Regional Spotlight: Office and Mixed-Use Projects Drive Growth in the U.S. Mid-Atlantic

The first phase of the multibillion-dollar development the Wharf opened in Washington, D.C., in October. One of the largest active real estate developments in the District, the Wharf is a mile-long (1.6 km) waterside neighborhood that stretches across 24 acres (10 ha) of land and more than 50 acres (20 ha) of water. (Hoffman-Madison Waterfront)

After years of planning, the first phase of one of Washington, D.C.’s most ambitious projects, the Wharf, opened in October with restaurants and shops along cobblestone walkways, in addition to residences, offices, a live music venue, and public parks, all with dramatic views of the Potomac River.

“D.C. has 26 miles [42 km] of waterfront, but until now has not had a true waterfront community,” says Monty Hoffman, chief executive officer of PN Hoffman, the lead developer on the project in partnership with Madison Marquette. “With a mile of waterfront, the Wharf changed that. Others are recognizing this transformation and are investing in the area. It is very exciting to see development increasing as the Southwest D.C. resurgence continues.”

The Wharf is but one of the ambitious real estate developments planned, under construction, or recently completed along waterfronts in America’s Mid-Atlantic region, including Washington, D.C., Virginia, Maryland, and Pennsylvania. Others range from the revitalization of Harbor Point in Baltimore to new offices beside the James River in Richmond, Virginia, to luxury high-rises along the Schuylkill River in Philadelphia. Large developments are also planned in other major cities in Pennsylvania and Delaware.

Helping drive waterfront development and other real estate activity in the Mid-Atlantic are stable, and sometimes growing, economies. “Job growth in the Mid-Atlantic states over the next year is expected to keep pace with the national level,” says Hans G. Nordby, managing director of CoStar Market Analytics. “Supply growth is also, on average, in line with the U.S.”

Whereas no metropolitan area in the region is posting the kind of breakout employment growth that markets such as Dallas and Atlanta are enjoying, there are bright spots in the Mid-Atlantic region, particularly for office jobs.

“The bulk of these high-paying jobs are in the D.C. and Richmond markets, which posted gains of 2.5 percent and 5 percent year-over-year, respectively,” Nordby says. “Both D.C. and Richmond have benefited from strong population growth by millennials.”

Richmond has been adding millennials at nearly double the U.S. pace since 2010. “Some people find Richmond’s success in attracting millennials surprising, but a close examination of the city explains a lot,” says CoStar Richmond market analyst Max Peker. “Housing costs are very affordable, there is a sizable local university base, and the entertainment scene is vibrant. Companies such as Amazon, Capital One, Nestlé, Facebook, and CoStar Group have established footholds in the Richmond and D.C. markets.”

Joint venture developers PN Hoffman and Madison Marquette have begun pre-development on the second phase of the massive Wharf project and expect to break ground in late 2018, with a projected delivery of 2021–2022. (Perkins Eastman)

Washington, D.C.
One of the largest current real estate developments in the District, the Wharf, a mile-long (1.6 km) waterside neighborhood that stretches across 24 acres (10 ha) of land and more than 50 acres (20 ha) of water, is designed to appeal to locals and visitors alike. The Wharf’s first phase includes 2 million square feet (186,000 sq m) of mixed-use space that includes condominiums, apartments, offices, hotels, restaurants, retail space, a performing arts venue, and public parks and piers.

One difficulty experienced in the early days of the massive development was convincing people that the Wharf would be completed, recalls Hoffman. “Now, people see that the Wharf is transforming the way D.C. interacts with its waterfront,” he says. “We are bringing fun and excitement to this federal city with great food and entertainment on the waterfront—the hallmarks of the Wharf.”

PN Hoffman has already started predevelopment on the second phase and expects to break ground in late 2018 for a projected delivery date of 2021 to 2022, he says.

For developers, waterfronts are attractive because they offer large properties where many opportunities exist to create competitive and profitable ventures, says Stan Eckstut, a principal in the New York City office of Perkins Eastman, the architecture firm that planned and designed the Wharf.

