The Washington, D.C., metro area is riding a wave of prosperity sweeping across all property sectors. And the good times aren't ready to end.
Plainly put, it would be tough for conditions to get much better in the real estate markets that comprise the Washington, D.C., metro area, including the District proper, Northern Virginia and Maryland.
According to Delta Associates, the Alexandria, Va.-based research division of Transwestern/Carey-Winston, the D.C. area continues to experience strong economic conditions, with 12-month job growth through April 2000 of 76,600, almost maintaining 1999's impressive figure of 78,200. The services sector continues to produce the most jobs, but the construction industry is growing the fastest - 6.3% for the 12 months through April 2000. The local unemployment rate was just 2% in April 2000, compared with the national figure of 3.9%.
Technology is the primary force behind the numbers. New Internet companies continue to emerge and semiconductor firms and chip makers are becoming more active in the region. Tokyo-based Toshiba and Sunnyvale, Calif.-based SanDisk recently announced a $700 million expansion in northern Virginia's Prince William County. And both Maryland and Virginia officials have submitted proposals for two additional semiconductor manufacturers considering expansion in the area.
So, what's on the D.C.'s horizon? "It's hard to predict how long the good times will last," says Steven Bralower, executive vice president of D.C.-based Carr Real Estate Services. "There are many fundamentals in place in terms of strong economic and employment conditions that would lead to healthy predictions of `good times' through at least the next several years. This region is not solely dependent on the federal government or high-tech activity for its economic well-being, making it somewhat resistant to general economic cycles."
Office market rides high times "With the toppling of the $50 per sq. ft. barrier, `the good times' appear to be going strong," says Stephen Goldstein, senior executive vice president in New York-based Julien J. Studley's Washington, D.C., office. "As developers strive to bring new product to the market, supply continues to be outpaced by demand and, as a result, the metro area continues to see rental rates climbing to new heights."
"In D.C., [asking] rental rates in select new construction projects (such as 1399 New York Avenue N.W., 2099 Pennsylvania Avenue N.W. and 101 Constitution Avenue N.W.) topped $50 per sq. ft.," continues Goldstein. "Class-A buildings saw an increase in rental rates, climbing from just over $38 per sq. ft. to over $40 per sq. ft. These rental rates are fanning the flames of the hot real estate market in the metro area, and many tenants seeking Class-A space may be more likely to renew as options are limited with little new space scheduled to hit the market."
According to Delta Associates, absorption is on pace for a record-setting 16 million sq. ft. this year. That's also the highest level in the nation among major metro areas - by a factor of two. Likewise, vacancy, at 4% region-wide, is the lowest ever recorded. The region now ranks among the three metro areas in the nation with the lowest vacancy rate.
"The key driver of the Washington region's office market is the flourishing high-technology sector layered on top of a generally strong regional and national economy," says Petch Gibbons, executive managing director of New York-based Insignia/ESG's D.C. office. "The result is a thirst for space never before seen in the metro area. The high-tech sector is also driving business that supports this industry. Major law firms, accounting firms and consulting firms are gobbling up office space within the high-tech arena as demand for their services continues to skyrocket."
Gibbons is quick to point out, however, that the boom isn't confined to the relentless telecom, Internet and dot.com craze, but also includes the hot biotechnology industry.
The flurry of activity recently produced significant changes in certain areas of the downtown D.C. market. "The East End submarket continues to experience dramatic gentrification on the heels of the MCI Center opening and the construction of the new convention center," says Gibbons. "Many law firms, previously entrenched in the CBD market, have moved their offices to the East End where they can find brand-new space at comparable rent levels. And while this end of town was previously thought to be lacking amenities, several existing and proposed projects are quickly rectifying this perception."
Northern Virginia's office market continues to clip right along, with the first six months of the year registering an 8% increase in net absorption as compared with the same period in 1999. Fairfax County is particularly strong, seeing its share of technology-driven building with 41 projects now under construction.
And in Maryland, the office market vacancy rate fell below 9%, with 54% of new projects preleased.
"Professional services firms have begun to follow the technology tenants into the Northern Virginia market," says Goldstein. "Major law and accounting firms have accounted for much of the increased demand. These tenants will lease in excess of 1 million sq. ft. in the next six months. In some cases, they will be paying more than $40 per sq. ft. for space in new projects in the Tysons Corner and Reston submarkets. Technology firms looking for co-location facilities, other types of data centers and switch sites have been leasing increasing amounts of space."
