The Top 10 D.C. Commercial Real Estate Stories Of 2019

For the D.C. real estate industry, 2019 was the best of times, and it was the worst of times. 

Amazon HQ2 moving forward sparked new activity in Arlington, but the District experienced record-high office vacancy rates. The D.C. government took steps forward on planning for future housing growth, but it also raised taxes on commercial properties. 

The Nationals won the World Series amid a development boom in the ballpark area, but a government shutdown in January set the year off to a slow start. Major mixed-use developments delivered in Northern Virginia, but Montgomery County placed a moratorium on housing construction.

Bisnow looked back at the top 10 D.C. commercial real estate stories in the roller coaster of a year that was 2019. 

Amazon HQ2 Moves Forward As Activity Surges In National Landing

The region's biggest economic development win in years, the Amazon HQ2 selection, came in November 2018, but the implications of that decision began to unfold this year. 

The process of Amazon developing its second headquarters took major steps forward. In February, Gov. Ralph Northam signed a bill that could give Amazon up to $750M in incentives, dependent upon job creation, and Virginia committed to investing more than $1B in infrastructure improvements. In March, Arlington County approved a $23M incentive package for Amazon, despite vocal opposition. 

Just last week, the county approved the development plan for the first phase of new HQ2 development, two 22-story towers on the Metropolitan Park site in Pentagon City. Amazon also began moving employees into space it leased in Crystal City. 

The Amazon HQ2 selection spurred a surge of activity in the market, with major properties trading hands and plans for nearby developments moving forward. 

JBG Smith, the developer partnering with Amazon to build its campus, filed plans for multiple projects of its own that would create thousands of new residential units through a combination of ground-up construction and redevelopments. Additional developments have also been planned in the area from Brookfield, Kimco Realty and LCOR. 

On the investment sales side, Starwood Property Group made two big acquisitions in the area around the Amazon HQ2 campus totaling nearly $200M. Polinger Co. bought a Pentagon City apartment building for $228M, more than double its 2009 sale price. And several other buildings hit the market as owners looked to cash in on the spike in property values. 

The Amazon selection also led to a strong surge in housing demand, with home prices increasing at some of the highest rates in the region and new apartment buildings filling up quickly. This has led to greater concerns about housing affordability, an issue local officials and the business community continue to try to tackle. 

WeWork Goes On D.C. Leasing Spree Ahead Of Failed IPO

The saga of WeWork's failed IPO was one of the top commercial real estate stories nationally, but the coworking giant's struggles were particularly relevant for the D.C. market, where it had been expanding rapidly. 

In the eight months prior to WeWork's attempted IPO in August, it signed eight new leases totaling over 550K SF in the D.C. area. The new spaces, some of which are slated to open next year, will bring WeWork's D.C.-area portfolio to 22 locations totaling over 1.7M SF, according to CBRE. 

WeWork founder Adam Neumann stepped down in September, and the following month the company was taken over by SoftBank Group in October at a fraction of its previous valuation. It is reportedly looking to back out of as many as 100 newly signed leases, though it has not yet pulled out of any finalized deals in D.C. It did scrap plans for a new Ballston lease that was in negotiations, but a deal had not yet closed. 

Many of its new D.C. spaces are clustered near existing WeWork spaces, especially in the Chinatown-Mount Vernon Triangle area, where it will soon have four locations. The coworking provider hopes to secure more large commitments from enterprise users and growing companies like GetUpside, which took the full top floor in WeWork's 1701 Rhode Island Ave. NW building, Bisnow first reported.

WeWork is not the only coworking provider that has expanded in the D.C. area this year. New leases were also signed by Industrious, Spaces, Convene, Mixer and others. Some coworking providers have even bought buildings, such as WeWork partnering on an acquisition with The Meridian Group and Novel Coworking purchasing a building on Connecticut Avenue NW. 

Mayor Lays Out Vision For Housing Development In D.C.

As D.C. grapples with a housing affordability crisis, Mayor Muriel Bowser's administration and the D.C. Council took significant steps this year to guide the city's residential development for the years to come. 

The D.C. Council Oct. 9 approved the first set of amendments to the Comprehensive Plan, 21 months after the Office of Planning first introduced the changes. The first section, called the Framework Element, sets the guiding principles and defines land-use categories for the remainder of the the plan. 

