As Development Slows, D.C.'s Biggest Projects Are Being Counted On To Spur Momentum
As office projects stall and construction financing remains tricky, large mixed-use developments that include public investments have taken on a much greater role in the growth of the D.C. area.
That includes projects like the redevelopment of the Landmark Mall, a property that spans more than 50 acres in Alexandria, Virginia.
The 4M SF project picked up steam six years ago when The Howard Hughes Corp. bought the former Macy's store. In late 2020, Howard Hughes brought on Foulger-Pratt as a partner, and the team signed Inova to build a $1B hospital on the site. But even before those moves, Alexandria had been working on its vision for the site for two decades, said Jay Kelly, vice president of development at Foulger-Pratt.
The combination of a jurisdiction motivated to make a major redevelopment happen — in part by committing over $100M in infrastructure funding — and a development team with the patience to work through a lengthy entitlement process enabled the project to move forward despite the economic volatility of today’s market, Kelly said.
“The perfect storm came together,” Kelly said during a panel at Bisnow's D.C. Major Projects event at Comstock's Reston Station. “Alexandria showed real leadership in committing a sizable amount of public funding. The jurisdictions across Northern Virginia have shown real leadership in being able to invest into developments like this, like Landmark and other ones.”
Rachel Flynn, deputy county executive for Fairfax County, said that the development was right on the border with her jurisdiction, specifically the Lincolnia planning area, where she said she hoped to see "ripple effects" from the Landmark Mall megaproject.
What's more, Flynn said that pro-growth public officials in Fairfax County are interested in finding ways to work with developers to meet the vision set out in their master plan.
"I always say, 'What does the public sector need to do to help the private sector succeed?' We need you all to be successful, that’s how we all live well," Flynn said. "Thanks for all those taxes, by the way. The better you do, the more we get."
Groundbreakings in the D.C. area have slowed over the past few months, as rising interest rates and construction costs have hampered development. The number of construction cranes in D.C. remained flat at the end of the third quarter of 2022 as New York City, Chicago, Boston and six other markets saw their count rise, according to Rider Levett Bucknall, a construction consultancy that reports crane counts in 14 North American markets twice a year.
Part of that stagnation is due to a beleaguered office market, which is still facing record-high vacancy in downtown D.C. and in Northern Virginia. That has led to an office construction pipeline that Newmark described as the District's lowest in decades in its fourth-quarter office report. The story is similar for Northern Virginia's construction pipeline, which Newmark described as healthy but modest in the fourth quarter, with "recessionary pressures" ensuring that the pace of groundbreakings remains flat over the next year.
The market has turned sour for some developers hoping to build offices in the region today. But that hasn't stopped developer Comstock from moving ahead with its own spec office building in the second phase of Reston Station, Chief Operating Officer Tim Steffan said.
The difference there, Steffan said, is that the developer is delivering 500K SF of offices at roughly the same time as a JW Marriott, 450 residential units and 116K SF of retail.
It is an intentional strategy by Comstock, which is developing each major office phase of Reston Station largely on spec, then putting new debt on completed properties to finance the subsequent phase. Steffan said having a large, complex capital stack is essential to building in that manner.
Having that ability also allows Comstock to deliver high-end offices to a market where few other developers can, reducing competition for Reston Station Phase 2 when it delivers in the next two years.
"If you wait on the office and you wait for the tenant to come, they're going to wait for the hotel that's built, for the retail that's built, and you're going to have construction that goes on and on and on," Steffan said. “We'll be the only new supply delivering into the market.”
Large mixed-use projects are also taking shape in D.C. with the support of the public sector. At Buzzard Point, a team of developers that includes Akridge, National Real Estate Advisors, Blue Coast Capital and Bridge Investment Group is developing The Stacks, a 2M SF mixed-use project.
The development's first phase secured $367M in construction financing from Bank OZK in April. But Kristin Connall, vice president of development at Akridge, said pulling together financing for the project required some difficult deal-making in which the guaranteed maximum price agreed to between the developers and general contractor increased by 10%.
"We took a long time to master-plan our project, and so by the time we were ready to get a GMP, get bids, we were in this inflationary, price-escalation environment," Connall said.
Connall said the project is attracting more uses of its own: the joint development team is “on the precipice” of securing a hotel for the property. But she warned that “there’s tons of lingering impacts from Covid in the construction world.”
The District has stepped in to help certain projects like The Stacks overcome those impacts. Because the mixed-used development fits squarely within the goals of the Office of Planning’s long-term vision for the waterfront neighborhood, the Office of the Deputy Mayor for Planning and Economic Development worked with the development team to maximize density and ensure a mix of market-rate and affordable housing, Connall said.
Sarosh Olpadwala, DMPED's director of real estate, said that developing more public-private partnerships would be critical as the District works to meet its goals.
“We're not in the golden era of 2014 or 2015,” Olpadwala said. “We're in a new world right now where we really need to be thinking about how the government and the private sector can work together to solve these very systemic, very structural problems.”