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Is Everyone In America Buying a Condo?
Moderator Mark Bisnow has been a lawyer, politico, and businessman in Washington for nearly three decades and publishes a growing series of electronic newsletters, including Real Estate Weekly, which features interviews with top Washington- area experts. He also writes“BizKnow,” a weekly personality column in the Washington Business Journal.
Anthony M. Lanier founded EastBanc, Inc. in the late 80s, a Washington D.C.-based real estate investment firm specializing in the acquisition, redevelopment and management of real estate assets. With a focus on urban mixed-use investment, EastBanc’s developments include upscale retail, luxury residential, Class A and Class B office and luxury hotel property types. Since 1987, EastBanc and its partners have acquired and/or developed over four million square feet, which represents an investment value in excess of $1 billion. Washington’s West End and Georgetown neighborhoods, as well as its Central Business District, are the core markets for the group’s most recent development projects.
“Washington today doesn’t reach the housing prices of Milan, London or Sydney. While all of us are affected by bad markets, our buyers are less affected by a recession and most likely won’t be affected by the inability to deduct taxes.”
As founder and CEO of PN Hoffman, Monty Hoffman has developed extraordinary upscale condominium residences and mixed-use properties in Washington, D.C. Under his leadership, the company is deeply committed to serving the neighborhoods of the District and has built over 30 developments throughout the city.
“There’s been so much negative news over the last six months, but I also feel that we’re starting to hit an affordability ceiling. While we might have 70,000 jobs coming into the area [a year], how many of those jobs can afford $800,000 condos?”
Michael Darby is a principal and cofounder of Monument Realty, one of Washington’s leading real estate development firms. Along with partner, Jeffrey Neal, he oversees the firm’s diverse work throughout the region, including a portfolio of more than five million square feet of office, and over 3000 residential units. Current projects include Belles Rives at The Watergate, Dumbarton Place, Potomac Place, The Connecticut, and Columbia Center in Washington, D.C.; and The Odyssey, The Hawthorn, and The Palatine in Arlington, Virginia.
“[Washington is] the center of the world financially and politically. That’s something that we have that no one else will ever have.”
Mark Bisnow: What are each of your marquee
Michael Darby: We have approximately five thousand condo units in Maryland, Virginia, and D.C. The Watergate is one of the highest-profile. We have four projects in Arlington Courthouse and a bunch on Glebe Road. Eventually, we will build condos down by the ballpark in Southeast. We have seven hundred units in Southwest that we’ve nearly completed and some projects up on 22nd and P Street, N.W.
Bisnow: What does a typical condo among your five
thousand units cost?
Darby: They range in value from $500,000 in Arlington to a $1,000 a square foot at the Watergate, depending on the market and location.
Bisnow: What percentage of Monument’s activity is
Darby: We have about $3 billion of development underway, about $1 billion of that is office space and the other two-thirds is condos.
Anthony Lanier: At the moment, our key project is 22 West, also known as the Zinc Building, but I always think our latest project as our best project. Unlike Michael (laughs), who differentiates by which building will arrive when, I have a clear notion of my last building. Our condo activity is about 60 percent of our overall activities.
Monty Hoffman: We have a project on Military and Western Avenue, N.W., called Chase Point with 108 luxury condominiums in the heart of Bethesda; Parcel 31 will have 220 condominiums and a large parking garage; and Union Row Flats at 14th and V Street N.W. with 280 condominiums; and a couple of warehouses that we’ll be refurbishing. We also have a project called the Alta on 14th Street between L and Thomas Circle, with 126 condominiums for your younger cosmopolitan buyer. In Alexandria on Carlisle Square, we will have 145 soft lofts, a cross between the more sophisticated condo product and the loft product. Finally, we have a project starting up over at the Southeast Federal Center of an existing munitions warehouse on the east side of the property near the Navy Yard.
Darby: That’s 16 million condominiums. (general laughter)
Bisnow: I’m reminded of an Esquire Magazine
cover around 1990 that had a picture of a monkey
and the caption said, “Is everyone in America
writing a screenplay?” Washington Life should
have a cover: Is everyone in America buying a
condo? Is this a fad or not?
Hoffman: Oh, I thought you were going to ask, “Is everyone in America building a condo?” I don’t believe it’s a fad, but a change in lifestyle. People are rejecting the outer suburban lifestyle and opting for a condominium lifestyle where they take their discretionary time to travel and enjoy life instead of being strapped to the house.
Bisnow: Are people taking their places in the
large houses in Potomac, or if this were the stock
market, should we be shorting Potomac?
Hoffman: What’s happening is that you have the empty nesters who are moving back into the condominiums and their kids are moving into more of the loft-style condominiums. Those with small children are moving to the single-family homes.
