begins in the second quarter. Necessity retail including food-anchored shopping centers is leading the retail sector in terms of tenant retention and rent stability.”
In addition, more and more companies and businesses are looking at economic development projects throughout Virginia, Maryland, and the District of Columbia, says John V. Cogbill III, partner in the Richmond, Virginia, office of national law firm McGuire Woods. “A recent United States Chamber of Commerce report ranks Virginia second in the nation in top overall growth, and other surveys rank Virginia as one of the best states for doing business,” he says. “Yet businesses still face numerous development requirements, and outside help is imperative in making sure those deals get done.”
Despite the ongoing economic downturn, the mid-Atlantic region is poised to recover more quickly than other areas, buoyed by the strong performance of the government sector, many believe. the area continues to foster a good business environment and attract new business. Northern Virginia and central Virginia have both benefited from Base Closure and Realignment (BRAC) Commission realignments, and the growth of the federal government could result in the metropolitan Washington area seeing more than a million new residents over the next decade. And that assessment is awakening the real estate, development, design, and financing sectors.
The D.C. metro area is one of the strongest regions of the country, built on a robust economy with positive job growth that is driving demand, particularly for housing, says Thomas m. Gallas, chief executive officer of the Silver Spring, Maryland–based design firm Torti Gallas and Partners, Inc.
“The first developments that are going to happen as we come out of this recession are at the absolute grade A sites,” says Gallas. “These include Metro locations and those near other urban amenities. We are working with the developer of a project at Third and H streets in Washington, D.C., that is going to have trolley lines in the near future. It is a highly desirable location because it brings transit and mixed-use amenities. It is LEED certified. These are the types of projects that are going to go forward and be financeable in 2010.”
Property sales and recapitalization activity in the Mid-Atlantic has picked up dramatically in recent months, says Jon Abbett, director of Structured Finance at Chevy Chase, Maryland–based portfolio lender CapitalSource LLC, who adds that the overall outlook for the area is good.
“From our perspective as a senior lender on commercial income-producing properties, the best opportunities in the area are providing loans for recapitalizations, property purchases, and paying off existing loans in office and multifamily,” says Abbett. “Volume for these structures has been increasing steadily. Another positive sign is that the loans that are being paid off are being done so at modest discounts, not deep discounts as in other areas of the country. Competition for financing and refinancings in the metro area is very intense, with institutional investors, both foreign and domestic, competing for deals. All of this points to a recovery.”
The federal government continues to be the economic driver for the region as well as a leader in sustainability, points out J. Scott Kilbourn, vice president in the D.C. office of international architecture and design firm RTKL Associates Inc. RTKL is currently involved in a broad range of projects in the region from campus and entitlement planning to large federal complexes to interior design including the new 2.4 million-square-foot (222,960-sq-m) National Geospatial-Intelligence Agency (NGA) Campus East at Fort Belvoir, Virginia—scheduled for LEED Silver—and the southeast quadrant of the U.S. Food & Drug Administration’s 6 million-square-foot (557,400-sq-m) campus in the White Oak neighborhood of Silver Spring, Maryland, that is on track for LEED Silver and possibly Gold.
“Lately, emphasis on green design and smart growth is being mandated not just from the federal contractors such as the General Service Administration, but from the county and city levels as well,” says Kilbourn. “so within the next year, ‘connectivity’ criteria in leasing and planning will continue to evolve, with real connections to transit, schools, housing, neighborhoods, retail, recreation, and the environment becoming increasingly important. this will maintain the region’s high marks that are being received from corporations, consultants, and agencies embarking on relocation or consolidation programs.”
Urban infill developments are particularly attractive, says Michael S. Balaban, president of Lowe Enterprises Real Estate Group, Eastern Region. “We are currently in very active stages with a broad range of projects throughout the region—all of which are in urban infill submarkets,” he explains. “our strategy is to concentrate on urban infill submarkets, where supply is constrained and workplace-proximate with 24/7 amenities,” he continues. “In the metro D.C. area, the trend is for smart growth. We are finding more and more customers for office, retail, rental, and for-sale residential products, who are oriented to dense urban environments that can be accessed by public transportation.”
The markets are positioned for a lot of excitement over next 18 months, Balaban continues. “Much of [the] product one would target for acquisition or joint venturing remains priced so strongly that it is difficult to underwrite acquisitions,” he says. “But capable, focused investors are becoming more involved. They are seeing the upside in those kinds of submarkets and are acquiring property at some discounts from replacement costs.”