“For any city on the water, it’s a chance to redevelop land that is typically available and often in need of major investments to overcome normal marginal and underdeveloped status,” he says. “There is a great need and desire, particularly among city dwellers, to enjoy open spaces and other natural resources, and waterfronts provide that in special ways.”

Paving the way for such new developments is Washington’s solid economy, built on a highly educated workforce and low volatility, thanks in part to the presence of the federal government.

“In the near term, we believe the defense, health care, and technology sectors will continue growing, which will positively impact sectors like hospitality in the long term,” says Anthony Balestrieri, director at MetLife Real Estate, based in the District. “We believe real estate investors will find strong relative-value opportunities under a variety of future possible economic scenarios.”

Also benefiting the D.C. region will be the extension of the Washington Metro system’s Silver Line to Dulles International Airport in Virginia from downtown D.C., expected in 2019. New Metro stations will also serve as a catalyst for new projects, such as the Boro in the Tysons Corner suburban community, which will create a walkable urban setting outside the District, says Balestrieri.

Above and below: Earlier this year, MetLife completed its renovation of District Center, an 820,000-square-foot (76,000 sq m) LEED Gold–certified office building near Metro Center in Washington, D.C. Newly signed tenants include Macfadden and FTI Consulting. (MetLife)
Within the District, MetLife Real Estate recently completed extensive renovations of District Center at 555 12th Street and the Fairmont Hotel, he said, and the firm recently completed the Insignia on M apartments in the Capitol Riverfront district.

Although at a slower pace than the market has enjoyed in the past, the government sector is expected to create jobs that drive demand for new office space, housing, and related development to support economic growth, says Mark W. Sharer, market executive for commercial real estate banking at Bank of America Merrill Lynch.

“The market has yet to identify that next driver of economic growth that will fuel development at a pace seen in prior years,” he says. “The upside to that issue is that lower economic growth could result in creating a development environment that is more sustainable and less reactive to negative economic cycles.”

While real estate activity in Washington continues, developers also are experiencing a more challenging environment for entitlements and approvals. “The contentious arena has become far more litigious,” says Adam Weers, a principal in Trammell Crow’s Washington, D.C., office. “As a result, the ability to successfully shepherd projects through the complex regulatory processes in our market is more valuable than ever.”

Though efforts by public and private sector leaders are in the works to find a fix for this issue, Weers says, “we’ve found it prudent in the interim to adjust our strategy and prepare for the longer and more expensive predevelopment periods that are now synonymous with these entitlements processes.”

Among the bright spots in the real estate sector is the market’s appetite for adaptive use.

A current example is the result of the ground-up development of Fannie Mae’s new headquarters building on the site of the former Washington Post headquarters, says Sharer. “Fannie Mae’s move, in turn, created an opportunity to redevelop their former headquarters into what potentially might be a mixed-use development of some combination of residential, retail, and office space,” he says.

In late 2016, Washington,–based Roadside Development, and its joint venture partner North America Sekisui House of Arlington, Virginia, purchased the 228,000-square-foot (21,000 sq m) former Fannie Mae headquarters and ten acres (4 ha) on Wisconsin Avenue in Washington. Roadside is working with local officials and community leaders on redevelopment plans.

Above and below: CAS Riegler Companies of Washington and the Washington, D.C., office of the Cooper Carry architecture firm reinvented the Mill in Alexandria, Virginia, a 226,000-square-foot (21,000 sq m) historic property in Old Town that was built in 1847 and originally served as a cotton mill. It now comprises 25 industrial, boutique loft apartments, as well as the Bottling House, a new seven-unit, 10,800-square-foot (1,000 sq m) condominium building. The redevelopment was completed in 2015. (Josh Meister Photo LLC)
Virginia

Across the river from the nation’s capital is another example of adaptive use, the Mill in Alexandria. Built as a cotton mill during the presidency of James Polk, the 226,000-square-foot (21,000 sq m) structure has been reinvented as 25 industrial, boutique loft apartments in the Old Town neighborhood by developer CAS Riegler and architect Cooper Carry’s D.C. office .

