All the 2012 data for commercial real estate in Washington is in and the prognostications for 2013 are, well, rather blah.
For anyone watching the federal government, that should be of little surprise: the debt ceiling continues to be a threat, sequestration remains on the tips of everyone’s tongues and there is little hope of expansion for most government agencies, law firms and other major office tenants that occupy downtown D.C., Tysons Corner, Bethesda and the area’s other largest office markets.
“I think the first half of 2013 looks a lot like the second half of 2012,” said Greg Meyer, senior vice president at Brookfield Office Properties, a major owner of commercial real estate in the region. Government stagnation means so many other real estate decison-makers will keep their fingers on the “pause” button before inking new deals. When tenants do start making choices, Meyer said, they will have the opportunity to be picky. The buildings with the best design, in the best location, with the best amenities will have a greater advantage than ever.
“I think that it’s going to be a year of winners and losers,” he said.
What will be the other dominant story lines of commercial real estate this year in Washington? We chose 10, told here through the stories of some of the properties we will be watching most closely.
The fate of the $950 million development on the site of the District’s former convention center is large enough that it could shift the market for offices, housing and retail downtown.
The project’s ability to attract office tenants has cemented the notion that employers are willing to relocate for more efficient, modern office space. CityCenter has 90 percent of its 515,000 square feet committed, according to lead developer Hines. Others then followed suit, with Boston Properties landing Arnold & Porter for its planned building on Massachusetts Avenue NW and Akridge and Mitsui Fudosan America drawing Pillsbury Winthrop Shaw Pittman to its rehab project at 1200 17th St. NW.
If newly built offices remain popular with law firms and other tenants in 2013, another set of projects — downtown, in Mount Vernon Square, NoMa and maybe even Capitol Riverfront — could find similar success.
Outside of Tysons Corner and White Flint, the mixed-use Edens project in Merrifield might be the region’s most ambitious remake of an auto-oriented area into a walkable, transit-oriented urban neighborhood. There have been hiccups — such as the public spat with chef Jeff Black that led him to cancel his massive Oyster House restaurant — but Edens has blazed a path others are likely to follow.
Where will the next urban in-fill projects come? Developers of the Southwest Waterfront are in search of major equity partners that could make that project a reality in short order. And there are big plans for Potomac Yard, along Route 1 in Northern Virginia, and at PenPlace, the Vornado project near Pentagon City. Plans to remake malls in Springfield, White Flint and other areas are likely to advance as well.
Lerner Enterprises let it be known in the summer of 2011 that it was making a bold move in Tysons Corner by beginning construction on a high-end, highly sustainable office building near the Silver Line, 1775 Tysons Blvd., without any tenants or any bank financing.
Since then, things have been pretty quiet. The site still has no foundation and remains a pit of sod and mud. Meanwhile, across the street, the development firm Macerich actually began construction on its office building and was quickly rewarded when satellite firm Intelsat opted to move its headquarters there.
For anyone who has not noticed, Douglas Jemal is back.
During the recession, the cowboy boot-clad District developer was behind on his taxes and floating the possibility of selling some of his nicest buildings.
How things have changed. Jemal and his sons Norman and Matthew inked LivingSocial to a slew of leases and formed joint ventures with other developers that allowed construction to start on some of their long-held properties and put Jemal back into acquisition mode. The family picked up a charter school building in Northeast D.C. and 1401 14th St. NW, in Logan Circle, over the holidays.
Where will the Jemals’ next move come? Best bets are the Hecht’s Warehouse and the Uline Arena, two of Jemal’s favorites, both in Northeast D.C.
The remake of White Flint appears to be on track to transform a traffic-riddled stretch of Rockville Pike into a transit-oriented urban center. But developers there — who worked so cohesively around a plan for the area — are now entering a more competitive phase.
How many new apartments can White Flint handle? Researchers at Delta Associates see an oversized pipeline and declining rents in store for much of 2013, and there are already signs that banks are growing stingier with financing in the area.
There are also close to a half dozen new movie theaters planned for Rockville and Bethesda, some of which have been delayed or are yet to be finalized. Developers that time things right in White Flint are likely to distinguish themselves in 2013.
By many measures, the Washington area did not end 2012 ranked among the country’s hottest real estate markets. About 2.9 million square feet more space was vacated than occupied over the course of the year, according to Delta Associates, and rents fell 2.9 percent. Cassidy Turley researchers called the fourth quarter the best in five years for the U.S. office market, but Washington wasn’t named among the markets driving the numbers.
The outlook isn’t great, at least in the near term, and perhaps no one has more on the line than Monday Properties and Goldman Sachs, which are building a 580,000-square-foot Rosslyn project, 1812 N. Moore, without tenants or financing. It should be ready for interior build-out in the spring or summer, but will anyone be moving in?
Area colleges are some of the largest employers in the region and many of them have stuffed their existing campuses to the brim. Where else to go?
The question has Georgetown University, George Washington University, Gallaudet University, American University and community colleges thinking about how to expand or add new campuses and keep up with the region’s shift to the east. Major sites in the District, from Walter Reed to Poplar Point, as well as eastern parts of Montgomery County are likely to be in play.
Acting GSA administrator Dan Tangherlini inherited the two massive projects, and now he must see them to some end. Tangherlini says it’s been smooth sailing dealing with the Trumps who plan to turn the Old Post Office Pavilion into a hotel. But the $3.4 billion consolidation of Department of Homeland Security facilities at the former St. Elizabeths hospital in Southeast D.C. needs to be re-worked due to lack of funding. Where does the agency go from here?
The DHS project became a victim of congressional disagreement over whether to continue to fund construction there, but there are some new players involved. Rep. Bill Shuster (R-Pa.) is the new head of the committee overseeing transportation and public buildings, while Tangherlini’s future at the GSA is unknown. Their visions for the future of the agency and the property will have to coincide for St. Elizabeths to move forward much this year.
For Prince George’s County, a possible move by the FBI is the white whale — a major headquarters consolidation pegged for 55 acres or more near a Metro station. A chance to land the FBI could mean the start of a major, transit-oriented project and commercial tax base boost that County Executive Rushern L. Baker III and other leaders have been pushing for since Metro first opened its doors.
Pulling it off, however, will require winning a regional competition likely to bring out the most politicking and financial one-upmanship in the region since Northrop Grumman decided to relocate its corporate headquarters here. Fairfax County hauled in Northrop and with the Silver Line arriving in Tysons, the FBI could be next.
The world’s largest retailer has been quietly making progress on its six planned stores in the District, albeit on a much slower time frame than it had hoped. The company says it will open for business in D.C. in 2013, but it’s likely to be first at a mixed-use project at First and H streets NW, rather than the more traditional stores it plans on Georgia Avenue NW and New York Avenue NE. If that store and the new Costco-anchored shopping center in Northeast succeed, the District’s tax base will be a big winner.
Progress in the suburbs, meanwhile, has been mixed, as the retailer shelved plans to open on Rockville Pike in Montgomery County, but is plowing ahead with construction in Tysons Corner.