Darby: I still think the future is in mid-level housing in suburbs like McLean and Potomac because it’s only $250 a foot for a four to sixthousand- square foot house. What can you get downtown for $250 a foot?
Lanier: But you’re shorting Potomac with that statement because it didn’t sell at $250 a square foot yesterday.
Darby: Short it or buy it, same thing. I want as much of it as I can get, because I think after a while people are going to say “I’ve done the condo thing, it’s been great, but the baby is getting older and I want more kids and more space.” But the whole market is growing in size. The latest statistics show an increase of 80,000 jobs a year. If 80,000 people are coming to the area, then we’re not building fast enough.
Bisnow: How much of building condos is speculative.
To the extent it’s speculative, how dangerous
Lanier: All of it.
Darby: Until it’s built and you’ve had someone close, it’s speculative. The risk for us is massive, because if they put down $15,000 to buy a $300,000 condo, and the market turns, they can walk away.
Bisnow: So, what are the chances that the market
could turn? How confident are you that there will
be an ample market for all the condos you are all
Darby: We’ve already seen it turn a little bit recently. We’ve seen it transition from a frenzy of investors to buyers sitting back and taking another look. The owner/occupiers or the true buyers, the guys that we’re after, are looking and a bit nervous, and are coming back a couple of times. We’re seeing an adjustment now which I welcome because we get the investors out and sell to our true market. The next stage is what happens with interest rates and affordability, pushing prices up. The investors created a market where they kept pushing numbers up and prices are getting to the point where people can’t afford it.
Bisnow: Do you agree that prices are too high?
Hoffman: The market shifted this summer, and although October was pretty good, I believe that investors are sitting on the sidelines now. There’s been so much negative news over the last six months, but I also feel that we’re starting to hit an affordability ceiling. While we might have 70,000 jobs coming into the area, how many of those jobs can afford $800,000 condos?
Lanier: I don’t think there’s a danger of overbuilding as a general statement in Washington, D.C. It depends on where your focus is; today worldwide the focus is and should be on the baby boomers because they have the highest disposable income statistically in the history of our world. That market is a very neat market and has a very, very narrow supply because nobody has any taste.
Lanier: In this city, some start off with a sense of mediocrity. The people most disbelieving of the quality of the city are many of the citizens themselves. I mean, it’s a terrific city, but whenever you want to do something forward-thinking, it’s met with disbelief that it could work. I noticed it with the Ritz condominiums and we had the same experience when we developed Cady’s Alley. Everybody said that nobody wants to lease off the street. People do not believe that we can achieve something as a city because in [their] minds we are mediocre. In fact, we have a huge amount of disposable income looking for a sense of quality and quality of life.
Bisnow: How much money do you pay for upscale
Lanier: Let’s take this number Michael put into the room of $1,000 a square foot which to most people in this city is an absurd number. While it has been achieved in certain instances, it’s not been achieved on a broad basis.
Darby: You have to be in a penthouse overlooking the Potomac River for $1,000 a square foot.
Bisnow: How many square feet and how much
are your penthouses at the Watergate?
Darby: There are six 5,000 square foot penthouses. We’re asking $8 million. But we offer different products in the mid-range and the upper end, giving you a real choice, something that’s interesting. But to do that in Washington has always been hard because it is a challenging city in terms of its architecture. There are a lot of boxes that are controlled by the height and the amount of square footage you can put on the sites. We can’t just differentiate high-end projects by the marble, etc., but by the architecture and the quality of the product from the visual aspect, the innovative aspect.
Bisnow: So there’s news that this bi-partisan tax
commission has recommended severe limitation
of the mortgage deduction. Are people looking at
your product immune to that? Secretary of the
Treasury John Snow says they’re studying it very
seriously, and it may take them quite a while to
reach a conclusion, but the president’s supposed to
put out a comprehensive tax proposal by 2006.
How would that affect you?
Lanier: I think that’s an interesting question for all of us. There are very few countries in the world that allow you full deductibility of the interest for housing. Nevertheless, their average housing prices are far superior to ours. Washington today doesn’t reach the housing prices of Milan, London or Sydney. While all of us are affected by bad markets, our buyers are less affected by a recession and most likely won’t be affected by the inability to deduct taxes. But certainly, it pushes the rental market again.
Hoffman: You already have a million dollar cap on interest rate deductions. So to those extreme high-end buyers it’s probably immaterial. However, I do think it would have a slight effect on your $800,000 to $900,000 home buyer who is already stretching.
Bisnow: And how about if interest rates keep
Hoffman: Fortunately, the long-range mortgage picture hasn’t really adjusted at all. I think that it will put some pressure on mid-level buyers, but I think we’ve got to go up another pointand- a-half or so for that to really be material.