“Projects like this can help create blueprints for future developments that want to emphasize sustainable and restorative aspects in these types of buildings,” says project architect Brandon Lenk.

Like Washington, Virginia benefits from a sustained real estate market led by the government-contractor dynamic and balanced by private sector growth, including in technology centers.

“Northern Virginia has a disproportionate share of major corporate headquarters and the largest component of data centers in the world,” says Greg Riegle, managing partner of law firm McGuireWoods in its Tysons office. “While there may be an open question whether we will continue to see the federal government lease and occupy office space at the same rate, we anticipate the real estate industry in the northern Virginia area will remain strong.”

Office space and other real estate projects planned for the Tysons area, for instance, include 40 million square feet (3.7 million sq m) of mixed-use development. “The Inova Health System is growing and has acquired the 117-acre (47 ha) former ExxonMobil headquarters campus across the street,” notes Riegle. “Tourism and hospitality remain bright spots, with retail and business tourism drawing people to the area.”

CoStar Group, a leading provider of commercial real estate information, last year leased the top four floors in the nine-story WestRock building, overlooking the James River in downtown Richmond, Virginia, for its research operations headquarters. The company now leases 133,000 square feet (12,400 sq m) of space in the building. (CoStar Group)

Farther south, Richmond is attracting a diverse array of industries that appeal to millennials. While the roots of the city’s economy run deep in big tobacco—primarily from Altria Group, the parent company of Philip Morris USA, which continues to expand its downtown center for research and technology—more companies are relocating to the city. Earlier this year, CoStar’s global research headquarters became Richmond’s largest information company, adding 600 workers over less than six months.

Firms are relocating to the city’s downtown for the quality of life and to attract the millennial workforce, says Jane C. Ferrara, chief operating officer of economic and community development for Richmond.

“Many companies that left the CBD [central business district] years ago are now recognizing today’s workforce prefers to live and work in the urban areas,” she says. “The daily car commute is shortened, and employees are showing a preference for alternative ways of getting around, including bicycling and walking. This workforce also tends to gravitate toward living in areas with easy access to recreational and other quality-of-life activities.”

Among the companies making the move are CarMax, the largest retailer of used cars in the United States, which opened an office on Richmond’s riverfront, and Capital One, which purchased a former tobacco warehouse that is being positioned as a startup incubator in Shockoe Bottom, an area east of downtown along the James River.

In addition, “health care logistics company Owens & Minor wanted to consolidate its customer engagement functions, which were spread throughout the country, to downtown Richmond,” says Ferrara. The company leased about 90,000 square feet (8,000 sq m) of space at Riverfront Plaza.

Adapting real estate development to reflect generational shifts in the market is a key to continued growth in the area, says Ann Neil Cosby, a lawyer for Richmond-based McGuireWoods. “We are seeing millennials moving into the area to take advantage of job opportunities with innovative companies like CoStar and other startups that the area is fostering,” she says.

Richmond’s introduction of its new Pulse rapid bus system is expected to drive transit-oriented development with higher densities and vertical mixed-use and infill development.

“Cranes are currently a fixture on Richmond’s skyline,” Cosby says.

Dominion Energy is constructing a 20-story tower that will include over 900,000 square feet (84,000 sq m) of office and retail space, he notes. In the Manchester district across the James River, Thalhimer Realty Partners is developing in five phases the 17-acre (7 ha) City View Landing mixed-use development, which at completion will comprise 370,000 square feet (34,000 sq m) of office space, 550 residential units, and 50,000 square feet (4,700 sq m) of retail space.

The eight-story, 103-unit Nelson Kohl, a market-rate apartment complex, is under construction in Baltimore’s Station North neighborhood. A project of SA+A Development and Ernst Valery Investments, the $21.5 million development is expected to be completed this March. (Be | The | To Studios)

Maryland
Millennials are also driving development in Maryland and reviving once-moribund residential districts.

