Apartment demand meets building boom

By Sonny Goldreich

With hundreds of new apartments under construction in the Silver Spring and Wheaton area and hundreds more planned, can a glut be far behind?

Actually, quite the opposite is true.

The reality is that renters have been moving into new apartments almost as fast as developers can build them, especially in the Georgia Avenue corridor of Montgomery County. Despite all the new buildings going up, the vacancy rate has not climbed.

“That’s what everyone’s been talking about. It’s been a big fear in all the sub-markets,” said Bethany Schneider, a research analyst with broker Cassidy Turley. “But everyone we talk to says it’s over-exaggerated.”

In fact, the stabilized vacancy rate stood at 4.3 percent in the first quarter for DC’s Maryland suburbs, tumbling from 5.7 percent in the same period last year, according to the Delta Associates First Quarter 2014 Class A Apartment Report. That’s lower than reported in DC or Northern Virginia for the quarter.

There were some predictions of a slowdown in the DC region’s torrid multifamily housing market as construction permits fell last year. But the area experienced a rebound during the first quarter, with the hottest pace of construction and demand in the Silver Spring and Wheaton areas.

The Exchange at Wheaton Station has rented about
 half its 486 units, says developer Foulger Pratt.

While 491 newly built units hit the market in Silver Spring during the first three months of the year, 255 of them were rented during the same period, Schneider said, citing data from Reis, which tracks commercial real estate markets nationwide. That’s a surge from 2013, when 432 new apartments were delivered for the entire year and 427 renters moved into the buildings.

In the Wheaton/Kensington market, Reis reported that 622 units were delivered during the first quarter and 266 were rented (in this case, all the action was within two blocks of the Wheaton Metro station). That’s after there were no deliveries in 2013.

In Rockville, the only other Montgomery submarket with new apartments during the first quarter, builders delivered a record 814 units, but 439 were rented, according to Cassidy Turley’s 1^st Quarter Multi-Family Snapshot. Cassidy Turley Multi-Family Snapshot 1Q14.pdf

These new apartments are literally changing the skyline and renters are responding favorably.

Bethesda-based developer Foulger-Pratt reported strong demand for its $120 million investment in Wheaton, with the opening of The Exchange, a brand-new 17-story, 486-unit high-rise it completed atop a new Safeway next to the Wheaton Metro last year (Reis recorded the project as a first quarter 2014 delivery). “The Exchange is already nearly 50 percent leased and continues to experience a stronger-than-normal lease-up pace,” the firm wrote to County Council President Craig Rice (D-Dist. 2) of Germantown in support of the Wheaton town center development plan.

The Solaire Wheaton is 45 percent leased after 5 months.

Two blocks south, Bethesda-based Washington Property Co. delivered the 232-unit Solaire Wheaton during the first quarter on the site of the
former First Baptist Church of Wheaton (which moved to Olney and changed its name to Streams of Hope). The $75 million complex is 45 percent leased after five months.

And the projects keep coming. The County Council this month approved spending $144 million on the new Wheaton town center plan. The project—which is a private partnership with developers Stone bridge CarraslBozzuto Group—includes an apartment building with 225 units, 20 percent of which will be affordable at 50 percent of area median income.

The planed center piece of the Wheaton complex is a new 266,000-square-foot public office building that the Leggett administration pushed as a jobs measure to bring high-paying white collar work to a Metro transit employment area that is almost entirely retail. The county plans to relocate from various sites in Silver Spring and Rockville the headquarters of the departments of parks and planning, permitting, and environmental services to the new 12-story building, which they will share with the Mid-County Regional Services Center and 15,000 square feet of street-level retail.

The project will occupy a triangle stretching northwest from the intersection of Georgia Avenue and Reedie Drive, which is now home to a 15,367-square-feet county building and parking space. The plan promises to replace 158 surface parking spaces with a 395-space underground garage and a town square or urban plaza of more than 32,000 square (story to follow on continuing community debate).

Also in Wheaton, DC-based Lowe Enterprises will deliver a 12-story apartment building with 194 units just south of the Metro at 111411 Georgia Avenue.  And at the northern edge of the Wheaton commercial district, Alexandria-based AvalonBay has emptied out tenants of a former BB&T bank building, where the firm plans to build a 322-unit, block-long apartment complex.

