Vacant Sites Flooding The Market As D.C. Construction Stalls

For many years, the D.C. development landscape was defined by cranes dotting the skyline. Those days are gone, leaving many sites that were once planned for development sitting vacant. 

And as these sites languish, with developers unable to begin construction, longtime owners are starting to give up on them. 

A ramp-up in interest rates, inflation, supply chain and labor issues, and banks pulling back on real estate lending all contributed to a construction slowdown nationwide.

In D.C., the slowdown was more like a grinding halt. Over the past three years, just two office buildings have started construction, and on the multifamily side, the city experienced a 79% drop in starts last year. 

This construction cooldown came after a period when money was cheap and developers were giddy about building new multifamily. Many projects that were conceived during those optimistic years remained unbuilt, and as they languish, these sites have been burning holes in developers’ and lenders’ books.

Now, more developers are either deciding to give up on these properties and put them on the market — or being forced to give them up by their lender. 

“For certain projects, both the capital sources and the developers have reached an inflection point where the former plan is no longer viable, and they need to do something with the asset,” Mac Realty Advisors Executive Director Andrew McAllister told Bisnow.

This summer, JBG Smith sold a NoMa site it had owned for more than a decade that was slated for a 475-unit development.

In the spring, Newmark began marketing a 3.1-acre lot at the former Sursum Corda housing development, entitled for up to 683 units, on behalf of the owners, Toll Brothers Apartment Living and L+M Development Partners. 

Grocery chain Lidl brought to market a 2.3-acre Crystal City site approved for two office buildings after it didn’t find any interested developers. Cohn Property Group is marketing it as a multifamily opportunity. 

Feldman Ruel is marketing a parcel next to the Congress Heights Metro station, which is approved for a 227K SF office building with 9K SF of retail. 

A site approved for 92 units of senior affordable housing near the National Arboretum was just purchased by a new development team after the previous owners abandoned the plans, citing elevated interest rates, the Washington Business Journal reported.

Additional development sites have come to market in Shaw, Tenleytown and near the Waterfront Metro station. 

Although each scenario is different, similar undercurrents run throughout. Developments that were planned before the pandemic or in its early years don’t pencil like they once did. It has become cheaper to acquire properties than to develop. And getting construction financing is difficult: Banks are more selective about commercial real estate investment while at the same time increasingly offloading nonperforming loans from their books.

“There's been a slow drip of properties being sold, foreclosed on, coming to market,” said broker Marty Zupancic, head of Marcus & Millichap’s Zupancic Group. “From our standpoint, the last six months, we've seen a huge uptick in banks making decisions to like, ‘OK, we're foreclosing now. We need these off the books.’”

As these sites come to market, they are meeting an increasingly interested pool of buyers willing to reimagine their future. 

“Now we're starting to see an increase in the number of developers that are looking to get back into the space,” said Feldman Ruel Managing Principal Ian Ruel, whose investment sales brokerage is marketing about a dozen development sites.

Those developers tend to be smaller development shops backed by private money, he said, and they are increasingly interested in taking chances for the right basis.

“And so maybe it doesn't work for one developer and they want to transact, they want to get out,” Ruel said. “But we are seeing more interest over the last few months in these opportunities than we did six, nine, 12 months ago.” 

Over the years, Feldman Ruel has found a niche in marketing properties where owners made the business play of buying raw land and entitling, zoning or permitting the site to sell it at a premium. 

Now, the brokerage is seeing an increasing number of developers who were once planning to build on a site themselves but have changed their minds and are pivoting to sell. 

“Either A, the developer doesn't have the desire to do the project personally, or they can't find the capital, they're playing triage on other projects, and they don't have the mental bandwidth, the financial bandwidth to bring in another project,” Ruel said. 

Feldman Ruel was brought in to market a Laurel, Maryland, site where the developer, Chevy Chase-based New Legacy Partners, had been planning to build a 73-unit multifamily building with retail. 

The conceptual plans were first approved in 2020, but three years later, it was no longer feasible and the developer decided to sell. It went to market in August 2023.

Feldman Ruel tried to sell the original vision but couldn’t get interest. It ended up going under contract with an affordable housing developer that was able to make different plans work.

“That's a little bit a sign of the times: a market-rate developer that had a very nice site in a decent area, that worked as a market multifamily, mixed-use project, that has had to pivot to somebody that had a different execution and a different funding source,” Ruel said.

The properties that are being publicly marketed on behalf of the owner are just the tip of the iceberg, brokers said. Many development sites that have been stalled are having their lender foreclose on them or sell the note.

When lenders are looking to remove distressed loans from their books, development sites are often some of the first to go.

“When the regulators look at their balance sheet and their loan portfolio, they really hyper-focus on land loans that are unimproved or underimproved,” McAllister said. “And that gets a lot of attention, and it causes internal angst with the bank. They want to move those off the balance sheet now.”

And the longer they sit, the more of a drag they become, garnering no income but still draining funds with expenses like property taxes.

As the stress has built up, properties are coming to market more and more.

This fall, EagleBank took to foreclosure auction an NVCommercial-owned development site next to The Boro that was entitled for two office towers totaling 700K SF. 

The lender took control of the parcel for a value of $14M, according to Fairfax property records filed in September. 

The bank is now trying to sell the property with CBRE, Randy Harrell, a vice chairman with the brokerage, told Bisnow. He said that based on the interest it has generated, it is likely to be contemplated as multifamily rather than the original vision for office. 

Given the changes in market fundamentals, changing the plans on the site is often the only way for properties to move forward, brokers said. 

“There's a lot of like, all right, that those schematic plans or those architectural plans worked in a different environment, but now I've got to come in and I've got to reprogram everything for 2025, given current market conditions,” Ruel said. 

Newmark was likely thinking along those lines in its marketing of the Sursum Corda site. Although the site is entitled for 683 units, the brokerage’s marketing materials suggest a buyer could instead move forward on a more cost-effective 536-unit development, allowing a stick build rather than concrete, according to a brochure obtained by Bisnow.

And developers are increasingly willing to grapple with taking those chances if the fundamentals are right. 

July Residential founder Isaac Pinto, who purchased JBG's NoMa site for $11M this summer, told Bisnow at the time that the pricing reached a point where it made sense. The nearly acre lot had an assessed value of $26M.

“This is the first time you see a strong price adjustment and a reset in a form that really allows you to step in and create some interesting opportunities,” he said.