Outside of Northern Virginia, a weak economy and excess capacity are dampening demand
- November 30, 2011
Today, 1812 N. Moore St. in Rosslyn is barely more than a hole in the earth. A massive crane, though, perched atop layers of underground concrete hints at what’s to come. When construction is finished in mid-2013, this site will be home to the tallest tower to rise in Northern Virginia in years.
In fact, at 35 stories and 390 feet with a pyramid-shaped top, the $300 million project will be the tallest office tower in the entire region, according to its developer, New York City-based Monday Properties. It will offer expansive views across the Potomac River toward Washington, D.C., the highest sustainable building standard (LEED platinum) and 580,000 square feet of space.
At this point, the project is speculative, with no tenants. But that doesn’t slow the enthusiasm of Audrey Zale Cramer, vice president of Cushman & Wakefield, the project’s leasing agent. “Everybody is going to be dying to get into this building. There’s not anything else like it.”
Northern Virginia’s resilient economy is proving its strength in commercial real estate, with a fair amount of development under way. Yet across Virginia, an uncertain economy and excess capacity in some markets are dampening demand for new commercial projects.
That trend is evident in construction hiring, which is down 2.6 percent statewide to 178,200 workers for the 12 months ending in September, according to data from the Arlington County-based Associated General Contractors of America. That translates into 4,800 fewer jobs, the latest chapter in a “miserable” decline in business, says Steve Vermillion, CEO of the Associated General Contractors of Virginia, a state trade group based in Glen Allen.
Compared with 2008 levels, employment is down 30 percent and volume is down 40 percent, Vermillion says, and he doesn’t expect much improvement next year. “We’re hoping for flat, to be honest.” Architecture and planning firms aren’t busy enough now, he says, and that doesn’t bode well. “You should be seeing that stuff going on right now, and it’s just not happening.”
John Levy, who leads the Richmond-based real estate investment firm John B. Levy & Co., says the current financing market for construction “is pretty difficult. I think the answer really is that a lot of people depended on their community or their regional bank” for loans. “And most of the community or regional banks have an overwhelming amount of real estate on the books” and don’t have much appetite for adding more, he says.
Plus, says Levy, “the flip side of that is, there really aren’t a lot of things needing to be built.” Apartments and health-care projects are probably the strongest, but much of the rest — retail, office or industrial — is weaker. “It’s not that there aren’t cases where there’s some need … what I would say is, it’s not a cakewalk anymore.”
For now Northern Virginia’s hottest construction ticket is transit-related development. The Monday Properties project in Rosslyn sits almost directly on top of the Rosslyn Metrorail station — a feature the developer hopes will draw tenants from Washington. Access to Metrorail plays into another Northern Virginia project a few miles west. There, Chevy Chase-based JBG Properties has a new 10-story, 316,000-square-foot office and retail project called 800 North Glebe, a short walk from the Ballston Metro station.
In October, JBG announced a major tenant in the project, which cost a reported $120 million. Accenture PLC plans to move its Reston offices there next year and occupy about 100,000 square feet.
Northern Virginia also is seeing large residential projects. There’s the $140 million Sedona-Slate project in Arlington, being developed by JBG. Clark Construction is the general contractor, and the final product will have 474 apartment units and 25 town homes. According to the company’s website, it will be available next year.
In the Tysons Corner area, the McLean-based Georgelas Group is working with South Carolina-based Greystar on plans for a 25-story, 400-unit apartment tower. It would be the first project under the new higher-density zoning plan the county approved for the Tysons area in 2010.
While Northern Virginia is seeing the most action, projects are going up in other parts of the state.
In Virginia Beach, Gold Key/PHR Hotels and Resorts, a local company, is developing 31 Ocean, a mixed-use project with 45,000 square feet of class A office space and 50,000 square feet of retail space. The company also is developing and funding the Oceanaire Resort Hotel & Conference Center, a 191,000-square-foot, 18-story addition to the Ocean Beach Club & Resort. Serving as general contractor is MEB General Contractors of Chesapeake.
