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Wall Street on the Potomac

With federal scrutiny and funding for big banks at a peak, has the financial capital shifted to Washington?

Now that Congress and the White House have taken steps to quell the crisis on Wall Street, multifamily investors and brokers are calling Washington, D.C. the nation's new financial capital. Banking and workout analysts are moving from New York into apartments at DuPont Circle or along Connecticut Avenue, bolstering the city's apartment sector.

Already one of the healthiest metro regions in the country, the capital is benefiting from government hiring as the newly installed Obama administration tries to shore up the nation's financial system. The implosion of investment banks Lehman Brothers and Bear Stearns triggered greater federal scrutiny of big banks and created a need for more workers with auditing and investment expertise in government regulatory offices.

“Now that the federal government is getting involved in so many more areas of the economy — banking, the automotive industry, the insurance business — all of those expenditures will require lots of people to oversee them, and they will all be hired here,” says Rob Seldin, senior vice president for Archstone, an apartment developer and investment firm.

Headquartered in Englewood, Colo., Archstone owns 18,000 apartments in greater Washington, D.C., and its development pipeline holds 4,000 more units. The government's expanded role in private industry is drawing new enterprise including lobbyists, says Seldin. “All of that bodes well for multifamily housing.”

But the city's apartment market weakened in the first quarter, according to New York-based research firm Reis. The vacancy rate rose to 5.4%, up 60 basis points from the fourth quarter and 130 basis points from the first quarter of 2008. Still, the figures looked good compared with the national vacancy rate of 7.2%. Locally, the average effective rent dropped 1.3% to $1,331 per month.

Concessions ease sticker shock

Multifamily developments planned well before the recession struck in December 2007 are bringing a stylish new generation of housing to the region. But they're not cheap. The 246-unit Axiom at Capitol Yards, recently completed by Irving, Texas-based developer JPI Cos., commands rents starting at $1,595 for a studio, $1,885 for a one-bedroom and $2,725 for a two-bedroom unit. Concessions to entice new tenants include three months of free rent, and lengthy free parking.

The complex, near the new Nationals Park baseball stadium, has a rooftop pool and a glass-and-steel staircase. It is one of three multifamily projects JPI recently completed in the Capitol Yards district at a combined construction cost of $320 million, and the company said it would invest another $180 million in the Yards by the end of the year.

The Bozzuto Group, based in Greenbelt, Md., recently built the mixed-use Monroe Place, in Herndon, Va. With two months of free rent, the effective rate for a one-bedroom apartment is $1,345.

In Charles Country, Md., Archstone recently completed Westchester at the Pavilions. The 491 units sprawl over 30 acres, providing boxing studios and a soccer field, along with swimming pools.

In its investment strategy, Archstone looks for a diversified economy, high-income levels and limited land, along with job creation and potential growth near subway stops. “Right now the D.C. metro area is our single largest focus for development in the U.S.,” Seldin says. “It's really the one place that has been the most insulated from the financial downturn.”

The government's plunge into the financial sector is attracting investment that typically would have gone to Manhattan, says Mike Muldowney, executive vice president of brokerage CB Richard Ellis at its mid-Atlantic multi- housing group. “There are German banks investing in hotels and office buildings.”

In one complex deal, 16 banks agreed to invest in a major property, and the deal is rolling toward closing. Because of the turmoil in Manhattan and the loss of jobs elsewhere, the capital has emerged as the country's most stable investment market, Muldowney adds.

But the city is not immune to layoffs. In 2008, employers cut 12,100 positions, and for 2009 the projected loss is 18,400 jobs, a 0.6% reduction in the work force, according to Encino, Calif.-based real estate services firm Marcus & Millichap.

The education, health services and hospitality industries generated 22,000 positions in the past year, but other losses drove the unemployment rate in the first quarter to 5.6% from 3.5% over the past five years — still a far cry from the national unemployment rate of 9.4% in May.

Bases loaded in Maryland

Ramon Kochavi, regional manager of Marcus & Millichap, isn't worried. “The government will grow,” he says. Kochavi anticipates a contraction of defense contracting and an expansion of biotech firms under the new administration.

New research and development firms are springing up in Rockville, Md. and along the Dulles corridor in Virginia to support the National Institutes of Health in Bethesda. Medical-services growth is anticipated, too, as access to health care becomes a national priority.

The Defense Department's 2009 budget allots $9.5 billion for its ongoing Base Realignment and Closure (BRAC) program, in which more than two dozen military bases are being closed, and others relocated. The realignment will bring new residents and defense jobs to Maryland by 2011, benefiting the suburbs, says real estate economist Andy Joynt of Boston-based Property & Portfolio Research.

“For central Maryland I believe it represents the biggest job expansion since World War II,” adds Muldowney. One economist predicts a related shortage of 250,000 housing units by 2015.

Condo market craters

Multifamily sales tanked last autumn. Transactions of at least $5 million totaled just $2.8 billion last year, about half the amount recorded in 2007, says Muldowney. Only 5% of the deals occurred in the fourth quarter. “Velocity came to a screeching halt.”

