Robust Job Growth Driving Development in the U.S. Mid-Atlantic

When New York City–based online eyeglasses retailer Warby Parker decided to open a second brick-and-mortar store after opening the first in its hometown, it chose Washington, D.C. “The same with beauty subscription firm Birchbox, which built its second clicks-to-bricks operation in D.C.,” says Melina Cordero, CBRE head of retail research for the Americas.

“Washington and northern Virginia [NoVa] are extremely strong in retail real estate now, to say nothing of Philadelphia and Baltimore,” Cordero says. “It’s a reflection of how well America’s Mid-Atlantic region is doing economically.”

Spurring real estate development in the region are robust job growth in the Mid-Atlantic region, including in Washington, D.C.; northern Virginia; Maryland; Delaware; and southeastern Pennsylvania; as well as the movement of millennials to urban cores and increasing incomes, according to the U.S. Census Bureau. This new development ranges from new office towers and innovative mixed-use projects to long-overdue waterfront revitalizations and groundbreaking multifamily residences.

“The Mid-Atlantic area has had very strong job growth over the last 12 months, with Washington reporting 90,000-plus new jobs, driven almost exclusively by a very healthy private sector,” says Matthew J. Klein, president and chief executive officer of Akridge, a real estate services company based in D.C. “I would expect that this job growth would provide a solid underpinning for a healthy real estate market in the months ahead.”

Urbanist Aaron M. Renn, a senior fellow at the Manhattan Institute for Policy Research and an economic development columnist for Governing magazine, has characterized the District as “America’s new second city,” Klein notes, and residents embrace being a global capital metropolis. “We are much more than a government town,” he says. “The diversity of the Washington regional economy is vastly underestimated. Washington is one of the more entrepreneurial cities in the country, with the second-largest technology job center in the U.S., the second-largest biotech center, and a vibrant and growing professional and business service sector.”

The Washington metropolitan area has the highest median household income in the United States and the most educated workforce in the country, adds Alexander “Sandy’ Paul, managing director of national market research at international real estate firm Newmark Grubb Knight Frank (NGKF). “The regional economy continues to strengthen with job growth accelerating, driven by employment gains in the office-using professional and business services sector,” he says.

The economic outlook for neighboring northern Virginia is robust, too. Government contractors, who have a strong presence in the area, have largely finished their “right-sizing” in response to the U.S. government spending cuts that were triggered in 2013. As a result, the commercial real estate market has been fine-tuned, Paul says. “These adjustments, which include a focus on more business-to-business contracts and work for state governments, are setting the stage for future, albeit slower, office market demand,” he adds.

Maryland—particularly Baltimore, the state’s largest city—also is experiencing hearty times thanks to its changing demographics, says Kimberly Clark, executive vice president of the nonprofit Baltimore Development Corporation, the city’s economic development agency. “Baltimore ranks ninth in downtown population and 12th in downtown employment and has experienced explosive growth in the well-educated young adult population,” she says. “It is the eighth-largest destination for millennials. With nine colleges and universities in Baltimore City alone, there is a great deal of young talent, making it very attractive to businesses in multiple sectors.”

The most sought-after segment of the U.S. population is also powering real estate activity in America’s fifth-largest metropolitan area. “Philadelphia is a very desirable location for millennials and empty nesters, and the demand for new construction is outstripping supply,” says Carl E. Dranoff, chief executive officer of locally based Dranoff Properties, a prominent residential developer. “Neighborhoods in every direction outwards from the Center City core show rejuvenation and population growth as Philadelphia reverses its population decline of ten years ago,” he adds.

Delaware is a bright spot in the Mid-Atlantic region, with a strong economy as well as an increase in real estate development. The Federal Reserve Bank of Philadelphia reports the state’s job growth at a healthy 2.2 percent for the year ended in July, ahead of job growth in neighboring states New Jersey and Pennsylvania. Wilmington is experiencing more development underway now than in decades—and not simply within the bustling central business district. “Work has begun on the $40 million train station replacement project in Claymont, which will be a catalyst for the redevelopment of the nearby 425-acre [172 ha] former Evraz Steel Mill property,” says Daniela Stundel, research manager in the Greater Philadelphia office of NGKF. “The ambitious plan for the site, which is being envisioned under the name First State Crossing, includes a mixed-use campus with build-to-suit office, commercial, and industrial space.”

Washington, D.C.