MEB has lots of experience in commercial projects but has diversified its work in the past decade or so, says Eric Keplinger, vice president for business development. That helped it stay reasonably busy even as the number of commercial projects slowed down. MEB bids on municipal water and wastewater projects, and this fall it settled deals to build a new water treatment facility in Stafford County and an addition to a wastewater plant in South Boston. The two deals are worth about $40 million, Keplinger says.
The firm also specializes in military fueling facilities and has done a handful of projects on Craney Island in Portsmouth, the Navy’s largest fueling stop on the East Coast. Nowadays MEB is bidding on similar projects all over the country and has $50 million in work under way in Florida. “That’s something nobody would have envisioned us working in five years ago,” he says. “Diversity is what is powering us along right now.”
Brian Turmail, executive director of the Associated General Contractors of America, says that, when commercial projects slow down, his members depend a lot on federal spending, education institutions and health care — what’s known as “feds, eds and meds.” That would include new hospitals built recently in Charlottesville as well as in Stafford and Spotsylvania counties, and a new 11-story patient tower under construction at Inova Fairfax Hospital. That $161 million project is being handled by Turner Construction.
Another example can be found in Blacksburg, where W.M. Jordan Co. is working on a $14.1 million project to expand the Virginia Tech veterinary medicine facilities. Also under construction is the 130,000-square-foot, $89 million Center for the Arts, scheduled to open in 2013.
Those mainstays still aren’t enough, says Turmail. “We’ve got a lot of members around the country that used to focus on local projects and now they’re regional, because they’re all chasing what is ultimately a stagnant amount of work,” he says.
A well-located project can do well in any market, even a weak one. In Chesterfield County the Landmark Co. is building 68,000 square feet of flex space, the second phase of the Ruffin Mill Center development. The first phase, done in 2009, is about 90 percent full, says Greg Creswell, the project’s marketing representative with Grubb & Ellis/Harrison & Bates. The project is close enough to Fort Lee and the Tri-Cities region that it finds demand even though “there’s not a lot of competition for that type of space,” he says. “The biggest cause for demand is the location.”
In Roanoke, a downtown location helped the former Patrick Henry Hotel find new life, in what was one of the region’s biggest and most watched renovation projects. The 10-story building underwent a $20 million rehabilitation at the hands of developer Ed Walker, who bought the property from a bankrupt owner in 2009. It reopened this year as a mixed-use building with 133 apartments, along with restaurant, office and retail space. According to a website for the building, the property is fully leased.
Back in Rosslyn, Monday Properties is laying plans for a bigger makeover of this office district. Monday is Rosslyn’s biggest landlord, with 10 buildings equaling 30 percent of the available office space. It has been doing renovations to the lobbies and retail space on the lower floors of several other buildings it owns on Wilson Boulevard, Rossyln’s main corridor.
It’s also signing leases with some new restaurants. Roti Mediterranean Grill is coming to the ground floor of a property at 1501 Wilson Blvd., and Ahra Cafe & Sandwich Bar took space at 1100 Wilson Blvd., one of the familiar “twin towers” that dominate the Rosslyn skyline.
Occupancy rates at Monday’s Rosslyn properties is around 95 percent or higher, the company reports, so there is optimism that the 1812 North Moore tower will find tenants. It’s going to be 100 feet taller than the twin towers, so people will notice it. Clark Construction broke ground in November 2010, and Cramer says they’re in discussions with “the usual suspects” which includes federal agencies, government contractors, law firms and the like. For now Monday Properties is financing construction itself with help from unnamed partners, but is seeking construction financing, says a company spokesman.
Cramer of Cushman & Wakefield says the timing is good for this new building. Other major office projects that opened this year are close to full and “when you look around there’s not a lot coming on [the market], so we’re feeling that we’re in the catbird seat,” she says. With a down economy and federal spending uncertain, she acknowledges that demand from tenants “won’t be incredibly robust, but there’ll still be demand.”