Demand-driven development and good job growth create a strong market in nation's fourth-largest city The companies and jobs are here. People and money are here. Big government is here.
It's a recipe for incredible commercial real estate success - a satisfying success being felt throughout the economically booming mid-Atlantic region. >From the northwest metropolitan Baltimore suburbs down through metropolitan Washington, D.C., Northern Virginia and south to Richmond, vacancy rates are low and leasing rates are up. The overwhelming demand for Class-A office buildings and industrial/flex space has spurred the first speculative building binge since the late 1980s and early 1990s. At the same time, many projects starting out as speculative construction end up with considerable prelease commitments well before construction is completed. "From the landlord's point of view the view is terrific," says Fernando Barruetta, vice chairman of The Carey Winston Co.
REITs are making their mark throughout the region as well, bringing with them fresh capital and an enthusiasm for building, buying and developing. Equally booming is the rash of ongoing hotel building in the nation's capital, as well as several promising proposals for downtown Baltimore. With a newly renovated and expanded Baltimore Convention Center, that city has three hotel proposals on the table. Attorney Peter Angelos, majority owner of the Baltimore Orioles, is pushing a plan to build an 850-room Grand Hyatt just north of Camden Yards. Local banking mogul John Paterakis Sr. is backing a 750-room Wyndham Inner Harbor East Hotel. New York-based developer Harvey Schulweis is already seeking design approval for a privately funded 600-room Westin Hotel on Pratt Street.
In the District, the former National Rifle Association headquarters and the Riggs Bank headquarters are both being transformed into Courtyard by Marriott hotels. A Residence Inn is under construction on Vermont Avenue in a building formerly used as a civil rights headquarters. The proposed Washington Convention Center at Mount Vernon Square will include 750,000 sq. ft. of exhibition space.
Hotel business is also booming around Baltimore Washington International Airport, where between August and December 1997, five new hotels came online. Three more hotels are planned for the region between this spring and next, adding another 300 rooms. "The number of new hotels is a reflection of the growth in the area and the airport itself," says Karen Black, spokesperson for BWI. The influx of BWI area hotel construction is the first such building since the 1980s. Until September 1996, when an AmeriSuites opened, the Doubletree Guest Suites was the only extended-stay suite hotel in the area.
Northern Virginia office market The Northern Virginia office market is exploding with growth and expansion, with a projected demand for at least 3 million more sq. ft. of space in each of the next three years, says Andy Georgelakos, head of office leasing in the Virginia office of KLNB. The Northern Virginia office market includes about 100 million sq. ft. of space, 21 million sq. ft. of that in the Tysons Corner area alone. "Tysons is the seventh-largest office market in the country," says Georgelakos. "Most were built in the last 10 years. Another 4 million sq. ft. of speculative projects are under way through the 14-mile-long Tysons-Dulles corridor. There is no question that this is the hottest market by sheer volume."
Between 1992 and 1997, Northern Virginia experienced slow and steady absorption from previous overbuilding. While new companies continue to flock to the region, internal expansions account for a huge amount of the growth. "This market is quite the story," says Paul Adkins, vice president and market officer with CarrAmerica. "High-tech firms have grown beyond everyone's wildest expectations."
Draws to the area include proximity to government, competitors and clients. And while companies and lenders remember the overbuilt market of the past, much of the new construction is financed more by REITs and less by the debt which brought the economy down earlier in the decade. "There is a lot of equity coming in while realistic numbers are driving speculative construction," Georgelakos says. "The market is moving with tremendous velocity, but with a good mix of new and expanding companies."
Among the region's newer projects, World Communications Inc., which is buying MCI and is the parent company of UUNet, the world's largest Internet provider, has purchased 450 acres in Loudoun County near Dulles Airport. In time that campus may include 2 million sq. ft. or more of space and employ 30,000 people. "The word on the street is that because there are so many MCI installations in the area, this site might become the world headquarters of World Comm.," adds Georgelakos.
And just outside Leesburg, BAAN Real Estate LLC of the Netherlands purchased 281 acres with plans to build up to 2.5 million sq. ft. for that software research company. The first phase of construction includes a 500,000 sq. ft. training/R&D building. At Dulles Airport, the Smithsonian's Air and Space Museum is building a 700,000 sq. ft. annex. At Reston Town Center, the region's premier outdoor street mall and mixed-use site, Anderson Consulting has a new 407,000 sq. ft. office building under construction for December 1999 delivery.
CarrAmerica has under construction two speculative office buildings. Reston Crossing on Dulles Toll Road, totaling 350,000 sq. ft., is to be delivered by the end of this year. "There is tremendous visibility along the toll road, and we are in negotiations with several possible tenants," Adkins says.
Washington, D.C., office market Downtown Washington is seeing its own revival of both office and entertainment markets. "There has been a shortage of Class-A office space here for a long time, and rental rates are rising as we speak," says Carey Winston's Barruetta. "I think there will be an explosion of speculative building this summer and fall. Lots of projects are ready to go, including some very large buildings. Georgetown is also seeing a resurgence."