Consider this sampling of major projects now under construction across the metro area:
- A joint venture of Toronto-based TrizecHahn Office Properties and D.C.-based The JBG Cos. received final approval from Arlington County for its proposed Waterview project in Rosslyn, Va. The 940,000 sq. ft. mixed-use project includes a 600,000 sq. ft. office building and a 330,000 sq. ft. hotel, each standing 300 feet high. Completion is projected by mid-2003.
- JBG also is involved in two other significant projects, both in partnership with McLean, Va.-based JER Partners. The first is Potomac Center, a new 1 million sq. ft. Class-A development in Southwest Washington, D.C. Delivery of the first of two 12-story office towers is scheduled for late 2002. Potomac Center will be located at 500/550 12th Street S.W.
- The second JBG/JER project is Chase Tower, a 12-story office building located in the Friendship Heights district of Chevy Chase, Md. Delivery of the 236,000 sq. ft. building is scheduled for mid-2001.
- Hines Interests also has several developments under way. Construction has begun on a build-to-suit headquarters project for Mitretek Systems, Inc. The eight-story, 253,000 sq. ft. building will be built on an 11-acre site in the Fairview Park office park in McLean, Va. November 2001 is the scheduled completion date.
- Another Hines project, 4100 North Fairfax, is being built in the Ballston submarket of Arlington, Va. The 13-story, 255,000 sq. ft. facility will have 245,000 sq. ft. of office space and 10,000 sq. ft. of retail. Initial occupancy is scheduled for November 2001.
- D.C.-based firms Quadrangle Development Corp. and Potomac Investment Properties have started construction on a 12-story, 170,000 sq. ft. office building at 1875 K Street in downtown D.C. Delivery is scheduled for late 2001.
- The Kaempfer Co., a locally based developer, is building 2099 Pennsylvania Avenue, a 12-story, 200,000 sq. ft. building located at Pennsylvania Avenue and 21st Street. Completion is expected in January 2001.
- The Kaempfer Co. and New York-based Blackstone Real Estate Advisors are redeveloping The Investment Building, a historic 1920s Beaux Arts landmark, into office space. The 370,000 sq. ft. building will include 13 floors of office space, 18,000 sq. ft. of ground-floor retail space and a rooftop terrace.
Investment sales roll along Investors of just about all stripes have been snapping up properties in the D.C. area. Recent biginclude the $55.9 million acquisition of 1176 G Street N.W. in downtown D.C. by a joint venture between the California Public Employees' Retirement System (CalPERS), headquartered in Sacramento, Calif., and Houston-based Hines. The building, which sits only one block from the White House and other area landmarks, was purchased from a partnership managed by the building's developer, The Robert T. Foley Co., Chevy Chase, Md.
Hines has been particularly active in D.C., developing more than 7 million sq. ft. of office space since 1982. The company is the development manager for the new Gannett/USA Today headquarters, totaling some 800,000 sq. ft., now under construction in Tysons Corner, Va. Hines has also begun construction of 4100 North Fairfax, a 250,000 sq. ft. office building in the Ballston area of Arlington.
In another recent deal, Arlington, Va.-based Charles E. Smith Commercial Realty purchased Tysons Dulles Plaza, a 475,000 sq. ft. office complex in Tysons Corner. The company paid Boston-based TA Associates approximately $100 million for the buildings, which are 99% leased.
Industrial pumps up The District's flex/industrial market continues to see the positive effects of the growing technology sector. In fact, according to Northbrook, Ill.-based Grubb & Ellis, the ever-increasing tenant base of rapid-growth start ups and several notable relocations means new construction can hardly keep up.
In all, 18 new buildings with about 1 million sq. ft. were delivered in the first half of 2000. By year's end, another 35 projects totaling 2.5 million sq. ft. are expected to bring construction to historic levels. About the only place for industrial space to grow is in the suburbs - Prince William County, Va., for example.
Grubb & Ellis reports that, overall, new industrial projects were 41% preleased by the end of June, and the trend is on the rise as new developments deliver. Overall vacancy in the second quarter dropped to 6.9%, and is expected to drop even further. Loudoun County, Va., is a clear winner, with a vacancy rate of less than 1%.
Rental rates in Northern Virginia jumped 11.6% in the second quarter. For the entire metro area, rates jumped 20% through the first half of the year, according to Grubb & Ellis.
According to Delta Associates, the Baltimore/Washington Corridor dominated regional industrial absorption in the first half of 2000. The Maryland counties that compose the Corridor - Prince George's, Anne Arundel and Howard - accounted for 86% of regional net absorption. The vacancy rate in the Corridor declined 300 basis points to 8.1% at mid-year.