“Not long ago, many of Baltimore’s neighborhoods had high vacancy rates, but expanding job markets are attracting more and more residents, particularly millennials,” says Joshua E. Neiman, principal at Baltimore-based Hybrid Development Group, which specializes in urban mixed-use development, historic redevelopment, and transit-oriented development. “Each of [Baltimore’s] 190 neighborhoods has a different feel, but are all connected. Millennials really like Baltimore and are coming here in droves.”

In the past, much of the region’s economic development focused on the Inner Harbor. While that type of development is still occurring, real estate activity is spreading to other neighborhoods, including Station North, Greenmount West, Hampton, and Remington—districts that are “authentic, with the right mix of grit and charm,” Neiman says.

SA+A Development and Ernst Valery Investments (EVI) are building the eight-story, 103-unit Nelson Kohl, a market-rate apartment complex in Baltimore’s Station North neighborhood adjacent to Penn Station, he notes. The $21.5 million multifamily development, expected to be completed in March of this year, is among the first major developments in Station North after it was designated a city arts district in 2002, he adds.

“Eds and meds”—educational and medical facilities—remain the backbone of the Baltimore economy. CoStar senior market analyst Chris LeBarton notes that Johns Hopkins University and Johns Hopkins Hospitals and Health Systems is the city’s top employer with about 45,000 people, followed by the University System of Maryland and Maryland Medical System, with 19,000 employees, and MedStar Health with 6,000.

“Cybersecurity is a burgeoning sector, too, with nearby Fort Meade home to the National Security Agency—the center of the nation’s cybersecurity effort,” LeBarton says. In 2005, Fort Meade had about 33,000 employees, and now it has about 52,000—twice the number of workers at the Pentagon, he notes.

The area is also seeing the continuing redevelopment of Port Covington and Harbor Point, says Neiman.

Baltimore’s 27-acre (10.9 ha) mixed-use waterfront development Harbor Point is expected to have more than 3 million square feet (279,000 sq m) of mixed-use development. It is projected to be fully built out by 2027. (Beatty Development Group)

Sagamore Development, a private real estate firm owned by Under Armour chief executive officer Kevin Plank, is seeking to transform 235 acres (95 ha) of the former Port Covington industrial site into a master-planned, mixed-use redevelopment project. Upon completion, the 25-year project—one of the largest urban renewal efforts in the country—will include up to 18 million square feet (1.7 million sq m) of new mixed-use development, 2.5 miles (4 km) of restored waterfront, and 40 acres (16 ha) of parks and green space.

The 27-acre (11 ha) Harbor Point, a mixed-use waterfront development east of the growing Harbor East neighborhood, is billed as one of the last substantive undeveloped stretches of land along Baltimore’s Inner Harbor.

For nearly 150 years, the site was occupied by Allied Signal’s Baltimore Works facility, the world’s largest processor of chrome ore.

After a $110 million remediation in 1999, Baltimore’s Beatty Development Group began developing the site, completing the first building, Thames Street Wharf, in 2010. That was followed in 2016 by energy company Exelon’s regional headquarters, which has a 65,000-square-foot (6,000 sq m) trading floor.

Also at Harbor Point, a 289-unit multifamily residence, 1405 Point, is under construction and expected to be completed in the first quarter of 2018, followed by Wills Wharf, a 225,000-square-foot (21,000 sq m) office building, and a 156-room Canopy by Hilton hotel expected to be completed in mid-2019.

Harbor Point is slated for 3 million square feet (279,000 sq m) of mixed-use development and is projected to be fully built out by 2027.

One major issue facing the real estate sector is taxes, says Neiman. “Property taxes in Baltimore City are two times what property taxes are in any surrounding jurisdiction,” he notes. “Property tax breaks are still available, but they burn off over time. If you build over 20 multifamily units, you get a phased-in tax break, but after ten years it disappears.”