The real estate sector in the nation’s capital is firing on all cylinders. Demand for office space is expected to be strong in the years ahead, Klein says. “We will have three new commercial projects under construction next year—1701 Rhode Island Avenue, 1101 16th Street, and 2100 L Street—to meet demand,” the Akridge CEO notes. “All three are in downtown Washington, where demand has been strong and consistent.”

D.C.’s multifamily sector is performing well, with record levels of absorption. Demand for rental units is expected to remain robust as the region’s population continues to grow and its for-sale housing remains expensive, Paul says. But, he cautions, “Apartment absorption likely will decelerate modestly in the months ahead since the current level is historically unsustainable.”
Last summer, locally based retail developer Edens broke ground on 1270 4th Street, NE, a mixed-use project at Union Market with 400-plus residential units and 28,000 square feet (2,600 sq m) of retail space. The Edison—a mixed-use development with retail space on the ground floor and rental units above—is another Edens project under construction, with another 28,000 square feet (2,600 sq m) of retail space and 180-plus residential units. The Edison is expected to be completed next spring.

Added to this is increased waterside development. Nathan Edwards, regional director at Cushman & Wakefield, notes that Nationals Park—home to Washington’s Major League Baseball team—and the new residential developments and retail amenities nearby are transforming the city’s southeast waterfront into an entertainment district, attracting many new residents as well as public and private sector office tenants. “This is being propelled by a lack of available land for development in the core urban submarkets of the East End and the CBD,” Edwards says. “Plans for the new D.C. United soccer stadium are underway. This portion of the market offers residential and office rents that are more competitive for similar-quality buildings as land values are generally much lower. A younger demographic of recent college grads and young families [is] acquiring the residential in a part of town that is rapidly gentrifying.”

One of the largest projects under construction is Hoffman-Madison Waterfront’s the Wharf, a mile-long (1.6 km) waterside neighborhood stretching across 24 acres (10 ha) of land and more than 50 acres (20 ha) of water. Centrally situated along the Potomac River, the Wharf’s first phase is scheduled to include 1.9 million square feet (177,000 sq m) of mixed-use space, including condos, apartments, offices, hotels, restaurants, and retail space. The site also comprises a marina, a 6,000-seat theater designed by David Rockwell Group, and public piers, parks, and promenades along the waterfront. It is expected to be delivered next October. The second phase, which will feature about 1.35 million more square feet (125,000 sq m) of mixed-use development, including additional office space, retail uses, and residential spaces, as well as public improvements, is scheduled for completion in 2021.

“The southwest [quadrant of D.C.] in general has been thought of as a government enclave but is now diversifying to attract new residential and private sector office tenants,” Edwards says. “In general, outside of the Georgetown waterfront, commercial development has been slow along the water as the U.S. government has owned much of it, including the Navy Yard, Fort McNair, the Marine Barracks, and more.”

That is changing. At Buzzard Point, at the confluence of the Anacostia and Potomac rivers, Akridge and Western Development plan to convert the 609,000-square-foot (57,000 sq m) former waterfront headquarters for the U.S. Coast Guard, which lies south of the planned soccer stadium, into Riverpoint, a development with more than 450 residential units stacked over 80,000 square feet (7,400 sq m) of retail space.

Other partners in the Riverpoint development include Jefferson Apartment Group, Orr Partners, and Redbrick LMD. It is just one of several planned developments in the area by real estate entrepreneurs.

Across the District, the retail real estate sector is performing impressively. D.C. is underserved from a retail perspective, says Jodie W. McLean, chief executive officer of Edens, which has about 25 percent of its portfolio in the area. “There continues to be an estimated $1 billion of annual retail sales leakage from the District due to a lack of supply,” McLean adds. “This is driving development across the District, with about 800,000 square feet [74,000 sq m] of new retail development projected for D.C. in 2016.”

Restaurants are performing particularly well in the region, notes Cordero. “D.C. is a restaurant hub, and chefs and restaurants now are looking to D.C. to expand because there is very strong growth,” she says. “There are lots of restaurants opening—sometimes seven or eight a week. But the industry can be volatile, with numerous closures as well.”

Northern Virginia

Northern Virginia’s economic performance continues to outpace that of the Washington region as a whole. “The unemployment rate in all major NoVa jurisdictions is at or below 3 percent, and job growth remains robust, with over 30,000 of the region’s 74,000 nonfarm jobs occurring in NoVa when comparing June 2016 to the year prior,” says Edwards. “Professional and business services employment continues to lead growth in office-using sectors, with nearly 4,500 jobs created year-to-date and over 10,000 when compared to June of 2015.”

