Washington, D.C.'s market is strong despite the perceived slowdown in the national and regional economy. In fact, according to industry experts, Washington has the strongest appeal to investors -- even for Class B office space.

The real estate market remains healthy as the attraction for a location in the District perpetuates amidst businesses and residents alike. There is a renewed vitality that crosses several sectors of the city and industry with a focus on mixed-use, retail and entertainment, multifamily and hospitality projects. In the downtown core alone, there is an estimated $6.3 billion of new development currently under construction.

Real estate investors are rapidly acquiring the building inventory, even outbidding each other in an attempt to secure a position in what is considered to be one of the most stable real estate markets in the country. The aggressive acquisition climate can be attributed to several key factors. There is a limited building stock as D.C. has a defined landmass with no opportunity for annexation and an extremely aggressive height limit. Consequently, available and potential sites have significant value.

Office

The office vacancy rate is at 4 percent, which is extremely low compared to the national average estimated just under 12 percent. Rents for both Class A and B space have been steadily rising since 1998. For some of the best locations, current rents for Class A buildings are moving upward to $60 per square foot. Average rents are at $37.45 per square foot for Class A space and $31.45 per square foot for Class B (source: Co-Star).

The low vacancy rate has created a demand for new space, not just in new buildings but also through conversions of existing space. The former Woodworth & Lothrop Department store located in the heart of downtown at 11th and F streets has been redesigned as a mixed-use project with three floors of retail (currently in negotiation with a department store) with office on the upper floors. Another renovation is the old Hecht's department store and four other historic buildings at 7th and F streets, in the budding east end. The 478,000-square-foot project will be the new headquarters of Venable, Baetjer, Howard & Citiletti, a regional law firm. A key component of the project is the condominium conversion of a 10-story commercial structure. Conversion projects represent a significant trend along 7th Street, a corridor that is steadfastly emerging as a 24-hour environment comprised of residential, office and a hybrid of retail and entertainment spaces.

Why is D.C. continuing to capture such a strong level of interest and investment? Investors and developers nationwide, as well as the local community, have finally recognized the assets and opportunities for investment that have remained dormant for years. There are numerous submarkets now ripe for repositioning, which is where the development is focused.

Multifamily

Bidding wars similar to those that have occurred in the office market are ongoing in the residential market for both single-family and multifamily properties. The demand for housing in the city is at an unprecedented level -- 4,000 to 6,000 units of new residential are planned in the downtown area, and other projects are taking off in neighborhoods of all demographics across the city. Prices have more than doubled in certain neighborhoods. Rental rates are strong and touted by some to be the highest in the mid-Atlantic area -- exceeding $1.75 per square foot. In order to meet demand and capture the market, developers are assembling sites that often require creative solutions previously not considered.

Retail

The expanding residential base, which includes several new projects such as Camp Simms, a 20-acre project in Southeast Washington, Harrison Square, a 98-unit project one block north of the U Street Metro -- off the historic U Street commercial corridor, and Fort Lincoln New Town, a new residential development in Northeast, are fueling an aggressive demand for retail space, not merely in downtown but along many of the city's commercial corridors. During the past 24 months over 1.8 million square feet of retail space has been leased in the District and an additional 3.6 million square feet of space is currently under construction and/or planned. The retail market is strong; the current vacancy rate is merely 8.3 percent, lower than national averages.

Traditionally strong retail areas such as Georgetown are growing even stronger. A project representative of this growth is Cady's Alley, which is being developed by EastBanc. This comprehensive project will transform over two dozen historic properties and two surface parking lots into an architecturally striking development of approximately 140,000 square feet of contiguous retail/showroom space, 118 parking spaces in a three-level underground garage and an additional 10,000 square feet of innovative residential space. The project is anchored by a 22,700-square-foot Baker Furniture location. Located in the 3300 block of M Street, the project is at the western most exposure of Georgetown and will include apparel stores, designers, furniture manufacturers and home decorating stores.

Retail development is an economic priority for the District, as many of the city's neighborhoods are under-retailed. Potential retail sites are being strategically targeted toward existing traffic corridors and metro sites to take advantage of existing and strengthening densities.

The potential for success is plentiful, and as a result there is tremendous interest from retailers of all types. An estimated $83 million in retail sales leave the city each year, and strong cash economies exist in the neighborhoods that have been overlooked for decades. Many neighborhoods feature properties ripe to capture new development, of both vacant sites and underutilized properties.

