The 11 Biggest D.C. Commercial Real Estate Stories Of 2018
When the history is written, 2018 will be remembered as the year that D.C. won Amazon, landing half of the tech giant's massive HQ2 campus in November. But a lot of other important news occurred throughout the year, from the first week to the final week, that will have wide-ranging impacts on the D.C. commercial real estate market.
The D.C. region opened a new soccer stadium, welcomed a new tallest building, lost a major media company headquarters and began to explore opportunity zone investments. Its office market experienced a surge of coworking growth and a shift of companies from downtown to the waterfront. Bisnow compiled the 11 biggest D.C. commercial real estate stories of 2018.
11. Office Center Of Gravity Shifts South Thanks To Waterfront Developments
D.C.'s amenity-rich waterfront neighborhoods have emerged as growing office markets over the last few years, beginning to draw tenants from the Central Business District, but two major deals in the final two months of 2018 show the center of gravity is beginning to move south.
Chemonics International reached a deal with Forest City to lease up to 290K SF in a planned office building for the next phase of The Yards, the 48-acre megaproject in Southeast D.C.'s Capitol Riverfront neighborhood. The international development company plans to consolidate two Downtown D.C. offices and one Crystal City office into the new building. The D.C. Council voted Tuesday to approve a $5.2M property tax break for the company.
Office tenants, including law firm Fish & Richardson, began moving in this year to The Wharf's 1000 Maine trophy office building, and the Hoffman-Madison Waterfront development team last week landed another law firm to anchor the next phase. Williams & Connolly signed a 15-year lease for nearly 300K SF at Parcels 6 and 7 of The Wharf's Phase 2, where it plans to move in 2022.
10. Big Players Enter The Workforce Housing Market
With rents for new apartments rising, older buildings being demolished and government programs not addressing the full range of the housing affordability crisis, middle-class families have increasingly struggled to find homes they can afford.
This issue came to the forefront of the multifamily industry in 2018, with large D.C.-based and national players launching initiatives to address the problem. JBG Smith and the Federal City Council in May launched the Washington Housing Initiative with a goal of preserving and building 2,000 workforce-level housing units in the D.C. area. Several nationwide investors, such as PGIM Real Estate and Starwood Capital, have also focused their investment efforts on Class-B and workforce-level apartments.
9. Capital One Completes New Headquarters, Region's Largest Building
The Washington region has a new tallest occupied building, thanks to Capital One. The financial institution this year completed its 470-foot-tall headquarters near the McLean Metro station in Tysons. The tower trails only the 555-foot Washington Monument as the region's tallest building, though others have been proposed that could surpass it.
The headquarters features a wide range of amenities, including a basketball court, a 15K SF fitness center, a cafeteria and numerous lounges and conference rooms. The tower is the first component of a massive 24-acre development that will feature an 80K SF Wegmans grocery store, expected to open in 2020. It will also include a 1,600-seat performing arts center, a 300-seat black box theater and a 1.2-acre sky park with a beer garden, plus residential and office buildings.
8. Activists Continue To Stall D.C. Development With Appeals
The battle over D.C. developments grew even more contentious in 2018. Several projects that have faced lengthy delays following appeals remained stalled this year, and activists filed several new appeals.
The $720M McMillan Sand Filtration site development was appealed for a second time in April, after having its approvals vacated by the D.C. Court of Appeals in December 2016 and then going through the zoning process again. The court in April blocked another major project, the 1,400-unit planned redevelopment of Southeast D.C.'s Barry Farm community.
Opponents filed new appeals over several developments, including Poplar Point's 2.3M SF Columbian Quarter development and Southeast D.C.'s 480-unit Randall School project. Some developments, including at least three near Union Market, had their appeals dismissed, but only after lengthy and costly delays that continue to scare some developers away from the planned-unit development process.
Amendments to D.C.'s Comprehensive Plan that aim to clarify issues surrounding the PUD process that have allowed appeals to be successful drew hundreds of people to testify at a hearing in March. But the D.C. Council failed to move forward on the amendments this year and developers and advocates believe the issue has not yet been solved.
7. Two Large Bethesda-Based Hospitality REITs Complete $5.2B Merger
A nine-month-long saga between two Bethesda-based hotel REITs ultimately concluded in late November with the closing of a $5.2B merger.
The process began in March when Pebblebrook Hotel Trust made an acquisition offer to LaSalle Hotel Properties and was immediately rejected. It then made a series of progressively higher offers, all while LaSalle was drawing the attention of several major investors, including Blackstone Group, Starwood Capital and Brookfield Property Partners. LaSalle decided in May to accept a $4.8B acquisition offer from Blackstone and began moving forward with that merger.
But the Blackstone deal did not stop Pebblebrook, which continued to make incrementally higher bids. In September, Pebblebrook finally made an offer LaSalle could not refuse. LaSalle moved to cancel the Blackstone deal and proceed with a merger with Pebblebrook. The Pebblebrook-LaSalle merger closed Nov. 30, along with the sale of five properties totaling $821M. Pebblebrook Chairman Jon Bortz will lead the merged company, which will keep its headquarters in Bethesda and trade under the "PEB" symbol.
6. President Trump Faces Scrutiny Over FBI HQ Reversal, Foreign Payments To D.C. Hotel
After scrapping the search for a new FBI headquarters in the D.C. suburbs last year, the General Services Administration in February proposed keeping the FBI on the J. Edgar Hoover Building site. The move instantly drew criticism from Maryland and Virginia leaders, and in March the GSA Inspector General launched an investigation over the decision-making process and a potential intervention from President Donald Trump.