Of greater importance, the northern Virginia office market registered 371,000 square feet (34,000 sq m) of net absorption in the second quarter of 2016. “It was the market’s best quarterly figure in more than five years,” Edwards emphasizes.

The area’s top-quality public schools; the drive to increase science, technology, engineering, and math (STEM) jobs; and the development of Metro’s Silver Line toward Dulles International Airport are all contributing to northern Virginia continuing role as a magnet for retail growth, says McLean.

“Inside the Beltway, northern Virginia has historically been tight for retail real estate,” she adds. “There is approximately 460,000 square feet [43,000 sq m] of shopping center space under construction across all shopping center types in northern Virginia. There is approximately an additional 2.8 million square feet [260,000 sq m] of planned shopping center space in centers where plans are drafted, permits and financing have been applied for, and groundbreaking is all that remains to take place.”

One area undergoing tremendous change is Tysons, an area adjacent to the Capital Beltway in Fairfax County long known for a major shopping mall, automobile dealerships—and traffic congestion. “Northern Virginia has a lot of development around Tysons, including innovative offerings,” Cordero adds. “Tysons Galleria [one of two major shopping malls anchoring the area] is converting its food court into a large food hall. Celebrity chef Mike Isabella plans to open an upscale ten-venue eatery next spring. It’s a national trend—malls turning food courts into food halls.”

Maryland

The Baltimore area also has experienced steady job growth over the past several years, says Toby Bozzuto, president and chief executive officer of the Bozzuto Group, a real estate development and construction company based in Greenbelt, Maryland. “The business sectors that have seen the strongest growth are education, health, and professional and business services,” he adds. “We continue to see institutional investors putting new money into projects in Baltimore. Companies from around the world are now recognizing the city has many great opportunities. Our company has been involved with nearly half a billion dollars in new development over the past seven or eight years. Clearly, there are socioeconomic issues that need to be addressed, but I feel optimistic about Baltimore’s future.”

Partnering with local development firm War Horse and real estate company Solstice, Bozzuto Development continues its investments in the area with the $100 million Anthem House project in the Locust Point neighborhood. The first phase—nine stories with 292 upscale residences and 20,000 square feet (1,900 sq m) of retail space—is expected to be completed next year. Anthem House II, the second phase, will include 55 apartments and renovated townhouses and is expected to be completed in 2018.

One encouraging aspect of the Baltimore revitalization is that development is occurring throughout the city, not just in the central business district or waterfront areas. “While those areas continue to see growth and activity, neighborhood developments such as Remington Row, multiple projects in the Station North area, and Stadium Square are also happening,” says Clark.

One of the most dynamic planned projects in Maryland is Sagamore Development’s plan to transform 266 acres (108 ha) of a former industrial site in Port Covington into a waterfront destination over the next three decades. Preliminary plans by Sagamore—the real estate development firm owned by Under Armour chief executive officer Kevin Plank—call for up to 13 million square feet (1.2 million sq m) of office, residential, and retail space, along with restaurants and entertainment venues at the south Baltimore site, as well as 42 acres (17 ha) of public parks and green spaces. In the midst of the redevelopment is a planned 50-acre (20 ha), 3 million-square-foot (279,000 sq m) campus for 5,000 Under Armour employees.

Billed as one of the largest urban renewal projects in the United States and designed by Boston-based architect David P. Manfredi, the $5.5 billion project hinges on tax increment financing from the city. Sagamore has proposed investing more than $100 million in education, recreation centers, workforce development, better streets, parks, playgrounds, and other priorities.
“Great things are happening in Baltimore,” says Bozzuto, a Baltimore native. “Like [in] any major city, there are challenges, with disproportional problems in some neighborhoods versus others. However, I am incredibly bullish on Baltimore’s future, and we are grateful to play a role.”

Pennsylvania

Builders and developers in Philadelphia are optimistic about their hometown, too. Recently named the first World Heritage City in the United States, Philadelphia has been in the global spotlight recently, hosting a visit by Pope Francis in 2015 as well as the Democratic National Convention and gatherings of the American Institute of Architects and ULI.

“The state of Philadelphia is very, very good,” notes Paul Commito, vice president of real estate investment trust (REIT) Brandywine Realty Trust, based in nearby Radnor, Pennsylvania. “The city is finally getting discovered. We’re on the map now as being a first-rate global city as opposed to being thought of as a stepchild to Washington, D.C., or New York City. [These] events . . . have been phenomenal to showcase who, what, and where we are.”