The D.C., Virginia, and Maryland region remains one of the best markets in the country, says Brett Guy, a partner with Annapolis, Maryland–based Osprey Property Company LLC, which has been developing affordable multifamily and senior communities in Maryland and Virginia since 1988. “That being said, I think that 2011 will continue to present challenges for many individual properties in this market,” he continues. “The bright spot right now is Class A multifamily in prime locations; I don’t see this changing in 2011.”
Osprey is primarily focused on affordable housing, Guy notes, while continuing to position its market-rate development projects for the coming economic recovery.
Renovations are currently underway at the 77-unit townhouse Cedar Hill Apartments in the town of North East, Maryland, he notes. “Cedar Hill Apartments, built in 1981, consists of ten buildings on nine acres [3.6 ha] off route 40 in Cecil county,” says Guy. “It is a partnership between Osprey Property Company and Home Partnership of Cecil county, which purchased the property in December 2009.”
Guy adds that despite the current economic conditions that make it difficult for many end users to justify a surcharge associated with sustainability, “I think that it will continue to be a major factor as owners and operators look to the longer-term impact on their projects.”
David E. Reemsnyder II, president and CEO of HHHunt, a residential and commercial real estate developer based in Blacksburg, Virginia, says that based on the company’s experience and observations, “we anticipate D.C. and the immediate suburbs to fare better than the rest of Virginia and Maryland. the bright spots currently are multifamily rentals in and around D.C.”
Reemsnyder notes that while sustain-ability may be the wave of the future, “some believe we are not there yet. Customers are not willing to pay for it yet, in spite of incentives and marketing,” he notes. “Generally, green costs too much. In order to gain big traction, we have to figure out a way to get green cheaper, both in the short term and the long term.”
Rob Fenza, chief operating officer of Liberty Property Trust of Malvern, Pennsylvania—a $6.6 billion real estate investment that owns 78 million square feet (7.254 million sq m) of office and industrial space—notes that Virginia, D.C., and Maryland will continue to face challenging conditions. “The District is unaccustomed to the level of negative absorption and vacancy it has experienced during the economic downturn, as historically it has outperformed other metropolitan areas during such times,” Fenza continues. “However, there are bright spots, with various government agencies and defense contractors growing in Maryland and also government growth in Washington, particularly in the NoMa [North of Massachusetts Avenue] area and peripheral areas of downtown. We expect D.C. to recover more quickly than other areas of the country, and the metro region is well positioned to grow. the Hampton Roads market in Virginia continues to enjoy more stability than many national markets due to the heavy military and defense presence.”
Sustainability is also continuing to grow in importance despite the economy because of the economic return of high-performance buildings through operational efficiencies, and the potential enhanced productivity of what is often a reduced workforce, he adds. An example of how sustainable development is proving its worth, Fenza points out, is the Liberty Building in Washington D.C. a redevelopment project the company purchased with the acquisition of Republic Property Trust. “The redevelopment was not originally designed to be a sustainable, high-performance building,” Fenza says. “We reimagined the building, which is now LEED Gold certified, is two-thirds leased, and is attracting the kinds of companies that understand the advantages of high-performing workforces and are seeking to capture the benefits. Similarly, a recent LEED Gold-certified office development in Chesapeake, Virginia, has out-paced the market in terms of leasing and achieved rents.”
HHHunts’s properties division has completed a new assisted living community in Winchester, Virginia, and will complete another one in Leesburg, Virginia, by the first of the year, Jim Nicholson senior vice president of properties development at HHHunt, says “We will start new assisted living communities in Virginia’s Spotsylvania County and Anne Arundel County, Maryland, in the first quarter of 2011,” he continues. “Each of these assisted living communities provides homes for 90 residents. Also, we have zoning and will start construction on a 368-unit market-rate community in Charles County, Maryland, and the 158-unit third phase of Abberly Crest in Lexington Park, Maryland, in the [first quarter of] 2011.”
Michael Nicolaus, director of design in the D.C. office of HKS, Inc., points to the North Bethesda Market Project by the JBG companies—scheduled for completion later this year or early next—as an example of needed, innovative development. “The neighborhood is transitioning from sprawl to a walkable, mixed-use transit district,” he explains, adding that the development is an example of good urbanism in the suburbs.
HKS was the architect on the North Bethesda Market Project, which comprises 397 multifamily housing units, 220,000 square feet (20,438 sq m) of retail space including a 60,000-square-foot (5,574-sq-m) Whole Foods supermarket, and a 50,000-square-foot (4,645-sq-m) LA Fitness facility.
Nicolaus predicts slow, cautious growth for this year and next, with the federal government and BRAC activities supporting the local real estate economy. “Master planning and land entitlement activity is returning for developers thinking ahead toward a rebounding real estate market,” he adds, “while there is an emphasis on repositioning existing buildings—turning Class B office buildings into Class A properties.”