The first new shopping center to be built in the District in several years is located on the site of a former city-owned impound lot and includes a 118,000-square-foot Home Depot and a 106,000-square-foot Kmart. These are the first large-scale retailers to locate in the District. The third tenant on the 23-acre site will be Giant Food with a 52,000-square-foot store. This project will put back in service a piece of real estate that was considerably underutilized.

Grocery stores and grocery-anchored centers are still in demand and succeeding. A new 48,000-square-foot Fresh Fields opened in the fall of 2000 in a neighborhood experiencing a rebirth, and has prevailed as the company's most successful store in the region with sales consistently rising.

Likewise, new restaurants and apparel stores are emerging across the District; a new restaurant has opened up every month in downtown for the past 36 months. The first sit-down restaurant opened on Georgia Avenue NW this past July. The 7th Street corridor also emerged as host to a number of restaurants in the past 18 months, including Ruby Tuesday, Legal Seafood, Fido's and Starbucks. This street has strong pedestrian and traffic counts in part due to its proximity to the museums and the MCI Center. Madison Retail Group recognized the potential for family style restaurants such as Fuddruckers and Ruby Tuesday and brought them into D.C.

Hospitality

Another principal catalyst for new investment activity in the District is the new convention center. The 2.3 million-square-foot center at Mount Vernon Square (March 2003), which incorporates a metro station, will be one of the largest exhibition facilities in the country. The new convention space has spawned considerable investment in downtown and in the area just north of Massachusetts Avenue known as NoMa. Development includes several new hotels and the renovation of many existing ones. And though D.C. already enjoys a strong tourism market with an estimated 25 million tourists and business visitors per year, the demand for hotel rooms is expected to dramatically increase.

Creativity in hotel design and development is abounding with limited sites available, including two adaptive reuse projects. One such example is the Old Post Office at 13th and Pennsylvania Avenue. Having housed office and retail space for the past two decades, the old Post Office never realized its full potential, particularly for retail. This property is now planned for redevelopment as a 220-room hotel. The former Tariff Building, an historic property at 781 E Street NW, is undergoing a conversion to a 180-room Kimpton Hotel. Neither is suitable as a designated convention hotel, but both are expected to be highly sought by conventioneers, due to their unique configuration, design and location. Several other hotels have recently opened or are in various stages of design and construction that will provide D.C. over 3000 new rooms by 2003.

Maximizing the Metro

Density is fast becoming a priority in the District. And as traffic and congestion dramatically increase, sites near metro stations are now being aggressively sought after. The region has one of the best public transportation/ metro systems in the Country, with sites strategically placed (and planned) to capture current and potential growth. Location above or adjacent to a metro station allows developers to achieve maximum density while simultaneously minimizing parking requirements; and offers an opportunity for the public and private sector to achieve regional smart growth objectives.

Gallery Place is one of the best examples of how this synergy can work. This 520,000-square-foot development combines commercial, retail and entertainment and residential uses and, similar to the Convention Center project, incorporates the local metro site into the project.

Other projects are being sited to take advantage of and maximize the benefits these stations provide. One such project is located at 4500 Wisconsin Avenue NW. This is the site of former Sears and Hechinger's department stores and is in the final stages of redevelopment. The concept for the building is also designed to take advantage of its location adjacent to a well traveled metro station that will minimize the need for additional parking, but perhaps more importantly, will allow a level of accessibility unavailable at other retail sites.

These metro sites are critical to the future of the District as it has extremely limited land holdings with no ability for expansion. As development moves out of the core, these sites become increasingly important -- particularly those located along the main thoroughfares and gateways to the city.

The District had developed an excellent working partnership with the Federal Government and the Washington Area Metropolitan Transit Authority to take advantage of these opportunities. Another project, the new headquarters of the Federal Alcohol, Tobacco and Firearms building, which is just about to start construction, was deliberately sited adjacent to a planned metro station (now under construction), and both efforts have fueled further investment along this corridor.

It is this type of strategic planning that is allowing D.C. to develop in a manner that is ideal to support future growth and demand. Additionally, the demand for space in D.C. is holding strong.

Richard Lake is managing principal and Eric Rubin is principal of Madison Retail Group in Washington, D.C.


©2001 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.