Millennials are flocking to Philadelphia’s vibrant restaurant and nightlight scene. More important, the city’s rents are more affordable than those in New York City and Washington, says Stundel of NGKF. “The region’s economy has picked up over the last year,” she explains. “Employment in professional and business services within the Philadelphia-Camden-Wilmington MSA [metropolitan statistical area] was up 5.1 percent, year-over-year. The leisure and hospitality sector also contributed to regional employment growth.”

Two of the nation’s biggest publicly traded REITs, Brandywine and Malvern-based Liberty Property Trust, are investing more than $2 billion in new construction and redevelopment in the region. Liberty completed Philadelphia’s tallest building—the 58-story Comcast Center, designed by Robert A.M. Stern—in 2008 and now is erecting the 60-story Comcast Innovation and Technology Center, a 1.7 million-square-foot (158,000 sq m) tower designed by Foster + Partners. In addition, the 49-story FMC Tower at Cira Centre South, a 1 million-square-foot (93,000 sq m) vertical neighborhood designed by Pelli Clark Pelli that includes a combination of office space, retail uses, hotel space, and residential units vertically stacked to create a vibrant neighborhood, is nearing completion. The office tower opened in May, and the hotel and residential tower is slated for a December 2016 opening.

Drexel University and Brandywine Realty Trust have announced their partnership for Schuylkill Yards, a 14-acre (6 ha) innovation development and master-planned community. Initially, the projected 20-year development plan will consist of 5 million gross square feet (465,000 sq m) of mixed-use space on a ten-acre (4 ha) site next to Drexel’s main campus and adjacent to Amtrak’s 30th Street Station and Brandywine’s Cira Centre. “Schuylkill Yards will be an integrated urban environment, offering a collaborative and connected community made up of educational and medical institutions, businesses, residents, and visitors bound together by the pursuit of innovation,” Commito says.

With renewed interest in the Philadelphia central business district, it is possible that commercial tenants looking for space could be priced out and forced to seek space in the suburbs, Stundel says. “This will trigger more suburban owners to upgrade and renovate their properties,” she explains. “Mixed-use development will gain more traction in suburban areas to accommodate interest in live/work/play lifestyles seen in urban areas.”

Philadelphia’s residential sector is on fire. Dozens of high rises—18 apartment buildings, four hotels, three office/mixed-use structures, three medical/education buildings, and two condominium towers—are under construction in the Philadelphia area. “We have never witnessed this level of new construction until now,” Dranoff adds. “Both rentals and condominium sales have been very robust this year. Our apartment buildings are at 98 percent occupancy, and the demand for luxury ground-up condominiums has exceeded all expectations.”
Dranoff’s newest project is the 22-story One Riverside—the first ground-up condo development to be built in Philadelphia since 2008—which is already 70 percent sold. It is expected to be completed next year.

As in D.C., northern Virginia, and Baltimore, Philadelphia’s retail sector is sizzling, particularly downtown, and it is spurring refurbishment in the outer areas, Cordero says. “Suburban Philadelphia is seeing a lot of reinvestment in existing large-scale shopping centers as landlords try to solidify their market share,” she says. “New retail and mall construction had been at record lows since the 2008 recession, and reinvestment provides an opportunity for malls to stake their claim in areas.”

Delaware

Spurred by a drop in the unemployment rate to the lowest level in eight years, Delaware is reporting a robust economy. According to Jared Jacobs, research manager at the Philadelphia office of Cushman & Wakefield, since midyear 2015, the state’s unemployment rate has dropped 70 basis points to 4.2 percent, driven by a 4.8 percent increase in professional business services and a 4 percent rise in leisure and hospitality. The overall vacancy rate for the northern Delaware office market fell 270 basis points to 15.6 percent compared with a year ago.
“The largest user-sale transaction of the second quarter,” says Jacobs, “was American pharmaceutical company Incyte Corporation’s purchase of its 191,000-square-foot [17,700 sq m] headquarters building at 1801 Augustine Cut Off building in Wilmington, which was developed by Capano Management Company.”

The 2016 third quarter saw New Castle County’s office market build on a robust first half with a fifth-consecutive quarter of positive absorption, driving further rent growth, says Stundel. “For a region that has posted fluctuating periods of occupancy gains and losses since the 2008 recession, this sustained period of demand growth points to a stabilization in the office market,” Stundel says.

Real estate entrepreneurs are cautiously optimistic about the future of the Mid-Atlantic region. “Real estate is [cyclical], and there is the potential for a recession in next couple of years,” Cordero points out. “People are taking that into consideration. But the Mid-Atlantic’s economic diversification makes it more resilient in a business downturn.”

Mike Sheridan is a writer in Richmond, Virginia.