How The 'Flood' Of Demand Into Emerging Markets Is Affecting Downtown D.C.

Emerging markets such as the waterfront and Northeast D.C. have already begun to dominate the city's multifamily sector, and industry experts and leaders say the office market is beginning to follow suit, presenting challenges for the central business district. 

Nearly 90% of the multifamily units recently built or under construction in D.C. have occurred in the Northeast, Southeast and Southwest quadrants, JLL Managing Director of Research John Sikaitis said, leaving just 10% for traditionally dominant Northwest D.C.  

Sikaitis said multifamily demand has followed the new construction and led people to move to new parts of the city, and that is beginning to translate into a growing office market in those areas. Capitol Riverfront and The Wharf have landed big office tenants from the CBD in recent years, and activity is starting to grow in Northeast neighborhoods like Union Market and H Street. 

"If you think of the office market, its usually a herd mentality and the last to develop," said Sikaitis, speaking Tuesday at Bisnow's D.C. State of the Market. "First it's multifamily, then retail, then office. Finally, you're starting to see that office demand not just trickle but flood into the emerging markets."

Over the next three to four years, JLL projects that 2.5M SF of D.C. office occupancy will shift into emerging markets. 

"There's really a big shift in terms of how demographics are transforming the city, and that creates a challenge for the CBD," Sikaitis said.

Skanska Executive Vice President Mark Carroll, who hosted the event in the developer's new 2112 Pennsylvania Ave. NW building, said the company is seeing growing demand at its 99 M project in Capitol Riverfront from tenants moving from the city's more traditional office areas. 

"The tenants we're seeing are coming from the East End and from the CBD and are recognizing the live-work-play aspect of that neighborhood," Carroll said. "It's an exciting place to be on the street, there's a lot going on, a lot of retail. At the same time, the CBD has a lot going on." 

Caroll said the growing demand in areas like Capitol Riverfront is not taking away from the strength of the CBD, a sentiment echoed by two developers with a large downtown D.C. presence. 

Columbia Property Trust has a 1.5M SF D.C. office portfolio, largely concentrated in the CBD and East End with buildings such as Market Square on Pennsylvania Avenue. 

"We're certainly feeling pressure from emerging markets, the new development that's been going on for a while," Columbia Property Trust CEO Nelson Mills said. "But we're also encouraged by some more diverse demand beyond the original traditional tenant base for D.C. So it's a mixed bag." 

Akridge CEO Matt Klein, who broke ground last year on two spec office projects in the CBD, said he is not concerned by the demand moving to emerging office markets.

"I think the CBD will continue to thrive," Klein said. "It will always be a special anchor and place, the CBD and East End, in part because we’re the center of the Metro system. The transportation infrastructure designed in the 1970s is a fundamental foundation for how we build on demand for this neighborhood." 

While much of D.C.'s office market expansion has taken place west of the river, some organizations are beginning to look across the river at neighborhoods such as Anacostia. 

The Menkiti Group is building the 51K SF MLK Gateway project at the corner of Martin Luther King Boulevard SE and Good Hope Road in Anacostia. The developer reached a deal with Enlightened, a minority-owned consulting group with a specialty in cybersecurity, to move its headquarters from Northwest D.C. to the Anacostia development.

Menkiti Group CEO Bo Menkiti said the company, which represents the largest tenant to move across the river in four decades, will help spur the activity he hopes to create in the area. 

"I always think of it as the office and residential creates the market, and the retail and commercial defines the character," Menkiti said. "In Anacostia, we thought about three core, market-making drivers, the existing long-term residents who were underserved in terms of goods and services, we also had folks looking to find a new home and establish themselves in a new neighborhood, and there's this question of to what extent is the neighborhood a destination with folks who come to shop." 

Tuesday's State of the Market event, which featured a discussion between WashREIT CEO Paul McDermott and Boston Properties Senior Executive Vice President Ray Ritchey, also included a panel of D.C. commercial real estate executives offering leadership and management advice. The executives talked about how they prepare their companies for an economic downturn, which many experts believe could happen in the next few years. 

The key for navigating a global commercial real estate services firm through a downturn, Cushman & Wakefield Regional Managing Principal Roberta Liss said, is maintaining a wide variety of business lines. 

"The real estate services world offers opportunities to develop your business with countercyclical, sustainable sectors," Liss said. "We make sure we are fully built out in every city on the investor services side as well as the occupier services side. We focus on what are the sectors in regions that drive those regions and make sure we are extremely strong in them." 

As a developer, Kettler President Asheel Shah said he maintains optimism and sees the market with a glass-half-full mindset, but it is important to prepare for the worst. 

"We want to continue to do deal flow, but it's about approaching that with discipline and making sure your organization is scaled to the right level so it can withstand when a downturn happens and you don't create a tremendous amount of disruption," Shah said.

During the first downturn he experienced in 2001, JBG Smith Executive Vice President Dave Ritchey was a young broker in San Francisco, a market reeling from the dot-com bubble collapse. Many older brokers saw the lack of new leasing activity as a reason to take vacations and hit the golf course, but he used it as an opportunity to grow his own presence in the market. 

"From an office market perspective, I think the market is uneven. I don't think it's a downturn or an upturn, it depends on submarket by submarket, asset by asset," Ritchey said. "But regardless, with the question of how do you endure the down times, from my perspective it's how do you embrace the down times."