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Developers Concerned About Multifamily Overbuilding In Reston And Tysons

The Fairfax County submarkets of Reston and Tysons, both emerging areas boosted by the opening of Metro's Silver Line, have pipelines full of new apartment construction. Several top developers, speaking Thursday at Bisnow's Fairfax County State of the Market, worried they might be building too many rental units. 

Boston Properties' Pete Otteni, JBG Smith's Greg Trimmer and Comstock's Chris Clemente at Bisnow's Fairfax County State of the Market

JBG Smith Executive Vice President of Development Greg Trimmer said apartment rents in Reston are flat, and in some cases slightly negative, due to the amount of new multifamily construction. But he said the problem is worse in Tysons, where millions of square feet of development is underway around its four Silver Line stations. 

"In Reston we're a little sick, but Tysons is in hospice in terms of the glut of apartments," Trimmer said. "They've way overbuilt." 

The region's largest developer, JBG Smith has about 700 units planned in Phase 2 of RTC West, a major mixed-use project it is building in between Reston Town Center and the future Silver Line stop. At the Wiehle-Reston East station, the last stop of the Silver Line's completed first phase, JBG Smith has a 1.6M SF development, dubbed Midline, in the planning stages. That project, in partnership with EYA and Chevy Chase Land Co., calls for over 1M SF of residential development. Last week, the developer retained CBRE to seek buyers for another Wiehle-Reston East development site it owns, an 11.5-acre site that has received approval for 500 residential units. 

Trimmer still believes Reston is positioned well in the long term to become a successful multifamily environment, but it may be a bumpy road to get there.

"I think it's a blip," Trimmer said. "In the long term we're set up well, but right now we do have a bit of a problem." 

Famous architect Helmut Jahn, who designed Reston Station's first office building, and Comstock CEO Chris Clemente in the building's lobby

Comstock Partners last year completed BLVD, a 448-unit apartment building at Reston Station, the major mixed-use development in the works at the Wiehle-Reston East station

The units at BLVD did not lease up quite as fast as Comstock had projected, CEO Chris Clemente said, and the building did not achieve the rents it expected. Clemente attributes that, in part, to a poor leasing effort.

Once he replaced the original property management firm, Greystar, with Seattle-based Avenue 5 Residential, he said activity picked up and it is now 95% occupied. (Greystar could not be reached for comment.) But the rents have still not reached the level he hoped they would. 

"Rents are not where we would like them to be," Clemente said. "I think a lot of that has to do with the lack of understanding of what this neighborhood here is going to be. The new residential buildings will benefit from that lifestyle that only comes when you have a more complete environment."

A model of the full Reston Station development, planned around the Wiehle-Reston East Silver Line stop, on display at Bisnow's Fairfax County State of the Market

Comstock is completing the finishing touches on 1900 Reston Metro Plaza, the 16-story spec office tower that hosted Thursday's event on the top floor. The next two components, also office buildings, could also break ground on spec next year. The next residential piece Comstock has planned is 500 units in its Promenade at Reston Station development, a mixed-use development on a low-rise office complex it acquired last year. That project is still going through entitlements and Clemente hopes to break ground by mid-2019. 

"I think there is an oversupply in some places," Clemente said. "Reston certainly has a number of projects coming online." 

Walsh Colucci's Andrew Painter, Cooper Carry's David Kitchens, Boston Properties' Pete Otten, JBG Smith's Greg Trimmer, Comstock's Chris Clemente and Bozzuto Development's Mike Henehan

Also at the Wiehle-Reston East station, Bozzuto recently delivered Aperture, a 421-unit apartment building. Bozzuto Senior Vice President Mike Henehan said Reston is not alone in welcoming a glut of new apartment buildings, and said the supply surge is becoming the "new normal" across the region. Still, he said Bozzuto has achieved annual rent increases of 1% to 1.5% across its Reston portfolio. 

"There is still some rent growth in this market," Henehan said. "It certainly doesn't keep up with construction costs and some of the other costs, so I think there will be a little resistance there over time. But there is plenty of demand in the market for well-executed, well-located projects." 

Walsh Colucci's Sara Mariska, MRP Realty's John Begert and Foulger-Pratt's Bring Bunker

MRP Realty principal John Begert said rents have increased modestly in MRP's Fairfax County portfolio by 0.5% to 1% over the last year.

Tysons is the most challenging part of the county to launch new apartment projects right now because of the supply it has already in the pipeline, Begert said. MRP is currently working on an apartment deal and a for-sale condo deal in Tysons, and he said the latter has been much easier to finance. 

"We have an investor excited in the for-sale side, which feels good," Begert said. "The apartment does not. It's hard. It's a great product in a pretty good location, I just think for the investors that we work with, it's a very hard market to think of as a trader's market." 

Begert said he is optimistic about the area's future, but does not expect to see notable rent growth in Tysons over the next three to four years, making it difficult to underwrite new apartment projects. 

"If you're a family office or you have patient capital, in 10 to 12 years you're going to love it," Begert said. "But to try to see legitimate rent growth soon, I think you're kind of fooling yourself." 

Jefferson Apartment Group's Greg Van Wie, First Washington Realty's Alex Nyhan and Combined Properties' Katherine Bonnafe

One developer that is building apartments with a long-term strategy is Combined Properties. A large owner of shopping centers in Fairfax County, Combined has recently begun redeveloping those retail sites to mixed-use developments with rental components. 

As the company seeks financing for two of those projects, Combined Properties CEO Katherine Bonnafé said lenders and investors have gotten more hesitant over the last two years to fund new apartment construction. She still expects to break ground early next year, but due to the difficult financing environment and stagnant rent prices, she said the expected returns on those projects have narrowed since planning began.

"We're a long-term holder," Bonnafé said. "If we can get enough term on our loans then we feel we can lease out no matter what the rental market is at the time. For us, we look at these assets as 20- or 30-year holds. In the long term, investment in Fairfax County is strong."  

Jefferson Apartment Group development partner Greg Van Wie said there is some concern about pockets of oversupply around Metro stations in Tysons and Reston, but he believes overall housing demand in the county is strong. JAG recently delivered a 270-unit affordable housing project in Fairfax. He said it has reached full occupancy in six months and has a 1,300-person waiting list. 

"There is plenty of demand out there for multifamily housing," Van Wie said. "But I think affordability is a big concern. The depth of renters willing to pay $3/SF to be next to Metro, I think we're starting to see the end of that."