Downtown seeks retailers The downtown D.C. area has been trying for quite some time to attract more big-name retailers. The problem is, there aren't many large blocks of space (10,000 to 20,000 sq. ft.) to accommodate them.
Bristol, Conn.-based ESPN Inc. recently broke the ice by opening a new three-story, 41,000 sq. ft. ESPN Zone at 11th and E streets N.W. The building is near the White House, the Capitol and MCI Center. A big Barnes & Noble Booksellers will open soon right next door. Not far off, Borders Books & Music will open a 35,000 sq. ft. store in Hamilton Square at 14th and F Streets, on the old Garfinkel's department store site.
The District is so interested in attracting retail that earlier this year, D.C. Mayor Anthony Williams led a delegation to Las Vegas for the spring 2000 convention of the New York-based International Council of Shopping Centers, the largest retail conference of the year.
Apparently the trip went well. This summer, The Home Depot, Atlanta, announced it is taking up residence downtown with a new store in the former Hechinger space in Tenleytown on Wisconsin Avenue. Plans now call for an opening in 2002. The building was purchased in January by a partnership of Cincinnati-based Madison Marquette, locally based Capital Guidance, a private investment corporation, and local developer Roadside Development Corp.
Out in the 'burbs, Fairfax, Va.-based Peterson Cos. along with Rockville, Md.-based Foulger Pratt and its subsidiary Argo Investment are developing the $320 million Silver Spring town center project. The development will include 405,000 sq. ft. of retail space, 283,000 sq. ft. of office space, a hotel and a health club. The companies expect to break ground on the second phase, which includes a Borders, later this year. The store will be located at the corner of Ellsworth Drive and Fenton Street.
At Tysons Corner Mall, a new, two-story ft. L.L. Bean store has opened. It is the sixth anchor at the mall, joining Nordstrom, Bloomingdale's, Hecht's, Lord & Taylor and JCPenney.
But perhaps the biggeston the retail front was the announcement by Arlington, Va.-based Mills Corp. that it is selling its entire community shopping center portfolio to various affiliates of Greenville, Del.-based Stoltz Management Co. Mills has sold 10 of its 11 centers to Stoltz for $141 million. Sale of the remaining shopping center is expected to be finalized in the next month or two. The 11 centers total about 2.2 million sq. ft., and three are located in the D.C. metro area in Germantown, Md.; Gaithersburg, Md.; and Falls Church, Va..
Mills said it made the move to concentrate on its blue-chip pipeline of Mills-branded mega-sized shopping and entertainment complexes, which average 1.5 million sq. ft. and have 15 to 18 anchors at each center.
Hotels remain strong "The supply and demand balance in Washington remains strong in spite of additions to supply of approximately 1,000 new rooms since mid-1999," says Walter Williams, senior vice president in San Francisco-based PKF Consulting's Washington, D.C., office. "While occupancy percentage decreased 1.3 points (from 73% to 71.7%), real demand in terms of additional room nights increased 1.1% with the addition of the new supply. The year 2000 is tracking along a similar pattern with occupancy percentages down slightly (less than one point) but total room nights up over year-to-date 1999," according to Williams.
Further out, the picture becomes a bit cloudier. Earlier this year, New York-based Pricewater-houseCoopers listed the D.C. metro area as one of several hotel markets to watch through 2002 because its projected growth in hotel room construction exceeds the supply growth in the rest of the country.
The question of overbuilding inevitably comes into play, but according to Williams, the supply pipeline is in check - for now. "We see no material change in the supply and demand balance over the next year or so, even with the addition of some new supply," says Williams. "Washington has always been a very resilient market and routinely displaces significant demand into suburban markets due to peaking of demand and/or lack of appropriate product type."
Obviously, not all submarkets will be affected equally. Prince George's County is about to become home to the National Harbor in Fort Washington, one of the largest mixed-use projects in the region. It includes the $500 million Opryland Hotel Potomac and a 400,000 sq. ft. conference center, making it the largest such deal in Maryland's history. But construction isn't slated to start until 2002.
New construction isn't the only trend in the market. The St. Gregory Luxury Hotel & Suites, a $23 million makeover of the Empire Building at 2033 M Street N.W. in downtown D.C., opened in June with 154 units.
Some investors have even started circling the metro area for acquisitions and turnaround opportunities. Bethesda, Md.-based Crestline Capital is partnering with Dallas-based Bedrock Partners to acquire 15 to 20 hotels worth some $250 million. According to company officials, some of the acquisitions could happen in urban, suburban and airport markets around the D.C. area.
