Quarterly: Spring 2004 - GWCAR - Greater Washington Commercial Association of REALTORS

CBQ >> Spring 2004 Issue

NoMa Market Evolution Enters Next Phase

by Mark Mallus, Senior Vice President, CB Richard Ellis

Real estate markets are cyclical phenomena, ebbing and flowing with capital flows, tenant demand, the general economy, zoning regulations, transportation infrastructure and numerous other factors that create the whole entity we work with every day.

Newly developing areas have their cycles of evolution as well. Some of us can recall how construction of the Metro system downtown, the implementation of the Pennsylvania Avenue Development plan, law firm demand for large building footprints and the arrival in force of the national developers all had a hand in the growth over time of the East End submarket. But it didn't happen overnight. Now, the retail amenities have more than caught up and tenants and brokers alike see the East End and traditional CBD as being equivalent in their ability to provide services.

The development of NoMa, or the area loosely defined as "North of Massachusetts Avenue" has already completed its first stage of development and is quickly moving into the next. It provides a fascinating vignette into not only the development of a submarket, but also how that area can create linkages with the surrounding areas and build the urban fabric.

For the purposes of this article, we will focus primarily on high-density commercial development and therefore define NoMa as the area bounded by K Street NE to the south, the intersection of New York and Florida Avenues to the north, North Capitol Street to the west and the Amtrak/CSX/Metro railroad right of way to the east.

Historically this was a service and distribution warehouse area and this was reflected by the designated zoning, CM (commercial manufacturing, primarily warehouse) and M (industrial, also suitable for warehouse). The problems with these zones were:

They allowed almost any use but prohibited residential,

They had heavy, onerous parking requirements, and

Their by right densities were too low with downtown proper rapidly approaching full build out.

The city then astutely rezoned most of these areas to C-3-C to allow residential if desired, reduce parking requirements to an achievable level and provide tenants & developers with a new submarket that would stimulate development. Furthermore, a public/private effort was successful in securing a Metro subway stop to serve this area. Designation of this area as a receiving zone for Transferable Development Rights has made it even more economically attractive for developers.

The first real breakthrough project in this area was the conversion of 1500 Eckington Place from an obsolete printing plant/warehouse to a state of the art data center/switch and satellite broadcasting facility that also brought in intensive office use.

There were some isolated data center/switch facilities in the downtown area, but as real estate brokers we really knew nothing about them or telecommunications. However, once we found a tenant named Qwest, we learned very quickly as we were able to complete a 100,000 sf lease with them and 125,000 sf with XM Satellite Radio, who brought hundreds of employees to the area. We realized that the high speed, high capacity fiber optic lines in the nearby railroad right of way nearby made this area the place to be for "high tech." Other properties leased space to such users and owners rushed to qualify their sites for such uses, and so on.

Soon the market for these businesses disappeared, but these new uses, while not long-lived, accomplished two critical historical tasks. They allowed for the quick upgrade of often rundown industrial style buildings, thereby making the area look better, cleaner and less intimidating. This brought an entirely new potential population of people and businesses into this market. This was the first evolutionary phase of the redevelopment of NoMa.

Now we see a variety of new factors continuing this process, albeit in a changed direction, identifying the start of the second phase. High tech buildings with computers & few people are passé and human-centric office environments are in. Most importantly, the new Metro stop just north of M Street will deliver at the end of this year, creating the necessary transportation infrastructure to serve this market and connect it to the outstanding regional hub at Union Station. (Remember what Metro did for the East End?)

The traditional office core of the city is really totally built out, with only a handful of unbuilt sites remaining, pushing more future development into new areas like NoMa. Trends in government office space needs, procurement patterns and high emphasis on security are also increasing interest in NoMa. Here the multi-acre sites cannot only accommodate large blocks of cost-effective space, but they can allow setbacks from the street, highly desirable for many federal users. The best evidence of this is the new headquarters of the Alcohol, Tobacco & Firearms (ATF), now under construction in NoMa. Clearly, this area is on the federal government's roster of potential locations.

Bristol Group is also developing a seven-acre urban office campus next to the Metro with an existing 408,000 sf renovation known as One NoMa Station, and Akridge is creating plans for a site just west of the Metro that could contain approximately 2 million sf. Greenebaum and Rose has plans and permits for the first 275,000 sf of its project at First and K Streets NE. These and other sites in the market combine for a total potential development of nearly 16 million sf.

Other forward indications of market evolution now evident include continued sales of building sites with investors now purchasing property on the east side of the railroad bed, such as Douglas Jemal's acquisition of the Uline Arena site and the Wilkes Company closing on a site they previously had under lease. A highly interesting project on the north edge of NoMa proper is Sang Oh & Company's mixed use (retail, wholesale/warehouse and office) 187,000 sf building at 300 Morse Street, with frontage also on Florida Avenue. This is such an exciting concept because it has the potential to connect the large and vibrant wholesale market across Florida Avenue to the north with NoMa and its future human population.

Additional events that will follow are development of meaningful retail in the area, first on the city-controlled site east of ATF & the Akridge site and then throughout the area as office buildings deliver. We can also expect residential development to creep up from Capitol Hill proper and improvement of the housing stock east of the railroad bed.

As someone who grew up in downtown Washington, DC, and often visited these areas, it is fascinating and fulfilling to see their regeneration. As a real estate professional it's very interesting to observe the macro/micro level market dynamics and a pleasure to indulge in the art form of anticipating the future (no to mention future deals!). Make sure you keep an eye on NoMa.