A combination of factors have brought about the federal capital's revival, including the influx of REIT money, especially by Boston Properties, which is blanketing the region with money and projects, the opening of the MCI Center and a newly improved D.C. Control Board, which has made enormous strides to improve the governance of the city. "Bureaucracy has been whittled away, there are new police and school chiefs, and the city budget has had its first surplus in years," says Barruetta.
In the first quarter of 1998, a second BID opened, "promising a cleaner and more friendly central business district," according to Delta Associates Inc. Real Estate Services. A third BID is planned for summer. The MCI Center, where the Washington Capitals hockey team and NBA's Washington Wizards play, has been a huge factor in bringing restaurants and entertainment complexes back downtown. In the office market, REITs are paying top dollar to buy, lease and build. More people are also calling Washington home and not just a place to work. "I think people were a little gun-shy about the District at first," says Steve Goldstein, senior executive vice president at Julien J. Studley Inc. "But we are on the verge of significant activity. The market is tight."
The government has also been doing its part to up the real estate stakes here. This spring the feds delivered the Ronald Reagan building at 1300 Pennsylvania Ave. Other buildings with 1998 deliveries include Manulife Real Estate's 185,000 sq. ft. building on 12th Street and CarrAmerica's 250,000 sq. ft. joint project with Holland Park Services' Hamilton Square on 14th Street. Cafritz Co. is renovating the 227,000 sq. ft. Universal South site on Connecticut Avenue, while Tower Cos. is renovating the 235,000 sq. ft. Millennium Building on K Street.
In 1999, Washington should see a host of deliveries from Boston Properties, John Ackridge, Karchem Properties, Gould Property Co. and others. These Class-A office buildings are also making a mark in the CBD and East End regions of the city, which is a draw in particular to expanding law firms.
Metropolitan Baltimore office market REITs and expanding businesses are playing a role in the tight and healthy Baltimore office market as well. Vacancy rates are as low as this market has seen in years, according to Bill Miller, senior vice president in charge of office markets for KLNB. Downtown Baltimore is seeing both new development as well as renovations. Towson-Timonium area should see a couple of groundbreakings coming up as well, with Heaver Plaza looking for a lead tenant for a planned 170,000 sq. ft. midrise. Merritt is considering a two-building, 160,000 sq. ft. project in the area as well.
Smaller markets around Baltimore are also growing. Columbia is seeing significant office development and the first speculative building there in the decade. Among Merritt's projects there is a 120,000 sq. ft. midrise office building. Annapolis, which has had almost no Class-A office space available for larger tenants, is seeing site preparation work on Annapolis Exchange, a 200,000 sq. ft. highrise which originally was slated to be a headquarters for the merged BGE and PEPCO power companies. That merger did not go through, but the building is attracting considerable attention from other potential tenants.
Maryland retail market The region's retail markets are alive, strong and growing, but probably nearing the end of a significant six- to seven- year expansion cycle. That thought, however, hasn't diminished any retailer's lust for coming into or expanding throughout the Baltimore-Washington area, which is populated, well educated and flush with cash.
"This market is fueled by a lot of new retailers and the evolution of power centers," says Tom Maddux, principle and retail property specialist at KLNB Inc. "Throughout 1998 we are still seeing the delivery of a lot of that product as well as the redeveloping of older properties forced by the lack of available land close to densely populated areas."
Metropolitan Baltimore can be a difficult market in which to expand because it is an older city which is not growing very rapidly and has fairly highly regulated planning and zoning codes. "We probably have the demand to create a 500,000 sq. ft. power center in Owings Mills, but the zoning is not there and that's the way the county wants it," says Maddox. "There is a gaping hole in Owings Mills but, at the same time, the mall has expanded with a new Sears, Lord & Taylor, 16-screen theater and four new restaurants being built on pad sites."
Moving around the Baltimore beltway, Nottingham Properties' The Avenue at White Marsh is the first town center concept in the Baltimore area. The town center is anchored by Barnes & Noble and has a 34,000 sq. ft. building under construction, of which Pier 1 is taking a third of the space. The nearly 300,000 sq. ft. center is 82% leased. Barbecues Galore opened at The Avenue at White Marsh Memorial Day. "There is tremendous competition for beltway locations as well as the outer markets such as Hagerstown, Salisbury, Frederick, Lexington Park and Manassas," says David A. Ward, vice president at H & R Retail Inc.
Not only are new players such as Lowe's Home Centers coming into the market, but stores such as Target, Best Buy and Kohl's are back-filling wherever they can find locations. Relaxed building moratoriums in Bel Air and Columbia have created an explosion of growth in those two markets as retailers seek to catch up with pent-up demand. The 500,000 sq. ft. Columbia Crossing should be completed by fall. Towson Place on Goucher Boulevard has been reinvented with the addition of Michael's, Frugal Fannies and an upgraded Toys "R" Us.
Annapolitans may also finally see some dirt being moved this fall at Parole Plaza. For years, the 1960s-era center has been proposed to become Parole Town Center. Now property owner Carl Freedman has the property back under contract with Benton Development of Dallas. "There have been some extremely favorable meetings with the county and lease discussions are ongoing for lead tenants," says Framson. "There have been substantial design changes, but all are keeping the town center concept."