The condominium market plunged, and has not yet recovered. Many new, unsold condos were converted to rental apartments. An advertisement for the 297-unit Allegro Apartments in Columbia Heights, offers two months of free rent or a custom vacation. Rents run from $1,525 for a studio to $3,875 for a two-bedroom penthouse with a loft. The Allegro was marketed at about $80 million but hasn't sold, says Ari Firoozabadi, associate vice president at Marcus & Millichap and director of multi housing.

Another unsold project, the 550-unit Dumont Condominiums on Massachusetts Avenue, is priced at $170 million. The Dumont has been vacant for months, says Drew White, executive director of brokerage Cushman & Wakefield's mid-Atlantic group. “They could be leasing it up, but they'd rather sell it cleanly.”

Although the condo market is encountering headwinds, an annual influx of 100,000 students to universities such Georgetown, George Washington, and Howard is bolstering the rental market.

But many renters are bypassing costly Class-A units in favor of Class-B and Class-C rentals. “People are downgrading, and moving in with their parents,” says Kochavi. Class-A asking rents averaged $1,637 per month in the first quarter, a 2.1% year-over-year increase. Class-B and Class-C rents averaged $1,174 per month, a 3% year-over-year increase.

Loans require guarantees

Wrangling credit for new construction isn't easy. It takes a good relationship with lenders to get a construction loan of 65% of the project cost, rather than the 85% available a year ago. And it will likely be a recourse loan, requiring personal guarantees from the borrower.

Apartment construction has slowed, with about 3,600 units scheduled for delivery in 2009 compared with 5,100 last year, according to Marcus & Millichap. Fannie Mae and Freddie Mac are still financing market-rate multifamily deals at 70% or 75% loan to value.

“Right now, getting capital for a new conventional project is very difficult,” says Tom Bozzuto, CEO of The Bozzuto Group. HUD financing is available, he says. “The problem is, it tends not to work for most of the types of projects one wants to do.” Bozzuto manages about 30,000 apartment units, 9,000 of them in metro Washington. In the “spongy” suburban market, concessions are maintaining occupancy, he says.

Healthy signs

Behringer Harvard, a real estate investment firm based in Dallas, is developing three projects totaling nearly 1,000 units, says Jason Mattox, chief administrative officer. “From our perspective, D.C. is poised to have potentially a faster recovery than other markets,” he says.

On the sales side, Muldowney's team recently drew 80 offers for a three-building portfolio from Cleveland-based developer Forest City priced at $250 million to $275 million. In a separate deal, the 14-story Mass Court apartments, for sale at $100 million, attracted more than 20 offers.

After months without a major closed transaction, two deals have closed, notes White of Cushman & Wakefield. The 237-unit Avondale in Laurel, Md. sold for nearly $20 million, and the 533-unit Warwick House in Arlington, Va. sold for $109.5 million. “Transactions are starting to move after having been frozen for quite some time.”

Developer Bozzuto says the industry has been bouncing on the bottom, but he also sees healthy signs. “The homebuilding process is coming back. To the degree that it led us into this recession, I believe it will lead us out of the recession.”

Denise Kalette is senior associate editor.



  1. George Washington University
    10,000 employees

  2. Bank of America
    6,000 employees

  3. Washington Hospital Center
    6,000 employees

Source: InfoUSA


Source: U.S. Census Bureau


Source: U.S. Bureau of Labor Statistics



8.5% vacancy, 1Q 2009

7.2% vacancy, 1Q 2008

$43.64 rent per sq. ft., 1Q 2009

42.16 rent per sq. ft., 1Q 2008

Source: Reis


5.4% vacancy, 1Q 2009

4.1% vacancy, 1Q 2008

$1,331 monthly rent 1Q 2009

$1,311 monthly rent 1Q 2008

Source: Reis


5.9% vacancy, 1Q 2009

4.8% vacancy, 1Q 2008

$24.45 rent per sq. ft., 1Q 2009

$25.20 rent per sq. ft., 1Q 2008

Source: Marcus & Millichap


11.2% vacancy, 1Q 2009

8.5% vacancy, 1Q 2008

$7.84 rent per sq. ft., 1Q 2009

$8.26 rent per sq. ft., 1Q 2008

Source: Marcus & Millichap


59.1% occupancy, 1Q 2009

61.0% occupancy, 1Q 2008

$161.78 average daily rate, 1Q 2009

$152.04 average daily rate, 1Q 2008

Source: Smith Travel Research


Burnham Place at Union Station: The ambitious concept calls for a 3 million sq. ft. mixed-use project north of Union Station. The developer plans a 400-room hotel, Class-A office space, multifamily and retail space. Preliminary plans were drawn after prolonged discussions with Amtrak.

Developer: Akridge

Completion: To be announced

Cost: Estimated $1 billion

The Millennium at Metropolitan Park: Tenants are expected to begin moving into the 18-story luxury apartment building later this year. With 300 units, the development sits on 2.6 acres in Pentagon City in suburban Virginia. Amenities include a pool, spa, library and fitness center with a climbing wall. The Millennium is part of an eight-phase master-planned development that is expected to take up to 15 years to complete. Eventually it will offer 3,200 multifamily units.

Developer: Kettler

Completion: 2009

Cost: $129 million

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