Steven Pearlstein: For development, all signs point inward

Steven Pearlstein
Columnist January 14, 2012

Decades of rapid growth have made Washington real estate some of the most valuable in the country, particularly when it is close to the city center, along major roads and highways or near Metro stops.

But not always.

Steven Pearlstein is a business and economics columnist who writes about local, national and international topics. View Archive

Drive along Route 50 in Northern Virginia from revitalized Rosslyn to the glitzy office parks in Falls Church and you’ll think you’ve been transported back to the 1950s as you gaze out on mile after mile of aging strip shopping centers, small brick bungalows and dodgy motels.

Take Route 1 from College Park toward the District and you’ll find an impressive variety of marginal retail stores, fast-food joints and used-car dealerships.

Turn off the Capital Beltway at Pennsylvania Avenue in Prince George’s County, an intersection that must see tens of thousands of cars pass through each day, and you’ll find a motley collection of auto-repair shops, warehouses, long-term storage facilities and aging strip shopping centers.

Or think of Georgia Avenue in the District, Columbia Pike just over the Potomac in Northern Virginia, Route 1 north of Old Town Alexandria or downtown Anacostia. At any of these places, you hardly get the sense that a rational, efficient market has put centrally located, highly accessible land to its “highest and best use.”

Each, of course, has its own story to explain why things are the way they are. But collectively they suggest that the next phase of growth in the Washington region will focus on these underdeveloped areas in the eastern quadrants of the District and some of the region’s older, closer-in suburbs.

It’s not just smart-growth planners and anti-sprawl activists who think so; most developers I’ve spoken with in recent weeks agree. The models for the future, they say, can be found in Pentagon City rather than Dale City, along the Rosslyn-Ballston corridor rather than the far reaches of the Dulles corridor, in the NOMA area near Union Station and the downtowns of Bethesda and Silver Spring. The pressure of development now points inward toward the Capitol, not outward toward Germantown, Gainesville, Waldorf and Laurel.

Consider, for example, Crystal City, with its proximity to Reagan National Airport, spectacular views of the Potomac and the national monuments, its Metro stop and easy access to highways leading in all directions. If ever there was an ideal location for prime office and hotel space and high-end condos with all the amenities, this is it. And yet for years, legions of GS-13s and mid-level defense contractors toiled in its sterile office buildings and criss-crossed its warren of underground malls before driving home on streets devoid of interesting retail stores, restaurants or pedestrian life. It took the heavy hand of the Pentagon and its base closure commission to do what the market should have, forcing a redevelopment aimed at higher-paying, private-sector tenants.

The rationalization of land use in the region is now being driven by fundamental shifts in the economics of housing and commercial development.

The news that Bloomingdale’s will close its store at White Flint says less about the future of the department store or Rockville Pike than it does about enclosed malls. Shoppers no longer prefer them, retailers are abandoning them and developers are scrambling to tear them down or — as is the case of White Flint — turn them into suburban town centers. Even in a rejuvenated Georgetown, the once-elegant Georgetown Park mall sits mostly empty.

The same fate is in store for the suburban office park that, not so many years ago, was the bread and butter of the commercial real estate business in Washington. Workers no longer prefer to work in them, companies no longer want to occupy them, banks no longer will finance them, real estate investment trusts no longer want to own them and planning boards have become reluctant to approve them. In the future, developers say, offices will be part of mixed-used developments, with shops, restaurants, schools, day-care centers and doctors’ offices, preferably within walking or biking distance of condos, townhouses and Metro stops.

Changes in tastes are also conspiring with changing demographics to alter the economics of housing developments, particularly in the outer suburbs.

Across the region, a generation of baby boomers is getting ready to sell three-bedroom suburban colonials to Gen Xers who either don’t want them or can’t afford them. Add to that a wave of foreclosures and excess inventory left over from a speculative housing boom that has driven home prices in many submarkets to levels below the cost of new construction.

For exurban developers, the implication is pretty clear: The raw land they’re holding isn’t worth much and in any case, and there’s not much point trying to build on it until the excess inventory is worked off. Perhaps that is why developments that were started during the boom but were never finished are selling at 35 cents on every dollar invested in land, roads, street lights, sewer and water lines and half-finished golf courses. Even when the market clears, exurban development is likely to focus on low-cost starter homes.

All that contrasts sharply with what is going on in the District and inner suburbs, where prices have held steady and a construction boom is under way for new and remodeled townhouses and apartments. Despite the absence of bank lending, speculative condo developments have even begun to spring up in the hotter neighborhoods, almost all of them equity financed. This market is driven by singles, young-marrieds and empty-nesters, plus a growing number of families with children, all looking for a more urban, less car-dependent lifestyle.

