Innovation and Audacity Mark Mid-Atlantic CRE Market

WASHINGTON, DC—This is a time of dynamic change in Mid-Atlantic commercial real estate. Developers are moving forward with ambitious mixed-use projects, e-commerce is impacting both industrial and retail properties, and missteps by co-working companies could weigh down the office sector. In other words, it is a time requiring a careful balance of boldness and prudence, a combination rendered even more important by the uncertainty clouding economic forecasts.

The Amazon Effect

Amazon’s decision to locate its second headquarters in National Landing (formerly Crystal City) is emblematic of the changes transforming Mid-Atlantic CRE. The e-commerce giant is among the companies most responsible for the diverging fortunes of industrial and retail properties on a national scale.

With its announcement, however, it has become an intensely influential local presence, one that will add considerable momentum to an already strong multifamily market and counter headwinds in office. Not only is Amazon planning to bring 37,000 employees to its new headquarters, but its decision will have a ripple effect across the region, generating tens of thousands of new jobs over the next decade from Northern Virginia to the Baltimore suburbs. Virginia Tech’s announcement that it will create a $1 billion innovation campus is the most significant expression yet of this follow-on effect, but more are sure to come.

Multifamily Focuses on Scale, Amenities, and Transportation

Without a doubt, Mid-Atlantic multifamily is doing extremely well. Low vacancies, substantial rent growth, and rising home prices have combined with many of the factors shaping Amazon’s decision — solid employment growth, attractive demographics, and a flourishing economy — to push multifamily investment to record or near-record levels.

There are three trends that mark several high-profile projects underway throughout the region. The first is scale and complexity. Perhaps the most talked about project in Northern Virginia is The Boro, the Meridian Group’s 15-acre multi-phase development in Tysons. Meridian’s goal is unabashedly ambitious: to transform “Tysons from a commuter-driven “Edge City” to a dynamic, self-sustaining urban district.”

At full build-out, The Boro will rival the largest developments in the region, totaling approximately 4 million square feet of office, residential, retail, entertainment, and public use space. The 1.9-million-square-foot first phase is currently rolling out. It features more than 533 multifamily units as well as 140 condos, 400,000 square feet of office space, and 350,000 square feet of destination retail space, anchored by a 70,000 square foot Whole Foods Market, the largest in the region, and a 79,000 square foot ShowPlace ICON Theatre.

Another large, ambitious project is the redevelopment of the former Walter Reed Army Medical Center in the District of Columbia by Urban Atlantic, Hines, and Triden Development Group. When complete, the 66-acre campus will consist of over 2,100 residential units, 150,000-square-feet of retail, 185,000-square-feet of office, 116-square-feet of medical space, 30,000-square-feet of arts and cultural uses, a 200-room hotel, two charter schools and 20 acres of open space. Putting together deals of this scale and complexity requires expertise and investors with deep pockets.

Many of the new developments in the region are amenity-rich, a second trend defining multifamily in the Mid-Atlantic. For instance, the multifamily properties at The Boro feature a rooftop pool with sundeck and lounging areas, a club room with entertainment kitchens and private dining, an indoor bike room and fix-it station, and 24-hour concierge.

In Jersey City, Kushner Real Estate Group’s three-tower Journal Squared project is noteworthy for offering suburban amenities at an urban New Jersey property. They include a screening room, fitness center, rooftop pool, sky lounge with panoramic Manhattan views, and kids’ room, ideal for Millennials starting a family. This seems to be a winning formula. The 538 multifamily units in the first of the three towers were leased up in just 10 months. When completed in 2024, the mixed-use project will have 1,840 apartments.

The third trend defining Mid-Atlantic multifamily is transit-oriented development. Journal Squared is just three stops on the PATH line from the World Trade Center, while The Boro is being built around the Greensboro Station stop on Washington Metro’s new Silver Line.

Office Holds Its Own

For the better part of a decade, the office market has been undergoing structural transformation, driven by advances in technology, flexible work arrangements, and open design. For instance, digitization means that law offices no longer need extensive libraries and file storage. And with more and more employees spending at least part of their week working from home, organizations have adopted such space saving practices as hot desking and collaborative spaces.

At the moment, however, the office market is holding its own. Philadelphia has seen a decline in vacancies, Baltimore is seeing solid demand from a mixture of tech, healthcare, and government tenants, and Washington has begun to see the beginnings of the Amazon effect, as existing firms expand and new firms enter the market, soaking up what might have been excess supply.

One note of concern is that difficulties at WeWork, which has been particularly active in the Washington market, may lead the company to shed office space. As many observers have noted, the essential flaw in the coworking model is that WeWork and its competitors are trying to support long-term liabilities — leases as long as 15 years — with the short-term income stream generated by tenants, an increasingly untenable proposition. If WeWork and Convene, another coworking firm active in the District of Columbia, retrenches, expect to see additional supply flowing to the market.

E-Commerce Differentiates Retail and Industrial

While older malls continue to suffer from competition with e-commerce, there is a general sense in the market that a good portion of the bloodletting is behind us as retailers develop an omnichannel approach and reengineer their brick and mortar locations to serve the needs of marketing as well as sales. That being said, retail in the Mid-Atlantic is lagging the rest of the country, although there are some bright spots. The District of Columbia, Philadelphia, Pittsburgh, and Baltimore are ranked in the bottom half of this year’s Marcus & Millichap’s National Retail Index of 46 cities.

In response, some investors are reconceptualizing older multitenant malls into town centers. A case in point is Promenade at Granite Run, located in Media, a western suburb of Philadelphia. BET Investments took over a struggling two-story mall, demolished all but two of its anchor locations, and is creating a mixed-use development designed to integrate over 830,000 square feet of retail, restaurants, and entertainment with luxury apartments.

While retail struggles to regain its footing, industrial continues to do well. Double-digit growth in e-commerce is driving the demand for warehousing and distribution centers along such toll-free corridors as I-81 and I-78 as well as urban infill spaces for last-mile and fresh food delivery. Currently, vacancy rates for warehouses in the Mid-Atlantic are in the 2 percent range, but with new product coming online during the next 18-to-24 months, vacancies may rise, especially for older properties that were not designed to accommodate robotics and other automated processes.

Looking Ahead

For the moment, commercial real estate trends are reasonably well-defined, but uncertainty — both economic and political — means that experience and careful analysis are more important than ever. The recovery is already in uncharted territory, and trade wars, Brexit, slowing global growth, and a contentious presidential election could upset the balance of conditions that have sustained it thus far.

In these circumstances, it makes sense to work with investors and lenders who have weathered a business cycle and build relationships with those who have proved to be realistic and responsive partners in down times. Their ability to structure a transaction and work with each other during difficult times could be critical to the long-term success of both parties.

Sadhvi Subramanian is a senior vice president at Capital One’s Commercial Real Estate Group. The views expressed here are the author’s and not ALM’s Real Estate Media Group.