The following week, the Bowser administration unveiled its proposed amendments to the remainder of the Comprehensive Plan, which still need to go before the D.C. Council before being adopted. The 1,600-page document laid out the vision for all types of development in the District and was highlighted by the Future Land Use Map.

The FLUM sets the recommended density levels for every block in D.C., and the changes could allow more development around Metro stations and on sites with controversial projects that struggled to move forward. 

The administration hopes its Comprehensive Plan amendments can help mitigate the development delays that have been caused by frequent court appeals over the last three years. But the process has already shown signs of improving, with McMillan and several other major developments receiving favorable rulings from the court this year. 

Bowser in October also introduced another document, the Housing Equity Report, that detailed a plan to achieve her goal of adding 35,000 new units of housing to D.C. by 2025. The report set specific housing production targets for each part of the city, with a focus on adding more affordable housing in wealthy neighborhoods west of Rock Creek Park. 

D.C. Passes Commercial Real Estate Tax Increase

While the industry has supported the D.C. government's changes to the Comprehensive Plan, the District passed another measure this year that drew the ire of commercial real estate leaders. 

Bowser in March introduced a plan, which the D.C. Council passed in May, to raise commercial property taxes to help fund affordable housing development. The tax on commercial properties above $10M was raised by 2.2%, but the major change was in the deed and recordation transfer tax for commercial property sales, which was increased by 72%. 

Real estate leaders including Douglas Development's Douglas Jemal, EagleBank's Tony Marquez, Abdo Development's Jim Abdo and DSC Partners' Doug Donatelli sharply criticized the tax hike at Bisnow's D.C. State of the Market event in May. 

A JLL report released in June found that the sales tax increases would make it more difficult to close deals and that investment sales activity would "grind to a halt," after the taxes went into effect. The tax increase went into effect Oct. 1, and in the final days of September, a string of major deals totaling at least $1.2B closed as parties sought to avoid the higher rates. 

Opportunity Zone Projects Begin To Move Forward In D.C.

The rules for the opportunity zone program were finalized this year, and while it has not spurred the level of activity that some predicted, a series of D.C. developments in emerging neighborhoods have utilized the federal tax incentive program. 

Douglas Development in March closed a deal with PTM Partners for an opportunity zone investment in its 453-unit office-to-residential conversion project on Buzzard Point. 

Donatelli Development and Blue Skye Development in May received an opportunity zone investment from EFJ Capital for a 262-unit project in D.C.'s Hill East neighborhood. 

MidCity in May received opportunity zone financing for a 108-unit apartment building at the corner of Montana Avenue NE and Rhode Island Avenue NE. Also on the Rhode Island Avenue corridor, MRP Realty in July broke ground on the first phase of its 1,500-unit Bryant Street project with opportunity zone equity from FRP Development Corp. 

Urban Atlantic in June received $21M in opportunity zone equity from Bridge Investment Group for a 282-unit apartment building at its major mixed-use development in New Carrollton. Two other Prince George's County developments, Bozzuto's apartment project in College Park and the Hampton Park development in Capital Heights, also benefited from opportunity zone financing this year. 

The Menkiti Group started its own opportunity zone fund, which it is using to finance its MLK Gateway development in Southeast D.C.'s historic Anacostia neighborhood. 

Massive Developments Delivered In Tysons, Ballston

Two of the biggest developments to deliver in the D.C. region this year were built in Northern Virginia: The Boro and Ballston Quarter. 

A 15-acre project near Tysons' Greensboro Metro station, The Boro opened this fall with 1.7M SF of mixed-use development. It features the 20-story Boro Tower office building, a five-story boutique office building, apartment buildings of 32 and 13 floors and a 25-story condo building. 

The Boro is anchored by a 14-screen Showplace ICON movie theater and a 70K SF Whole Foods, the largest in the region. Its pedestrian-friendly streets are lined with additional restaurants and retailers and it has a series of parks and plazas. The Meridian Group, Kettler and Rockefeller Group partnered on the development. 

In Ballston, Brookfield in March completed the $330M redevelopment Forest City started of its aging shopping mall. The Ballston Quarter development features a food hall, a Punch Bowl Social and other experiential retailers, 150K SF of renovated office space and a 22-story apartment tower with 406 units. Brookfield took over the property when it bought Forest City in 2018.

Nationals Win World Series As Ballpark-Area Development Boom Continues

This was the year that D.C. became the District of Champions, with the Washington Nationals winning the World Series and the Mystics winning the WNBA Finals a year after the Capitals brought home the Stanley Cup.