Accommodating this new demand, and these new economics, won’t be easy.

Whereas exurban development was a matter of assembling a few large tracts of farmland or sparsely settled countryside, redevelopment of existing neighborhoods requires dealing with scores of owners of small parcels who may not want to sell, or like things the way they are and will use the political process to keep them that way.

Traditionally, one advantage of the “infill” development is that it can leverage existing infrastructure — roads, Metro, street lights, water, sewer, parks — without the need for new investment. But today, adding significant density in many instances may require expanding the capacity of that infrastructure, which can get pretty expensive and generate plenty of community opposition.

In those big exurban projects of the past, for example, the developers were required to pay for most of the new infrastructure, including schools in some instances. But if increasing density of housing or commercial use requires the widening of Route 1 or putting a light-rail line down Columbia Pike, there is no one developer who can be required to foot the bill. Whatever is done must be a public expense agreed to by the voters and added to the tax bills of all landowners in the city, the county or the special taxing district. That alone can explain why development never happened.

It is easy to point now to the fabulous success of the Rosslyn-Ballston corridor, or of downtown Bethesda and Silver Spring, but the reality is that it took more than a decade of determined effort by planning, zoning and elected officials before they overcame myriad practical and political obstacles.

Prince George’s County offers the greatest gap between the potential for development and redevelopment in the inner ring and market realities. High crime rates, inferior schools, rampant corruption and sheer ineptitude on the part of local officials have scared away many developers. Racism has been a factor as well. At this point, however, what has long been considered a Prince George’s problem is now a regional problem: If the Washington area is to grow, a lot of that growth is going to have to happen in Prince George’s.

Given the strength of the market resistance so far, only the federal government has the clout to jump-start that development process. A study by the University of Maryland found that although the county accounts for a third of the land in the region and a fifth of the population, only 4 percent of the government’s leased office space is within its borders — and that despite some of the region’s lowest rents and land values. Although 26 percent of the region’s federal workers live in the county, less than 8 percent of them work there, and over the past decade that percentage has dropped.

The General Services Administration made a knuckle-headed decision last year when it extended a big lease for 3,000 federal workers at a building in Montgomery County rather than take up an offer to relocate the work to New Carrollton, Largo or Hyattsville, all with Metro stops nearby. The GSA cited lower cost as the key factor, reflecting a sizable subsidy that Montgomery County taxpayers provided to keep the jobs.

That kind of bidding war among local jurisdictions is just plain stupid, whether it is for Northrop’s headquarters or a GSA lease. If GSA Regional Administrator Robert Peck is to be taken seriously on his promise to locate federal employment in Prince George’s, he should be pressured to issue a rule discounting the effect of local subsidies in evaluating competing lease proposals. On a level playing field, Prince George’s ought to win most of those competitions hands down.

Even that, however, probably won’t be enough. Given the endemic corruption and favoritism surrounding development in Prince George’s, it also will be necessary for Maryland to step in and create a Capital Region Redevelopment Authority whose director and board majority are appointed by the governor. Such an authority would need to have the power to borrow money, buy and assemble land (by taking if necessary), override local zoning in extraordinary circumstances, and provide an open and fair mechanism for private developers to compete for rights at Metro stops, highway exits and other prime locations. Because of the potential to raise land values and generate additional revenue for the state and its counties, such an authority could easily be self-financing.

Virginia and the District probably don’t need such heavy-handed intervention, but they should consider the possibility of special taxing and redevelopment districts, such as the one used to finance the extension of Metro to Dulles International Airport. It is reasonable to ask landowners who will realize windfalls from infrastructure to help pay for these public investments, and in the current political environment it is folly to think that other taxpayers will agree to do so.

There are natural limits to how much a metropolitan region can expand its economy and its population by expanding its geographic footprint, and Washington is probably getting pretty close to them. The evidence can be found in the horrible commutes, in the divergent trends in land values at the core and at the periphery, and in the extraordinary cost of extending Metrorail to Loudoun County.

Older cities such as New York, Boston, San Francisco and Chicago reached similar limits a generation ago, and it is no coincidence that their recent economic revival has been accompanied by the gentrification of urban neighborhoods and the redevelopment of closer-in suburbs. Changes in lifestyles and market pressures are pushing the Washington region in a similar direction. Still missing, however, is the political and business leadership needed to accommodate, accelerate and manage that process. More on that next week.

Do you have a reaction to this or any of the earlier columns in this series? What’s your “big idea” for the future of the Washington regional economy? Send your thoughts to pearlstein@washpost.com. I’ll include as many as I can in the final installment later this month.

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