Developers Call For More Help From Fairfax County As Costs Put Projects In Limbo
A construction project turning into a raging fire that could be seen on weather radars rarely represents a situation gone right, but Combined Properties was able to take just such a disaster and turn it into a positive lesson on public-private cooperation.
On the same day in February 2020 that the under-construction South Alex — a development planned to include 400 residential units, 41 townhomes and about 40K SF of retail — went up in flames, Combined was on the phone with Fairfax County to discuss ways to keep the project moving forward. Despite an arduous insurance claim process, the project rebounded, delivering four months ahead of its new schedule.
Aisha Hill, vice president of development at Combined, credits the developer's strong relationship with the county for the project's success.
"Doing things in a vacuum is not the way that we wanted to approach it," Hill said. "That really proved to be an amazing help for us after the fire."
The situation, Hill said, underscored the importance of meeting with the community and officials early and often in order to get a project across the finish line.
Today, with rent growth unable to keep up with skyrocketing construction costs, that type of partnership will be imperative to achieving the county's vision of a dense, modern transit corridor along Richmond Highway, developers said Tuesday at Bisnow's Fairfax State of the Market event at the Fairfax Marriott at Fair Oaks.
Ed Murn, managing director and head of development and residential at WashREIT, said rising construction costs and interest rates are making it hard to get started on the project his firm has planned on Richmond Highway, and he hopes the county will step in to help.
"It's a double whammy: your construction costs are up 20%, your capital costs are up, and you're not even sure if you have debt partners," Murn said. "I can't make my numbers work."
Fairfax County has taken steps to spur more development along Richmond Highway. It modified its land use plan across a 7.5-mile stretch of the corridor in 2018 to enable more than 15M SF of potential development near transit centers, starting with the Huntington Metro and continuing along planned bus rapid transit stops to Fort Belvoir.
But since that time, the pandemic and inflation have made projects that would add density to the corridor much harder to pencil, developers said. Meanwhile, the volume of mortgage borrowing and lending for commercial and multifamily properties is projected to drop 18% by the end of this year as interest rates rise dramatically and prognosticators debate when, if and why the country may be in a recession.
Murn said suburban properties were seen as early winners during the pandemic, but his urban assets in the D.C. area have since recovered more quickly. Meanwhile, the developer is experiencing economic pressures acutely as it attempts to restart its Riverside Apartments expansion project in Huntington. The project, planned to add 550 units to the site of an existing complex, has been in the works for at least five years.
WashREIT had its plans ready to go in 2020, and went to reprice construction costs at the end of last year, only to find that it would cost 22% to 25% more, Murn said. Meanwhile, the developer found rents in the area had only grown by 6% to 7%, limiting WashREIT's return on investment.
"Everybody hears these huge lease trade-outs of 15%, 20%, which is great, but what people forget is during the bottom of the pandemic, we were down 20% in rents," Murn said. "The growth of the rents are not covering the construction costs. So we need an incentive."
Fairfax County has been aware of the difficulties of development along its emerging Richmond Highway corridor for some time. In 2020, the county passed a 10-year tax abatement program that would waive the difference in pre-development and post-development taxes for projects in certain areas, including in Huntington.
But projects like Riverside, which had already been approved by the county, were not grandfathered in, said Scott Adams, a partner at McGuireWoods who heads its land use practice group. What's more, the tax abatement period is fixed to a specific 10-year window that begins in 2024 for Richmond Highway. If a project were to open after 2024, it wouldn't get the benefit for a full 10 years, Adams said. He said the county should create more flexibility for that window.
"I do think there are a number of shovel-ready projects, Riverside is one, that could benefit from that change," Adams said.
Despite the difficulties, Fairfax County still remains a draw for developers. The county saw strong job growth last year, thanks in part to the expansion of Peraton and Starkist’s corporate relocation to the county from Pittsburgh. And future transit, including not just the bus rapid transit line but also a refreshed Yellow Line and expanded Virginia Railway Express service, is still in the cards.
“The more you create critical mass to be able to connect on foot, by bike, by bus, connectivity to Metro ... will be critically important,” said Alex Iams, executive vice president of the Fairfax County Economic Development Authority. “We're not adding any land to this region. We've already seen projects be successful, there is a road map out there.”
Robin Bettarel, senior vice president of development for Hoffman & Associates, said the developer is still “bullish” on the county and the region at large. And it believes the success of new, mixed-use projects like its 9.5-acre West Falls development will inspire more density in areas of the county that were previously the domain of tony single-family homes.
“Fairfax County is one of the richest counties in the entire country,” Bettarel said. “I don't think that it is going to be seeing a huge dip from a recession when it comes.”