D.C. Sees Spike In Project Delays Amid ‘Dark Cloud’ Hanging Over Development

Across the street from a Metro station in D.C.’s Ward 7, developer Peter Farrell has a shovel-ready site where he hopes to build over 200 workforce housing units.

His firm, City Interests, has obtained the necessary approvals and lined up its equity investors for the next phase of the Parkside development on Minnesota Avenue Northeast, but it has fallen victim to the hostile economic environment that has dramatically slowed construction of much-needed housing and other projects in D.C. over the last two years.

“I still can’t get construction pricing where it needs to be or loan rates that make the deal work,” Farrell, who is managing partner at City Interests, told Bisnow.

Parkside is just one of 19 commercial projects that received zoning extensions in 2023, a notable increase from the four years prior, according to a Bisnow analysis of public zoning filings. Twelve commercial project extension requests were filed in 2022 — all of which came in the second half of the year, after interest rates began to rise. Nine were filed in 2021, 10 in 2020 and 12 in 2019, according to the D.C. Office of Zoning dashboard. 

A series of macroeconomic factors have coincided to prevent shovels from breaching the soil on many D.C. development sites, an environment Farrell called a “dark cloud that's been hanging over the development business.”

“This is, without a question, the toughest finance environment that I can remember in my career,” he added.

In the third quarter, multifamily construction starts in D.C. were at their slowest pace since 2010, according to Delta Associates. Meanwhile, 84% of multifamily developers nationwide reported construction delays in the last quarter of the year, according to the National Multifamily Housing Council.

Filings with the D.C. Zoning Office also show this slowdown, and the letters that development teams include with their extension requests give insight into the hardships facing some of the largest project plans in the city and what developers are doing to ensure they will eventually be able to move forward.

Most major projects in D.C. need to go through some type of zoning change or accommodation, either by the Zoning Commission or Board of Zoning Adjustment, to move forward. But once those bodies approve projects, they set timelines by which developers must break ground, typically two years. If they are unable to do so, they must ask for extensions. 

Some of the delayed projects have been planned office buildings that were unable to secure a tenant in a slow market, but many residential projects have also been delayed due to the rising costs of construction and capital, even as D.C. pushes to address its housing shortage with new supply. 

“Because of interest rates, because of construction costs, large multifamily projects and multifamily projects in general have been difficult to get off the ground in the past couple of years, and that’s probably one of the rationales and reasons you’re seeing these extensions,” EYA Chief Acquisitions Officer Aakash Thakkar told Bisnow.

Many of the new projects that were on timelines to start building in 2023 had received their zoning approvals during the first two years of the pandemic — a dramatically different economic environment in which interest rates were low and the multifamily sector was hot. But that all changed very quickly.

“With ’22 and ’23, particularly ’23, things changed and eroded quite rapidly, and so it’s not surprising that you see people protecting their entitlement and extending out,” WC Smith Chief Operating Officer Brad Fennell told Bisnow. 

“The financing market, the debt-equity markets, are the chief reasons for those delays,” he added.

Fourteen of the 19 extension requests mentioned financing challenges as the singular cause or one of the reasons for the delay, according to Bisnow’s analysis. 

The largest projects delayed mainly for financial reasons include the multifamily center block of Capitol Crossing, the residential, retail and office development at the Congress Heights Metro station, the three remaining parcels at Navy Yard’s Arthur Capper/Carrollsburg’s housing community, JBG Smith’s planned 800-unit development at 55 and 75 New York Ave. NE and Brookfield’s proposed mixed-use residential developments at the Waterfront Metro station.

WC Smith filed for a zoning extension on a 651-unit mixed-use project across from Nationals Park, a site it purchased in October from JBG Smith after the Bethesda-based REIT couldn’t secure financing for the project. 

JBG Smith was unable to secure financing due to “high construction costs, insufficient labor, and supply chain issues,” the zoning application says. 