The World Series took place in a ballpark that has helped spur a wave of development in the Capitol Riverfront neighborhood, and the area welcomed several new projects this year. 

Directly across the street from Nationals Park, JBG Smith completed West Half, an apartment building with a distinct cantilevered facade that provides half of its 465 units with views into the ballpark. On the other side of Half Street, Jair Lynch began condo sales for its mixed-use project that is expected to deliver next year. Additionally, the Novel South Capitol building delivered with 539 new apartments. 

The Yards, a 48-acre megaproject to the east of the ballpark, delivered two new multifamily buildings this year, one with 191 apartments and one with 137 condos.

The development — also being shepherded by Brookfield after it was started by Forest City — welcomed several new restaurants and retailers and landed its first major office tenant.

Chemonics signed a full-building pre-lease in a deal that signals the neighborhood's maturity as an office market. Early next year, The Yards will welcome its first hotel, and it will will deliver another 264-unit apartment building. 

D.C. Office Vacancy Reaches Record Highs

No parades were held this year for the District's office market, which reached record levels of vacancy as new projects continued to deliver with large blocks of available space. 

D.C.'s office vacancy rate rose to a new record high of 13.5% in Q2, according to CBRE, and it hasn't shown many signs of improvement since then. The brokerage firm predicts the vacancy rate could reach 15% by the end of next year. 

The market has had some demand growth, experiencing modest levels of positive absorption, but that has been greatly overshadowed by its deluge of office deliveries. CBRE projected 1.7M SF of new office space would deliver in Q4, and just 45% of that was pre-leased as of Sept. 30.

Experts see a supply slowdown coming between 2020 and 2022, as developers have become more hesitant to break ground speculatively, but it will take time before that translates into a decreasing vacancy rate. 

Northern Virginia has experienced the opposite trend, with Amazon HQ2 helping bring down its long-elevated office vacancy rate. In Q2, Northern Virginia recorded 1.6M SF of net new demand, its highest level since 2006, according to CBRE. 

Government Shutdown Hurts Hotel, Retail Businesses

The year began with the longest-ever shutdown of the federal government, which hurt the D.C.-area economy and affected commercial real estate sectors from retail to hospitality to office.

The 35-day shutdown ended Jan. 25, and it was estimated to cost the region's economy more than $1.6B. Though it was technically a partial shutdown with some agencies remaining funded from previous appropriations bills, the shutdown forced 800,000 federal employees to be furloughed or work without immediate pay. 

With many of those federal employees in the D.C. region, the lost paychecks reduced the amount of foot traffic and business local retailers experienced. The closing of museums led to a drop in tourism that caused D.C.'s hotel market to experience a 3.8% drop in occupancy during the first quarter. 

The shutdown also caused consternation in the office market, with landlords of General Services Administration-leased buildings worried about when they would receive a rent check. Investment sales brokers also said the uncertainty the shutdown created made sellers more hesitant to bring properties to market and caused buyers to be more careful about purchasing D.C. assets. 

Montgomery County Faces Challenges With Housing Moratorium, Stagnant Growth

Montgomery County has had better years than 2019. 

The year started with the release of a report from Sage Policy Group, commissioned by an advocacy group of business executives, that said the county is "marching toward fiscal peril." The report detailed the slow pace of job growth and business formation in the county and recommended ways to spur commercial activity. 

Then in July, the county instituted a one-year moratorium on new housing development in parts of Bethesda and Silver Spring to try and help overcrowding schools. The move caused delays for major projects in those areas and was widely criticized by real estate leaders. 

In September, Maryland scrapped the funding for a planned 15-mile bus rapid transit route in the upper portion of Montgomery County, a line that would have included provided a new transit option for several major developments.  

This month, Johns Hopkins announced plans to relocate a biotech education facility out of Rockville and consolidate it on the university's Baltimore campus. The I-270 Corridor has been Montgomery County's biggest bright spot, booming with new life sciences and biotech companies, but leaders say it needs educational institutions to create a talent pipeline. 

The county did see some positive signs in its office market. In Silver Spring, Children's National signed a 140K SF lease for part of the building that Discovery Communications recently vacated. In Downtown Bethesda, the construction of Marriott International's new headquarters continues to move forward, along with three other office projects that have experienced positive leasing momentum.