Nearer to Washington, retail outlets are still growing at a feverish pitch. Stadium seating movie theaters are marking their presence throughout the Washington area. The newest and biggest power center opening this summer is The Washingtonian near Gaithersburg, which will include the region's first Galyon's and The Limited's 100,000 sq. ft. sporting goods offering on two levels.
The first new enclosed regional mall to be built in years in the region is under way, with an expected fall 1999 delivery. Dulles Town Center in Loudoun County is a 1.3 million sq. ft. offering which includes Sears, JCPenney, Hecht's and Lord & Taylor as beginning anchors. The latter two stores will open this fall as freestanding stores a year before they become part of the mall.
Industrial and flex space The Northern Virginia suburbs are leading the charge in construction of low-rise flexible space as well. However, many pockets of the entire region are seeing growth in this area, often where the final cost is not as pricey as in suburban Virginia.
"This is the most easily misunderstood commercial real estate space," says Andrew J. Czekaj, chairman and chief executive office of Cambridge Holdings of Herndon, Va. "It's not just for industrial users." Czekaj says that flex space may be a larger part of the future real estate economy as companies look more to low-rise, campus-like developments. Cambridge has recently developed 3.2 million sq. ft. of business space in the Northern Virginia suburbs, 80% of that being flex space. Vacancy rates are below 10%. "Anything that could be leased right now would be," Czekaj says. "Vacancy rates were as high as 35% to 40% early in the decade and look where we are now."
In suburban Maryland, flex prices are up as well, but that market has not seen the dramatic up and down swings of Northern Virginia. The market is also seeing vacancies rates below 10%. Companies leasing this space in Maryland include biotechnology and life sciences firms as well as manufacturing businesses looking for Interstate 95 corridor convenience.
And as a buyer of flex properties, Czekaj says that the best deal going right now is Maryland's Prince George's County, where he is buying for $60 to $70 a sq. ft., compared to the $90 to $110 in neighboring Montgomery County. Also, in Maryland there is considerable flex construction activity ongoing throughout the Columbia region as well as around White Marsh on the I-95 corridor northwest of Baltimore. Towson-based Nottingham Properties has several buildings in the works at McLean Ridge, a 50,000 sq. ft. building and a 48,000 sq. ft. building, both leased by Metris Co.
"White Marsh is a very, very strong flex market that is 98% leased," says Joe Credit, senior vice president and director of commercial development at Nottingham. "We can't get buildings built fast enough."
Richmond's renewal About 100 miles south of Washington, D.C., on I-95, Richmond is undergoing a real estate revival of its own. A healthy balance of supply and demand coupled with good absorption is keeping the bulk of Richmond's commercial vacancy rates below the 10% mark. Only downtown Richmond is running a little higher at just over 11%, says Jeff Cooke, sales manager and senior vice president at Morton G.Thalhimer Co. "The biggest demand we see right now is for suburban office space. The majority of growth in the market comes from internal expansion of our existing businesses." Flex space has been particularly tight in Richmond with vacancy rates falling to nearly 5% by the end of 1997. That rate is up slightly as several speculative projects take shape this year.
Two REITs, Liberty Property Trust of Pennsylvania and Highwoods Property of North Carolina are the primary backers of speculative office and flex construction throughout the area. Capital One, formerly the credit card division of Signet Bank, headed to southwest Richmond for its new flex/office space. It's an area of the city not traditionally associated with office space, "but they are reacting to the labor shortage," Cooke says. "Labor is the big black cloud on everyone's horizon, because if companies can't find workers, that is what is going to slow the economy."
Downtown the big news is a revival of the Richmond riverfront. In May, Dominion Resources Inc. signed an agreement to purchase the 12-acre Fort James facility, which includes two buildings and parking. At the same time the proposed Richmond Riverfront project appears to be moving past a long-talked-about conceptual stage. The mixed-use project is a joint venture of several area developers and land owners. Construction should start as early as spring 1999, says J. B. Campbell, principle at Divaris Real Estate in Richmond. Zoning is in place, and the entire site is an Enterprise Zone. "There are four buildings on the site which are historic and must be rebuilt," Campbell says. "The project could total 3 million sq. ft. of office, retail, residential and hotel space."
Other new and expanding players in the market include Home Depot, Target, Kohl's and Wal-Mart. The 500,000 sq. ft. Chesterfield Market Place, adjacent to Chesterfield Mall in the Midlothian area, is nearly completed. Developer Henry Faison this spring also announced plans for a 600,000 sq. ft. center at routes 360 and 288 to be anchored by Target. And in seeking out the upscale shoppers of Richmond, Forest City of Cleveland and local developer Pruitt Associates have announced a joint venture high fashion center to be built on 150 acres on West Broad Street. Edwards Cinemas has signed on for its first project outside of California, while the developers are trying to lure the likes of Nordstrom and Saks Fifth Avenue with smaller versions of their stores.