washingtonpost.com
Rental boom provides life preserver for developers

By Jonathan O'Connell
Monday, October 11, 2010; 18

In 1904, brothers Guy and L.P. Steuart went into business together selling ice and coal from a mule-pulled cart. The two got into the real estate business in the 1920s and Steuart Investment has owned property between New York Avenue and L Street near Mount Vernon Square in Northwest D.C. ever since.

The company resisted developing the site when Metrorail came to Mount Vernon Square and when the city's new convention center opened in 2003, but now, Guy Steuart II says it is finally time to develop the property, a generation after his grandfather and great uncle acquired it. He recently finalized a partnership with Arlington housing developer Paradigm Development, secured an insurance company as a lender and applied for excavation permits so work can begin this month.

And what prompted him to finally get the shovel? A surprisingly strong market for apartments that has pushed vacancy rates to new lows.

Steuart is not alone. Despite one of the biggest construction slowdowns in decades, Washington area developers and investors are hustling to get new apartments out of the ground as quickly as possible, looking to take advantage of a growing stream of young job seekers who are moving to Washington. In a typical year, the Washington area fills about 5,200 more apartments than it empties. In the past 12 months it has filled 16,476, according to the Alexandria research firm Delta Associates.

Like most urban neighborhoods in the area, Mount Vernon Square is attracting more than apartments. Steuart himself plans office buildings for land he owns nearby and other owners are pushing hotels to feed off the Walter E. Washington Convention Center. But as he watched apartment buildings elsewhere quickly find takers and then discovered that lenders had money ready for projects, he decided to move. His 390-unit, 14-story complex will be called the Meridian at Mount Vernon Triangle.

"To a certain extent, it fits the demographic profile of what a lot of the city is," he said. "You've got a lot of that 25- to 35-[year-old] profile who may not want to own their own place and don't want to own a car."

BIG SHIFT TO RENTING

Since the housing market atrophied and plunged the economy into recession, a national shift toward renting has been predicted. A 2005 CNNMoney headline read "Rent or Buy? The answer may surprise." Soon thereafter, Time magazine wrote about "The surprising case for renting" and USA Today ran a piece called "For some, renting makes more sense."

But the paradigm shift from buying to renting comes nowhere near explaining the boom in Washington area apartment leasing, according to data from Delta. Of the nation's 57 largest apartment markets, Washington's 2.5 percent vacancy rate for the third quarter was the lowest and easily bested the 6.6 percent average for all markets. Otherwise strong real estate markets have vacancies that far outpace Washington. Dallas-Fort Worth, for example, considered one of the country's strongest areas for commercial real estate, had a 9.3 percent apartment vacancy rate in the second quarter.

"These are the best of times that we've seen in the 20 years that we've been compiling statistics on it," said Delta chief executive Gregory H. Leisch.

He cited the shift away from homeownership and the area's stronger-than-most economy in leading tens of thousands college graduates and young professionals to move here in search of their own places.

"We've never seen this kind of sudden shift from ownership to rental in a three-year period," he said.

The hunger for new apartments has bailed some developers out of what might have been untenable situations elsewhere. During the boom years for condo sales, developers at the Penrose Group, based in Vienna, proposed a first for Tysons Corner: a complex of condominium towers with an urban feel. On 14 acres located among office parks, highway interchanges and the Tysons Galleria shopping mall, they planned seven towers of 1,354 luxury condos.

The first building, called One Park Crest, delivered 350 condominiums as planned in 2008 -- just as the housing market was collapsing. With construction underway on the second building, Penrose was forced to switch the coming units from condos to apartments, prompting more than 50 lawsuits from 2007 to 2010, many from condo buyers who had units under contract.

Had the second building, the Lofts at Park Crest, been in Phoenix (where the apartment vacancy rate was 10.5 percent in the second quarter) or Houston (11.3 percent), it might still be empty and causing Penrose problems. Penrose did not respond to requests for comment.

Instead, the building is chock-full -- 99 percent leased. Penrose attracted a 66,000-square-foot Harris Teeter grocery store to the ground level and managed to sell the building to a Texas firm, Behringer Harvard, for $68 million. And Penrose then sold 2.64 acres of its remaining property to another apartment builder, AvalonBay Communities, for $13.3 million. AvalonBay now plans to build a 354-unit luxury apartment building called Avalon Park Crest, with leasing to start in 2012.

"We expect that Avalon Park Crest's convenient location and first-class amenities will be well received by residents employed in Tysons Corner and throughout the Dulles Corridor," said Jon Cox, AvalonBay senior vice president, in a statement. He said it would be the first of many new projects the Arlington-based company will begin in coming years.

THE BOOM IN NOMA

Not only has the apartment craze helped developers escape potentially distressful situations, it has helped ignite interest in some neighborhoods that weren't previously apartment hotbeds.

Take the 35-block former industrial area behind Union Station in Northeast Washington, a wedge north of Massachusetts Avenue known as NoMa. There is no neighborhood of rowhouses, townhouses or single-family homes in NoMa. Restaurants aren't open much past lunchtime, except for one on the second floor of a hotel. There is no library. There are no parks. In fact, there are very few trees at all. Until this year, NoMa consisted mainly of office buildings surrounding railroad tracks, construction sites, parking lots and a Metro station.

Then, in June, leasing began at the first new apartment complex in NoMa, the Loree Grand, built at 250 K St. NE by the Cohen Cos. and managed by the Bozzuto Group. Ninety-five of the building's 212 units are leased, with studios starting at $1,595, one-bedroom units starting at $1,795 and two-bedroom units starting at $2,695.

Leasing 95 units in four months means more than one per weekday -- an incredible clip. For perspective, Delta recently gave its 2010 award for "highest lease-up pace" to the Allegro, a Columbia Heights apartment building. Federal Capital Partners purchased the Allegro at foreclosure auction last year and then leased the building at about 21 units per month through June. The Loree Grand is leasing almost 24 units per month. The former Dumont condo building at 425 Massachusetts Ave. NW, which was purchased by Equity Residential and converted to apartments, is leasing even faster; since April it has leased 286 of its 559 units, a jaw-dropping rate of 47 per month.

Eric Siegel, executive vice president of Cohen Cos., is part of a group of commercial property owners that is trying to find land for a park in NoMa, possibly through a land swap with the city. A Harris Teeter grocery is set to open in December and a number of restaurants are planned for the area. In the meantime, Siegel said the lack of certain amenities hasn't mattered.

"I'm a romantic," he said. "I find living near the railroad, particularly the views looking at the railroad tracks, I find extremely appealing."

Other NoMa developers, eyeing Siegel's success, can't get started fast enough. Archstone, a residential builder headquartered in Englewood, Colo., has begun construction on a building more than twice as big, 469 units, at First and M streets NE. StonebridgeCarras, based in Bethesda, just completed 440 units ranging from $1,600 to $4,000 per month in rent.

"The apartment market is insane. It's nuts. It's so tight," said StonebridgeCarras Principal Doug Firstenberg.

StonebridgeCarras has plastered the Union Station Metro station with advertising for the project, called Flats 130 at Constitution Square, and Firstenberg said he plans to begin building another 190 units as soon as possible, hoping to complete them in 2012.

"For us, everybody who is not a tourist who goes to Union Station lives, shops, works, whatever here, that's our prime target," he said. "Every person out of there is a potential person who wants to live in NoMa."

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