In other news, one of the country's leading hoteliers, Marriott International, is expanding its corporate headquarters in Bethesda, Md., to include a new five-story, 263,000 sq. ft. office building in Gaithersburg, Md. The 20-year lease is with developer Fremont Properties of San Francisco. Some 1,400 employees will occupy space in the building upon its completion in 2004. The new building will be located in the Washingtonian Center next to three Marriott International properties.
Apartments on the up and up "I've lived in Washington for 23 years and this is the tightest apartment market I have seen in that span," says Jonathan Kempner, president of the locally based National Multi Housing Council. "There are virtually no vacancies (i.e., 98% to 99% occupancy) and rents are enjoying healthy increases. If you are an apartment owner today and not doing well in the Washington area, you should quit your day job and roll away on one of those flashy chrome scooters."
As with the other markets, supply and demand of apartments appear to be in a healthy balance in the D.C. metro area, according to Matt Birenbaum, vice president of development at Alexandria, Va.-based AvalonBay Communities Inc.
"Supply has been increasing from about 4,500 apartments per year between 1997 and 1999 to about 5,500 to 6,000 apartments per year from 2000 to 2002," says Birenbaum. "However, to date, demand has increased even faster than supply, so that vacancy rates in the D.C. metro area today are at their lowest level in the post-War era. We expect that demand will eventually cool off to a more sustainable level, with supply and demand keeping relatively in balance over the next few years," adds Birenbaum.
According to Dallas-based M/PF Research, the D.C. area is the tightest apartment market nationwide. Metro Washington absorbed more than 12,000 units between mid-1999 and mid-2000, more than doubling the completion rate of 5,544 units. Occupancy jumped 1.5 points during the past year, which is notable for any market and particularly impressive in a region with an existing base totaling more than 450,000 apartments. Occupancy now stands at 98.5%.
"With occupancy for projects built since 1990 at 98.6%, new supply is being absorbed immediately upon availability," says G. Ronald Witten, president of M/PF Research.
Witten also says rents shot up 11.3% during the past year. Only the Bay Area/Silicon Valley, with rates for new leases up an astounding 28% on average, posted stronger rent growth.
Birenbaum says the hottest submarkets now include the Dulles Toll Road Corridor, from Tysons Corner through Reston and Herndon to Dulles Airport, and the close-in ring suburbs of Arlington and Alexandria, all in Northern Virginia.
He says the Toll Road Corridor is hot due to the explosion in office employment in that corridor, which has been absorbing on the order of 5 million to 7 million sq. ft. of office space per year for the past few years. It is the epicenter of the Northern Virginia tech economy, with telecom and Internet service providers and high-paying jobs.
"Arlington and Alexandria are hot due to their close-in location and access to excellent transportation networks. This area is evidence of the smart-growth trend of people wanting to live closer to downtown for lifestyle reasons," says Birenbaum. "Washington itself has also been experiencing excellent rent growth, but there has been very little new supply there to date, although that should change in the next year or two."
Where there's a tight market, construction is soon to follow, right? In this case, the market appears to be ready to absorb it. According to M/PF Research, scheduled deliveries for the year ending June 2001 will climb by one-third to more than 7,300 units, and another 3,400 apartments are already under way for completion in the last half of 2001.
"Given the current extremely low vacancy rates, it would take quite a bit of additional construction in excess of new demand just to return to normal `friction' levels of vacancy," says Birenbaum. "There may be select submarkets, however, which experience short-term oversupply for a year or two. These submarkets are in the outlying locations, particularly Loudoun County in Northern Virginia, where approvals have been relatively easier to come by over the past few years."
Witten says the biggest upturn in development registers in the closer-in portions of the metro area. "Sizable properties are in the pipeline within the District proper for the first time in a decade, building is up in both the North and South Arlington submarkets, and a surge in development is occurring in Alexandria (0 completions in the past year vs. more than 1,600 units under construction). These four submarkets have more than 4,300 units under construction, compared with 888 units delivered in the year ending June 2000."
The other hot spot for new construction is Fairfax County, particularly the Reston/Herndon area. Ongoing building across Fairfax County tops 2,800 units vs. 1,569 completed in the past year.
"While building activity is up, the increased volume of new supply still appears roughly within metro Washington's absorption capacity," says Witten. Helping to support the strong demand, job growth (steady at an annual pace of 75,000 to 80,000 jobs since late-1998) is expected to remain solid, with high home purchase costs presenting affordability challenges for a significant number of would-be homebuyers.