Those last three projects underscore the strength of the residential market relative to the weak demand for office space in Montgomery County, where the total vacancy rate in the first quarter was 14.3 percent, according to broker Transwestern. Throughout the Maryland suburbs, the total vacancy rate stood at 15.7 percent in March, which is about double the rate in 2005 during the pre-recession boom in federal and private tenant growth. The Suburban Maryland office construction pipeline was hovering at 1.3 million square feet in March, which is about half the level before the recession.

But if nothing else, the office-to-apartment conversions will help suck up some of the empty non-residential space in the Wheaton area. The office vacancy rate stood at 23.6 percent in March, Transwestern reported.

The loss of office space to residential in Wheaton mirrors what’s happened on a larger scale in downtown Silver Spring, where the amount of office space has actually shrunk since the recession “officially” ended in June 2009 thanks partly to apartment conversions, as I reported in the Gazette of Business last year.

The total Silver Spring office inventory fell to 4,472,139 square feet at the end of the second quarter of 2013, down by 72,538 square feet from the 4,544,677 square feet from the end of 2009, according to broker Jones Lang LaSalle.

The hopeful sign is downtown Silver Spring office vacancies now stand at 11.4 percent, which is second lowest in the county after Bethesda/Chevy Chase, according to Transwestern.

The trend away from office space in Silver Spring will be accelerated when Parks and Planning leaves its headquarters for Wheaton in 2018. Its 35,600-square foot building will disappear from office inventory and will be replaced by a 400,000-square-foot mixed-use complex that will include 360 apartment units and 25,000 square feet of ground-level retail space.

But United Therapeutics is adding 111,724 square feet of office space to its Silver Spring headquarters complex. The biotech firm has grown to more than 200,000 square feet since it originally moved to an 8,000-square-foot building on Spring Street.

At the southern edge of downtown Silver Spring, a groundbreaking is scheduled for June 12 on the Bonifant, a 149-unit, mixed-income, apartment building for seniors as part of the county’s new library project. The 11-story building near the corner of Bonifant and Fenton streets is a joint project of Montgomery Housing Partnership, a private nonprofit developer and Donohoe Development.
The project sits next to the planned Purple Line light rail station, which is expected to break ground in 2016.

Also in Silver Spring, 700 feet from the Metro station, WPC last year completed the 295-unit Solaire-Metro high-rise, which is assessed at $67.8 million. The building—the first in the Ripley District that the county has targeted for redevelopment south of the subway stop—was 95 percent leased within months of its opening. The firm has a pair of other projects planned fronting Ripley Street and Georgia Avenue, where it is considering a hotel, an office building or more residential development.

In January—north of Solaire-Metro—Home Properties delivered Eleven55 Ripley, with 379 rental apartments in two buildings, including a 21-story tower that is the tallest in Silver Spring. The complex had leased 58 units by the end of the first quarter, according to Delta.

Despite all the apartment construction, Silver Spring continues to show strong demand, with average rents rising at an annual pace of 4.2 percent for Class A high-rise buildings, compared to a 2.1-percent drop in Bethesda, Delta reported. Overall, the county showed a 2.9-percent decline in rent. Delta forecast 13,062 units to be completed over the next 36 months, showing a 26-percent increase over the first quarter of 2013. Both the DC and Northern Virginia report single-digit pipeline increases.

So who are all these people renting in Montgomery County?

Researchers point to Baby Boomer empty nesters giving up their big homes and a rush of their Millennial grandkids finally moving out to live on their own.

“There’s a strong pent-up demand—Millennial shadow demand—in the market,” Schneider said. “This could go on for a year or two.”

Others “have recently joined the workforce but are still living with parents. As the economy continues to improve, many of them will move out on their own,” Cassidy Turley reported.

That’s a continental trend, but it is driven locally by the fact that both the boomer and Millennial generations in the DC region have more wealth than the rest of the nation, according to the Delta report. And the trend is just beginning.

“Tens of thousands of prospective renters in the Millennial cohort will continue to join the workforce over the coming decade and to demand flexible housing arrangements that apartments provide. Those in the Millennial cohort currently doubling up or living at home will eventually “age out” (or be nudged out) and look for their own places, further enhancing demand over the long term,” Delta concluded.