“Inflation was high throughout the country, which led to tightened credit, increased borrowing costs, heightened market uncertainty, and a weak lending market overall,” it added.

Because of these conditions, JBG decided to sell the property, according to the application. 

WC Smith hasn't secured development or construction financing for the project yet, a spokesperson told Bisnow.

MRP Realty principal Matt Robinson said that although his firm doesn’t have any projects that require zoning extensions right now, as its planned developments are all by right, it is still dealing with the same financing problems.

“We’ve got a number of projects that were drawn, that started permitting, and the financial market is such that it just doesn’t make sense to build right now. So it’s really in a waiting game,” he said. 

The other large stumbling block that comes up in the extension requests is the beleaguered office market, which many of the developers planning that property type said stalled their plans. 

Tishman Speyer has plans to turn mechanical penthouse space at its 12-story building next to the White House into occupiable space. But it filed a zoning extension request for the project at 1730 Pennsylvania Ave. NW after being unable to secure a tenant. 

“Despite the Applicant’s diligent efforts, it has been unable to secure a tenant for the approved space due to the broader challenges currently facing the market for office space in Downtown D.C.,” the application says.  

It says the developer is confident it will be able to lease the approved space within the additional two years requested and is pursuing prospective users. But the application says Tishman would be unable to move forward on a “speculative basis, particularly given the current construction costs, which have climbed precipitously and remain at high levels.”

The developer behind a 10-story build-to-suit office project between the McPherson Square Metro station and Metro Center — which received a zoning approval in 2015 but was delayed due to a court appeal and then the pandemic — filed for another two-year extension in February. 

“Financing such a project in the current economic market is unreasonable,” the application says. “The market has acknowledged that due to uncertainty around return to office, interest rate increases, and massive negative absorption lending for new office construction has almost completely dried up.” 

While the developer is now facing financing challenges, City Interests had initially delayed its 209-unit Parkside workforce housing parcels to change the usage from office to residential. 

“We tried for five years to secure office prospects for this. That didn't happen,” Farrell told Bisnow in May.

Meanwhile, WC Smith’s final phase of Skyland Town Center in Ward 8 extended its zoning approval to switch from medical office to townhomes because it determined there was “not sufficient demand” for the former use. Fennell said the development is in the process of securing bids for the townhomes. 

Townhomes seem to be a bright spot in the financing market, EYA’s Thakkar said. His firm has financed townhome developments like Tysons Ridge at 7700 Leesburg Pike and the planned Graham Park Plaza redevelopment, both in Falls Church.

Extending approvals comes with risks that must be calculated by development teams — land taxes, lawyer fees — but developers say it is worth it to hold out hope the economy will improve.

But the more extensions projects get, the more variables are subject to change, like the economic environment and city requirements, which could have the potential to put projects in even more jeopardy. 

That process played out with MRP’s 1M SF multifamily project Washington Gateway near Union Market, now under construction on its third phase. The development underwent multiple extensions after it was approved in 2007. 

Now, each of the phases has a different percentage of affordable units, Robinson told Bisnow, due to the city’s changing requirements over that extended period. 

Land fees, lawyer fees and lenders also make extensions a complicated puzzle, but developers said they usually make sense, especially in a climate like this one.

“There are always risks in delaying a project, make no mistake about that,” Farrell said. “But we’re in an environment today with tighter loan standards, fewer lenders, higher borrowing costs. Those all remain as constraints to getting deals done.

“It is ripe, if you have an opportunity to delay, to take that opportunity and get a better sense of what the future's going to look like.” 

Developers said they are hopeful that the delays won’t be a trend much longer. The Federal Reserve has signaled that it is likely to lower interest rates in the first half of the year. Meanwhile, the lack of construction starts may lead to greater competition from contractors and, in turn, price reductions, developers said. 

“The question is, how does it unthaw? And it starts with progress,” Fennell said. “It starts with one project at a time getting financing and moving forward, and that builds on itself, and that builds confidence, and I think that’s probably the path forward.”