Construction continued in the fourth quarter of 2017 on Delaware biopharmaceutical research company Incyte Corporation’s four-story, 154,000-square-foot (14,000 sq m) office building on Incyte’s research and development lab campus near Alapocas, Delaware. The new office headquarters will be connected by a covered walkway to the parking garage, which will feature a green area on the roof. (Apex Realty Advisory)

Delaware
Delaware, too, is facing challenges as it moves from being a large corporation–based economy to a more entrepreneurial and technology-related one. The economic gyrations over the past 15 years from chemical concerns spinning off companies and merging and from cutbacks at financial firms came to a head this year with the union of Midland, Michigan–based Dow Chemical Company and E.I. du Pont de Nemours & Company of Wilmington.

“The merger is part of the local progression,” says Jay L. White, president of Apex Realty Advisory in Wilmington.

“The good news is that Chemours Company, a Wilmington-based chemical company spinoff from DuPont in 2015, has announced its headquarters will be in the Wilmington CBD, keeping nearly 700 employees.”

Delaware’s commercial real estate fundamentals are steady, with no overbuilding, White adds. “There is nothing else on the horizon that would impact significantly commercial markets overall,” he says. “Delaware is very business- and tax-friendly, with no sales tax and nominal property taxes.”

Over the past decade, Delaware’s economy has made the transition away from manufacturing, although jobs in the trade, transportation, and utilities industries still make up the biggest collective piece of the state’s economic pie.

“Wilmington has tons of office, financial sector, and legal jobs,” says LeBarton. “Dover has three industries: government, government, government.”

The University of Delaware (UD) is the major employer in Newark, he notes. In that city, the Delaware Technology Park—a state, university, and private sector partnership—is in growth mode, and the university’s Science, Technology, and Advanced Research (STAR) Campus is expanding, with a ten-story, 120,000-square-foot (11,000 sq m) office tower under construction and slated for completion in August 2018.

Other major office developments in the Wilmington area include biopharmaceutical research company Incyte Corporation’s 154,000-square-foot office (14,000 sq m) building, and CSC Corporation’s recently completed 150,000-square-foot (14,000 sq m) office tower.

On the residential side, the Wilmington-based Buccini/Pollin Group (BPG) is the driving force behind most of Wilmington’s recent multifamily deliveries. Currently under development is the $75 million, 200-unit Residences at Midtown Park, the first major residential project in the CBD not on Market Street, says LeBarton. The development began site work in June 2016 and is expected to be completed by summer 2018, he adds.

Among the major projects planned in the Philadelphia area is Brandywine Realty Trust’s Schuylkill Yards, with 7 million square feet (650,000 sq m) of new vertical development. The Philadelphia-based real estate investment trust broke ground on Drexel Square—a 1.3-acre (0.5 ha) park at the corner of 30th and Market streets—in November 2017. Schuylkill Yards includes the reimagining of the George Howe–designed Bulletin Building. SHoP Architects and West 8 Landscape Architects completed the Schuylkill Yards master plan. (Brandywine Realty Trust, SHoP Architects, West 8 Landscape Architects)

Pennsylvania
A robust economy in the state’s two biggest cities, Philadelphia and Pittsburgh, is driving diversification and development in Pennsylvania.

In Philadelphia, the Center City and key suburban markets are experiencing a renaissance. The downtown core and some suburban submarkets have been historically underinvested and underserved by multifamily development, but that is changing, says Leo Addimando, managing partner of Philadelphia-based developer Alterra Property Group.

“A lot of the new multifamily building in this market was needed just to catch up with demand,” he says. “The ever-growing supply of new upscale multifamily has put some pressure on rent growth, but things seem to be in relative balance between supply and demand. Barring some global political or macroeconomic event, I don’t see any signs of a material slowdown in the short or medium term.”

Alterra is partnering with MIS Capital and Kimco Realty to develop Lincoln Square, which spans an entire block downtown and features a 550,000-square-foot (51,000 sq m) mixed-use building with 323 apartments and 70,000 square feet (6,500 sq m) of retail space. “Lincoln Square, set to deliver in the 2018 second or third quarter, will transform the intersection of Center City and South Philadelphia and further propel the development of the Avenue of the Arts/South Broad Street,” Addimando says.