Current and potential clients in the Mid-Atlantic area are more actively exploring whether now is the time to at least start the design and/or approvals process in order to be positioned to proceed as conditions continue to improve, says Lee Quill, principal at Cunningham Quill Architects, based in the District. He adds that there is increased interest and activity in the residential mixed-use and commercial mixed-use areas, especially in transit corridors and the inner core.
“While not a lot of the projects have started yet,” says Quill, “as we slowly move out of the depths of the Great Recession, there is some limited activity with selected municipalities and cities we have been working with. Special high-profile projects, such as our project renovating and restoring the downtown Market Building in Roanoke, Virginia, started with design studies in winter 2009.”
With limited construction dollars available in many municipalities, tight economic resources have been focused on planning studies and urban design plans. “Plans such as our Mount Rainier Mixed-Use Town Center Development plan with the Maryland–National Capital Park and Planning Commission and the city of Mount Rainier in Prince George’s County, Maryland, have proceeded as municipalities see increased value in these efforts to assist them in shaping land use/transportation policy and the establishment of new frameworks for future capital expenditures for improvements during this period of slow development activity,” Quill says.
Also spurring demand in D.C., Virginia, and Maryland is relocations—the Mid-Atlantic continues to attract businesses from other parts of the country and the world. McGuireWoods and McGuireWoods consulting have been involved in a number of significant economic development projects throughout the region, points out Cogbill, including major projects such as the corporate relocation of both Hilton Hotels and SAIC—a provider of scientific, engineering, systems integration, and technical services and solutions—from California to Northern Virginia, as well as the $2 billion Midtown tunnel project that connects the Virginia cities of Norfolk and Portsmouth.
Central Virginia is rebounding from its two-year slump with new industries, including Sabra Foods and the Rolls Royce engine plant, he continues. And, as mentioned previously, Northern Virginia has benefited from three major corporate relocations—Hilton Hotels, SAIC, and VW/Audi. “The tax and regulatory environment makes Virginia a good destination for corporate relocations,” says Chris Lloyd, senior vice president of McGuireWoods consulting, who worked with Hilton Hotels and SAIC to relocate to Virginia.
In addition, Northrop Grumman has announced plans to move its headquarters from California to Virginia. “What’s more, the housing market has shown new vitality and new commercial projects are close behind,” Cogbill says. “It is estimated that over 600,000 new homes will be required in the region over the next decade to keep up with new jobs and new residents.”
And that will result in an uptick in real estate–related activity. “We seeing a pickup in geotechnical and environmental work, which is related to properties changing hands,” says ECS’s Lucas. “We are a relatively large firm, but we do a large number of relatively small projects. It’s all related to properties that are selling. Lending institutions mandate a Phase I environmental site assessment to look for a history of contamination on the site. Our volumes are increasing and that’s a good sign. We’re also seeing some people keying projects up for future.”
A consulting firm specializing in the related fields of geotechnical, environmental, and construction materials engineering, ECS has 40 offices, Lucas adds, but its greater Washington, D.C., operations remains the strongest. “The D.C. area is the best economy because of the increase in government funding,” he says. “It’s a good thing. We’re seeing a lot of stability in this market and across the board.”
ECS is involved in a number of new developments in the area, including the new U.S. Coast Guard headquarters on the site of the former St. Elizabeths Hospital as well as the NGA Campus East at Fort Belvoir, Virginia. “We are also seeing the area’s residential market picking up,” says Lucas. “Compared to 2009, we are experiencing positive trends particularly after the government offers to homebuyers ended. That’s a great sign.”
Another good indicator is that despite the downturn, companies, architects, and designers continue to seek sustainability. Sharer of Bank of America Merrill Lynch believes that sustainability will continue to be an important factor in real estate development in the years ahead. “Several years ago, landlords led the charge by recognizing the value that sustainability plays in development,” he says. “However, the tenant market was much slower in appreciating its long-term value. today, tenants view sustainability as an important initiative to their respective businesses, which is evidenced by the fact that sustainability is a part of many businesses’ corporate mission.”
Adds Gallas of Torti Gallas and partners: “For developers and architects alike, once a practice is outmoded, it is really outmoded and the only option is to move forward with sustainability,” he says. “As designers, it is our responsibility to make that happen. As architects, what we are designing today is what the world is going to have to live with for the next 100-plus years. We can no longer procrastinate when it comes to creating highly sustainable development. And the marketplace—in the Mid-Atlantic region and throughout the country—expects it.”