I've been writing for years about the low market demand for "luxury apartments" at the outrageous rents being asked for in downtown Bethesda. While thousands of new units have been delivered in Bethesda since the "Great Recession" ended, rents have only skyrocketed, recently surpassing $3000 for 1-bedrooms for the first time at one of the newest buildings. Under the laws of supply-and-demand, and the free enterprise system, landlords should be cutting prices to meet the actual market rate, and undercutting each other to compete with the many options renters theoretically have. Instead, they have maintained the high rents publicly, while quietly filling their many vacant units with illegal Airbnb guests, college students, and corporate contract housing tenants. But the weak demand for the current product at the current price is now spilling into more obvious view, with the proposed replacement of a failed condominium project with a retail building.
Washington, D.C.-based Dochter & Alexander Retail Advisors is pitching a new retail development for 8011 Norfolk Avenue, the former site of Steamers behind the Gallery Bethesda apartment tower. This site, and adjacent property, had been assembled for The Claiborne, a boutique condominium project. Groundbreaking for that building stalled repeatedly, and it is apparently now dead after 10 years of talk and development approvals. The property was sold to Rock Creek Property Group last year.
While the renderings of the proposed retail development look great, the bigger story here is what this is telling us about the multifamily real estate market in Bethesda.
The Bethesda condo market has been dead for some time now. Banks who finance condo mortgages are more than slightly averse to approving loans for condo owners whose neighbors will be Airbnb tourists and college students, to say the least. And you have to actually sell the condos, as opposed to filling them with frat brothers for the spring semester, and they won't sell at way-above-market-rate prices. So condos are kaput for now.
But 10 years ago, you might have seen a rental apartment developer swoop in to snap up 8011 Norfolk once The Claiborne flatlined. They haven't. In fact, multifamily housing building permits have dropped 96% over the last year, Montgomery Perspective reported last month. While blogger Adam Pagnucco is blaming that on the County Council's passage of a rent control law, the fact is that rent control doesn't apply to new construction for 23 years - by which time, reading the Montgomery County cartel tea leaves, the rent control law will have long since been repealed. Most developers sell their buildings shortly after they are delivered, anyway, so they couldn't care less about what happens in 2049.
No, the problem is that there is simply no demand for the apartment product being offered at the price it's being offered at. And now we are seeing the first crack in the dam that developers have constructed to hold off the forces of the free market.
Beyond the lack of multifamily development suitors for 8011 Norfolk, there is a second factor that supports this. That end of the Woodmont Triangle has historically been a terrible location for retail. It's a very quiet, low-traffic area more conducive to a good night's rest than high-octane shopping. If retail is now seen as more viable there than sleepy apartments...well, the multifamily market in Bethesda is in real trouble, folks.
We've already seen the impact of this low demand in the Westbard sector. The number of residential units sought by Regency Centers at Westbard Square was significantly below what was approved in the 2016 Westbard sector plan. Two apartment buildings were entirely deleted, and a third was changed to a nursing home use. A separate developer of two additional projects on the "Park Bethesda" site backed out altogether. When there's red hot market demand for apartments, a collapse like that - or at 8011 Norfolk - simply doesn't happen.
The chickens are slowly coming home to roost for our incompetent and corrupt elected officials who have created this moribund economy. They want to be reelected - and, in some cases, promoted - in November's election. And this is the record they're running on? Heckuva job, Brownie!
9 comments:
The slowing of new residential multifamily construction is not a local phenomenon. Condos across the country now take years to sell out, making them a very limited option for developers. As a renter, I feel the pain of high rent in downtown Bethesda, but that is true for the entire region, not just MoCo and certainly not just Bethesda. I believe most experts still believe that it’s still more economical to rent than the buy in nearly all neighborhoods in the DMV. At least if you want to live close to a walkable transit oriented urban village like Bethesda.
And yet every corner is being knocked down to make way for a 10-story or higher building with million dollar units and street-level retail. A question, which has been asked multiple times over but never answered is, where are all the people? No restaurant, with few exceptions, has a wait for a table or requires a reservation and there's no nightlight really at all. The streets and the sidewalks are empty after 9pm. Moribund is accurate.
Rent control alone killed the apartment market in Bethesda not lack of demand or pricing. The new office to residential tax abatement has restarted several projects which will deliver in the the next 5 years.
Any signs 'big investment' in the county or even the state is drying up? My gut feeling us that principally bigger retailers want a 'Bethesda footprint' for their websites but real investment is lacking.. on the flipside, small scale businesses such as smoke shops and maybe some pizzerias are more about money laundering.
6:40: Rent control doesn't apply to new construction for 23 years. The office conversions were already happening without the incentives (Guardian Building and Elan in Silver Spring, for example). The "tax abatement" is nothing more than profiteering by developers who sought this 20 year(!!) tax exemption from Andrew Friedson, who delivered it obediently for his sugar daddies. The exemption is so broad that it applies to projects that tear down offices, rather than converting them. The revenue impact is going to blow another massive hole in County budgets for the next two decades at least.
I don't think I've read so many factual inaccuracies in one article before. The apartment market everywhere is in a similar state. From DC to Arlington to College Park to Tysons neighborhoods that just a few years ago had cranes crowding the sky have very little activity today.
Your argument that rent control doesn't impact the economics of new development couldn't be more wrong. As you correctly stated (many but not all) developers sell after stabilization, but that sale price is 100% negatively impacted by rent control.
Like any other business investment, commercial real estate investors look at the discounted cash flow over the useful life of the asset to calculate their ROI, and if they can't achieve market-rate rents because of some artificial restrictions even way down the road the property value is adversely impacted. It's simple math.
Also, the rents you see are completely market driven, now more then ever, with all of the new supply.
Anyway Montgomery County's economy in general is flat lining because of years of incompetence by the current county executive and left-wing radicals on the council. The Trump administration's federal cutbacks and rent control are just the straw breaking the camel's back.
6:55: If the rents are market driven by all of the new supply, wouldn't they be dropping, not rising?
If things "are tough all over," why do most other jurisdictions have many times the building permits of MoCo on Adam Pagnucco's chart?
And if rent control is the dealbreaker for new construction and asset prices, why are the developers at Rio and Lakeforest moving forward like gangbusters on major developments? My guess is it's because rents aren't likely to be $3000 a month there, unless they are delusional.
I doubt the rent control law is going to survive the next Council, but even as is, it applies over two decades later, and can be avoided by the renovation loophole.
Adam Pagnucco is no Steve Kornacki or Steve Rattner, just another factless Dyer.
7:31: He may believe the planet will implode if he names me as a media outlet in his quarterly laments regarding the supposed lack of news sources in MoCo, but are you disputing his statistics regarding permits?
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