“Tourism also continues to grow steadily, and that has helped to stimulate more hotel development, with 1,500 to 2,000 hotel rooms currently in development,” he says. “The eds and meds sectors are one of the strongest and most consistent drivers of the Philadelphia economy. The city’s burgeoning tech community continues to expand, led by the continued growth and expansion of Comcast, creating jobs, demand for office space, renters for multifamily buildings, buyers for condos, and shoppers for urban and suburban retail.”

During the summer, Dranoff Properties, led by local developer Carl Dranoff, chief executive officer, completed One Riverside along the Schuylkill River. It was the first condo high-rise in seven years to open in Center City. Ninety percent of the units in the building are sold; most of the buyers are baby boomers eager to leave their big yards and houses in the suburbs for an urban lifestyle and waterfront views.

At the same time, Philadelphia continues to add jobs and to benefit from the influx of people who want to live and work in the city, says Paul Commito, senior vice president for development at Brandywine Realty Trust, which is based in the city. That, in turn, is spurring real estate development.

Brandywine has secured zoning approval for the first phase of Schuylkill Yards, with 1.3 million square feet (121,000 sq m) of new vertical development; the reimagining of the George Howe–designed Bulletin Building; and development of Drexel Square, a 1.3-acre (0.5 ha) park at the corner of 30th and Market streets.

“SHoP Architects and West 8 Landscape Architects, who completed the Schuylkill Yards master plan, have stayed on to design Drexel Square,” says Commito. “Brandywine expects to break ground on the park later this year.”

Though demand remains strong across most asset classes, Commito cautions that developers always need to be cognizant that real estate is cyclical.

“As investment and development flows into hot asset classes, and supply accumulates and the pipeline gets robust, smart developers have a knack for switching gears and either selling completed assets, redirecting their investments to higher growth areas, or identifying new opportunities,” he notes.

Construction costs have escalated rapidly and are a primary challenge facing developers of new projects. “Our experience suggests that costs for large-scale projects are up at least 20 to 25 percent over the past 24 to 36 months,” says Addimando. “Others would argue that they have escalated even more. This is not a Philadelphia-specific problem, but the situation is likely more acute here than in other markets.”

One of the latest additions to Pittsburgh’s skyline is Burns White Center, a 110,000-square-foot (10,000 sq m) building along the Allegheny River in the Strip District neighborhood. Designed by WTW Architects of Pittsburgh, with interiors by Gensler of New York City, the center is the headquarters of law firm Burns White and a project of local real estate firm Oxford Development Company. Built to LEED Silver standards, Burns White Center was completed in March 2017. (Mark Grasso, Oxford Development Company)

To the west, Pittsburgh’s steady economy and stable real estate sector are attracting increased international interest.
“Investors are being enticed by the growth of our rental markets because our real estate dynamics are different from other markets,” says Jeff Burd, founder of Tall Timber Group, a locally based consulting firm focused on the commercial and residential construction sectors.

Powering the Pittsburgh real estate market is a diversified economy. The city is home to banking giant PNC, as well as growing health care and higher-education sectors, including the University of Pittsburgh Medical Center, a $16 billion integrated global nonprofit health enterprise that has 80,000 employees and more than 30 hospitals.

Pittsburgh is also a hotbed of technology. In February, Ford Motor Company invested $1 billion in Argo AI, an artificial intelligence company based in the city. “In addition to Argo AI, Google is here with a big presence, and Uber’s autonomous vehicles are tested in Pittsburgh,” says Burd.

While new industries are welcome, the area faces a recurring challenge: “We’re an older city and most of the flat spaces were built out long ago,” Burd adds.

“Because of the topography, we really can’t comfortably expand without a significant infrastructure upgrade and expansion. We have the same infrastructure—the same number of lanes on the turnpike and the same highway system—which is not great for moving things around. So expansion is a challenge.”

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