Growth is Not a Given in the D.C. CRE Market
This week we feature an article from Bisnow.com that sounds a cautionary note about the future of commercial real estate in the Washington D.C. market. Author Jon Banister captures some thoughts from top developers who spoke at Bisnow’s D.C. State of the Market event. Some highlights:
- Fivesquares Development principal Andy Altman said. "There’s a sense of, ‘Oh, look at the cranes everywhere, this will just go on. We’re now at 700,000 people and it’s just this straight line that’s ascending.'" That sentiment is a misguided one that forgets D.C.'s history over the past three decades, said Altman, who served as D.C.'s planning director under Mayor Anthony Williams.
- "I’ve never seen a more inhospitable place for business," Roadside development partner Richard Lake said. "I really am very concerned that everyone thinks this thing is just going to continue to go on. "With the tax policies, the regulatory policies, it costs more to build the same exact product in D.C. than in our close-in suburbs. That is something we have to fix."
- Menkiti Group CEO Bo Menkiti said D.C. needs to become a more business-friendly jurisdiction if it is going to keep attracting the businesses and developments that have grown its economy over the past two decades.
- Fulcrum Real Estate and Construction Associate Director Andrew Lyons said it is harder and costlier to develop in D.C. than the surrounding jurisdictions.
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'Growth Isn't A Given': Developers Worry About D.C.'s Economic Future
September 27th, 2021
Jon Banister, Bisnow Washington, D.C.
Washington, D.C., has benefited from strong economic growth for much of this century, with thousands of people moving to the city and sparking development in neighborhoods across the District.
That growth continuing in the coming decade may seem like an inevitability, but commercial real estate leaders fear the District's government is taking it for granted while putting in place policies that could stifle the city's economy.
Several top developers, speaking Thursday on Bisnow's D.C. State of the Market event, said the District's increasing regulatory and tax burdens are leading investors to favor the suburbs over the city and to look to other markets.
"Growth isn’t a given," Fivesquares Development principal Andy Altman said. "There’s a sense of, ‘Oh, look at the cranes everywhere, this will just go on. We’re now at 700,000 people and it’s just this straight line that’s ascending.'"
That sentiment is a misguided one that forgets D.C.'s history over the past three decades, said Altman, who served as D.C.'s planning director under Mayor Anthony Williams. In the late 1990s, D.C. agencies were under court-appointed receivership and managed by a federal control board and the city had a junk bond rating, Altman said.
"There is a danger in not recognizing history can repeat itself," Altman said. "Cities can go in cycles, and policymakers have a big role in what happens."
The policies that developers criticized included the District's 2019 increase of the tax rates on the transfer and recordation of commercial properties, the Tenants Opportunity to Purchase Act, which creates hurdles for acquiring D.C. apartments, and the city's lengthy rezoning process that has become fraught with appeals and related delays.
"I’ve never seen a more inhospitable place for business," Roadside Development partner Richard Lake said. "I really am very concerned that everyone thinks this thing is just going to continue to go on. The risk the city has is that sense that no matter what we do everyone’s going to build here and everyone’s going to want to live here and it doesn’t matter."
Lake, who has served as co-chair of the Washington D.C. Economic Partnership since 2012, built Shaw mixed-use project City Market at O and is working on the Wegmans-anchored City Ridge project on Wisconsin Avenue NW. He said local regulations and taxes on businesses have made it more difficult for retail and office tenants in D.C.
"It’s becoming more and more difficult to operate in the city," Lake said. "We have to recognize that. If we don’t change our course, if we don’t educate the council, it's going to be a long road until we get back."
Lake said the District's policies make it a more expensive place to develop than its surrounding suburbs and other peer cities, and he said this is scaring away the investors that finance new projects.
"Capital does not feel like it gets treated well in the city," Lake said. "With the tax policies, the regulatory policies, it costs more to build the same exact product in D.C. than in our close-in suburbs. That is something we have to fix."
Jair Lynch Real Estate Partners Vice President of Development Ruth Hoang said the firm has acquired several apartment properties totaling 2,000 units since the start of 2020, and they have all been in the close-in suburbs. She attributed this in part to D.C.'s TOPA law making it more difficult to acquire apartments in the city.
"It's all been just outside the D.C. line," Hoang said. "We are looking at stuff in D.C., but we're still in this long and lengthy TOPA process."
Hoang said D.C's transfer and recordation taxes also present obstacles to making acquisitions in the District. She said Mayor Muriel Bowser's administration should waive the taxes for projects that are going to produce or preserve affordability to help meet its housing goals. She also said the process of bringing tenants into affordable Inclusionary Zoning units comes with delays that can leave apartments
Menkiti Group CEO Bo Menkiti has seen the risks associated with developing in D.C. firsthand with his 220-unit project across the street from the Brookland Metro station. The project was first proposed in 2010, has had its approval vacated by the D.C. Court of Appeals three times, and it has still yet to move forward.
Menkiti said D.C. needs to become a more business-friendly jurisdiction if it is going to keep attracting the businesses and developments that have grown its economy over the past two decades.
"There's this idea that the show will just always go on, it doesn’t matter how much restriction we have, it doesn’t matter how hostile we are, that that will just continue," Menkiti said. "At some point, businesses have opportunities and capital has choices, and they’re very fluid."
While local developers and businesses may have a loyalty to their home city, Menkiti said the outside investors that finance many D.C. projects don't have the same attachment and will be more quick to look elsewhere.
"The capital could care less," Menkiti said. "It is not going to go to places with additional uncertainty and additional cost. The question is whether we get in front of that."
Fulcrum Real Estate and Construction Associate Director Andrew Lyons said it is harder and costlier to develop in D.C. than the surrounding jurisdictions.
"If the District doesn't get its act together, that's more opportunity for Virginia and Maryland, because the District is expensive and bureaucratic," Lyons said. "If the District wants to keep up, it has got to change its game and make it more affordable, otherwise they're going to lose out to Montgomery County and Fairfax County, and people will just build around the city."
In addition to making it harder to build housing, the District's tax policies are also adding costs for an office market that is struggling with record-high vacancy, Akridge Chairman Chip Akridge said. He said D.C.'s taxes on office buildings pencil out to $20 per SF, and for comparison, he said office rents when he started building in the 1970s were around $7 per SF.
"Real estate taxes are triple what office rent was when I came to Washington," Akridge said. "It's expensive to do business in Washington, D.C."
As the Downtown D.C. restaurant industry has struggled to recover from the coronavirus pandemic, restaurateurs say the city's transportation system is adding additional challenges. Clyde's Restaurant Group President John McDonnell said hiring new staff has been difficult this year for a variety of reasons, but one of them is that workers have few options to get home after a late-night shift.
He said employees at the group's D.C. restaurants, including Old Ebbitt Grill, The Hamilton and Clyde's at Gallery Place, often work until after the Metro closes, and it has also become more difficult and expensive to hail a car with a ride-sharing app at that hour.
"That’s really been a big headwind for us staffing at night is there’s just not a lot of transportation solutions for employees right now," he said. "They don't have Metro late night, and it’s been impossible to get an Uber. That's affecting us. If the District can figure out something for transportation, that’d be beautiful."
End of Article
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