The IG released a report in August concluding that GSA Administrator Emily Murphy misled Congress when asked about Trump's involvement in the decision-making process. Emails and photographs surfaced in October showing that Murphy met with Trump in the Oval Office and that the president ordered the agency to move forward with the demolish and rebuild plan. His involvement is drawing scrutiny because of the potential conflict of interest with his family's property, the Trump International Hotel, sitting one block away from the Hoover Building.
The hotel has been at the center of a separate series of investigations and lawsuits. A suit filed last year by the attorneys general of Maryland and D.C. over payments from foreign officials to Trump's hotel has moved forward throughout this year. A judge in March determined the AGs have standing to sue because foreign spending at Trump's hotel could hurt competing hotels in D.C. and Maryland.
Earlier this month, the judge approved legal discovery for the case, and the AGs promptly began issuing subpoenas to obtain information from Trump's businesses. With the hotel suit continuing to progress and the FBI headquarters project still up in the air, both Pennsylvania Avenue properties will likely continue to make news throughout 2019.
5. Discovery Communications Leaves Silver Spring, Sells HQ To Local Developer
Silver Spring lost one of its largest employers in January when Discovery Communications announced it plans to leave the Maryland suburb and move its headquarters to New York City. The media company did sign a 60K SF lease in September to maintain a presence in Silver Spring, but its 550K SF headquarters building remains without a tenant.
Foulger-Pratt and Cereberus Capital Management in September acquired the building, which sits near the Metro station in the heart of Downtown Silver Spring, for $70M. Foulger-Pratt had already owned a large Silver Spring portfolio, including a major retail center, 700 multifamily units and 1.3M SF of office space. Earlier this month, the developer secured a $97M loan to reposition the building.
4. Audi Field Opens, Kicks Off Buzzard Point Development
D.C. United in July played its first game at the soccer team's new Buzzard Point stadium, Audi Field. The $300M facility includes 20,000 seats, 14K SF of retail and a 40K SF public plaza. The stadium is bringing thousands of people to the Southwest D.C. neighborhood for the first time and is sparking a wave of development on Buzzard Point.
The former Coast Guard headquarters at 2100 Second St. SW on Buzzard Point is undergoing a $250M redevelopment into a mixed-use building with 470 apartments and 60K SF of retail, where the development team has signed multiple big-name restaurateurs.
Another former Coast Guard facility at 1900 Half St. SW is being redeveloped by Douglas Development into 452 residential units with 24K SF of retail. Several other projects are in various stages of development on Buzzard Point from the likes of Donohoe Hospitality, Akridge, Capital City Real Estate, MRP Realty and others.
3. Opportunity Zones Take Shape, Generate Buzz
A new federal program quietly tucked into the December 2017 tax reform law took center stage this year and generated buzz throughout the commercial real estate industry. The Opportunity Zone program allows investors to defer capital gains taxes if they reinvest the money into projects in underserved areas.
Local governments in April selected the census tracts that would be designated as opportunity zones. In D.C., the areas are heavily concentrated in the low-income areas of Wards 7 and 8, plus a handful of neighborhoods in other parts of the city like LeDroit Park, Edgewood and Buzzard Point.
Many investors, including some top names in D.C., have begun pouring money into funds to deploy into opportunity zones. President Donald Trump last week signed an executive order to push more federal resources into the program.
2. Numerous Coworking Deals From Top Players, New Entrants Drive Office Leasing
The largest source of demand in D.C.'s office market this year came from coworking providers, which signed leases and opened spaces in every month of 2018.
Coworking providers that had already been in the D.C. market grew their footprints this year. D.C.-based MakeOffices opened new spaces at The Wharf and in Glover Park, and announced plans for one in Foggy Bottom. Spaces signed on as the first tenant at Comstock's Reston Station in January, and in October the coworking provider leased the top three floors of a Downtown D.C. redevelopment.
The largest player, WeWork, signed several new deals in D.C., including a space in College Park, one in Rosslyn, two more in the Chinatown/Mount Vernon Square neighborhood, and earlier this month it partnered in the acquisition of a Dupont Circle building, where it will occupy 100K SF.
Several coworking companies entered the D.C. market for the first time this year. New York-based Industrious began charting a rapid D.C. expansion, opening spaces in Thomas Circle and Bethesda this spring, signing on in Ballston and signaling plans for more.
Another New York-based provider, Bond Collective, opened its first D.C. space on H Street. Israeli company Mindspace opened a coworking space at One Franklin Square. Women-only coworking company The Wing opened in Georgetown, and Eaton House opened on K Street in October. The growth of the coworking sector drove D.C.'s office leasing in 2018 and has showed no signs of slowing down.
1. Amazon Selects Northern Virginia For Half Of HQ2
The most talked-about and most impactful story of 2018 in D.C. was the region's biggest economic development win in years: Amazon picking Northern Virginia for half of its second headquarters.
The year began with the D.C. region earning three spots on Amazon's 20-city shortlist in January, leading to months of speculation that it was a front-runner in the competition. Ultimately, Amazon in November decided to split the HQ2 in half between New York's Long Island City and a Northern Virginia neighborhood it is branding as National Landing, which includes Crystal City, Pentagon City and Potomac Yard.
The National Landing campus will be home to at least 25,000 Amazon employees, and the company will occupy at least 4M SF, which it is leasing and buying from JBG Smith. The HQ2 project was announced alongside a new $1B Virginia Tech Innovation Campus on a Potomac Yard site owned by StonebridgeCarras.
Numerous other developers and property owners stand to benefit from the massive influx of highly skilled employees to the area. Many key stakeholders in National Landing have already begun making moves, including putting properties on the market. Amazon will begin moving its first employees in the middle of 2019 and its presence will continue to grow for years to come as the region works to handle the wide-ranging impacts on housing, transportation and other issues that will come alongside its new largest private employer.