Darby: Pricing will adjust accordingly because we’re not going to sit with empty buildings. If we’ve already built the building and interest rates go up so less people can afford them, then we’re going to adjust the pricing. We just won’t make as much over time as we did before. Then hopefully the whole thing adjusts and land prices go down because the land component is a greater component than it was before. But these are just minor adjustments in any financial or business model.
Bisnow: Are you guys like the oil companies and
just frowning in parts?
Lanier: I think it’s interesting. The condominium business today is an escalating commodity on costs. The landowner today has sucked out, I would say, the predominant portion of the profit. Our pricing structure is nothing else but reflective of the increasing costs, but unlike the oil companies who have locked in their agreements many years in advance, we’re buying land, building on it ad hoc, and reselling.
Darby: And we’re buying construction . . . We’re trying to factor in whatever the market is at that point in time into the resale, too.
Hoffman: Increased interest rates are putting some pressure on the pricing side supported by continued inflation on the construction side. Although pricing on the land can adjust, and it will, at some point, I don’t for a minute think we’re in any kind of a bubble but I think there may be a leveling of appreciation on the resident side.
Bisnow: Is there greater interest in new
Hoffman: There’s a certain romance in the inherent design elements of the older buildings with older architecture, higher ceilings and fat moldings, but the newer buildings with all the high-tech aspects, large windows and greater light and air probably override that. Some buyers are attracted to these older buildings and some to the newer ones. Darby: They want new appliances, cabinets and bathrooms. By the time you do all that they’re getting mostly new anyway. After we complete the inside of the Watergate, nothing will be old, and everything inside will come out, everything. What’s going to remain is the outside façade.
Bisnow: What’s the coolest new feature or kind of
room that your customers are looking for?
Darby: I have my tranquility room in our Telluride house, with a mountain view. The masseuse comes to my room instead of me going to the bloody massage place.
Bisnow: What are mere mortals looking for?
Lanier: It is not about a feature anymore. We’ve gone through the bathroom and kitchen trend. It’s about quality and space. Hoffman: The open design of a condo is crucial; being able to see through, with 11 foot ceilings and windows to the floor, giving you a grand feeling that provides drama is what I think was missing in the past.
Bisnow: What’s the next hot area going to be?
Darby: An exciting challenge is the area by the ballpark. The proposals will allow us to start with almost a completely clean slate and design from the ground up. We can truly create something special, which is what Anthony has been talking about, where in Southeast D.C., there could be a twelve block radius where everything comes together in a truly livable area, where you don’t need a car.
Hoffman: The waterfront and Southeast is going to be phenomenal because there are so many players involved and there’s so much money moving in.
Darby: But creating something good doesn’t happen overnight. Think how long it took for all the restaurants to come in and fill up around the MCI Center. With the ballpark, it’s focused, and everybody is there with the right retail mix, so that period of time could be condensed.
Hoffman: There are probably a lot of people who wish they had bought near the MCI Center and won’t make that mistake in Anacostia.
Bisnow: Do you see the waterfront as being highend
Darby: It’s going to be a mix. It’s what Anthony said: it doesn’t matter what the price point is internally, it matters what you make the thing look like externally for it to work. The reason why low-income housing often looks like lowincome housing is because it’s been built that way. But if this stuff is all built together with a total plan, things won’t look like low-income housing. It will be integrated into an area that becomes totally dynamic.
Lanier: See Hundertwasser in Vienna, Austria, is one of the most visited buildings in the city. He became famous because he was one of the painters who appeared naked at his own venisage or gallery. But he took low-income housing and made it spectacular with round windows and odd passageways. It’s an icon in the city.
Bisnow: There are many Virginia readers of
Washington Life who know the metro is coming
to Tysons Corner and people are talking about
reinventing Tysons as a quasi-metropolitan area
with pedestrian traffic. What do you think about
condos at Tysons?
Darby: The problem with Tysons is that it was never developed well from the start. It’s amazing that, even with very few sidewalks, making it hard to move around as a street friendly community, the values of real estate in Tysons are going great. There is a development there now that’s selling for $635 a square foot and they’re two-thirds sold out of three hundred units. The beauty of the city now is that we have these massive nodes all around where people live, it’s like having ten or twelve cities within a city, and Tysons is one of those.
Bisnow: And Georgetown?
Lanier: It has had a new incarnation. Today, Georgetown is arguably the epitome of where you would like to be, the most exciting village in the world. It’s a fabulous club. Once you’re in the club you have a huge franchise value in who you see and the people you interact with. Where else can you go down to a little grotto to exercise next to the secretary of state?
Bisnow: Why doesn’t it spread across the bridge
Lanier: Rosslyn was built for a totally different purpose. The challenge for Rosslyn and other areas is how can you take scale, like New York has scale, and give humanity to it?
Darby: And why is Washington different than London, Paris or Rome? Those cities have operated as urban centers where people lived and worked for centuries, yet Washington, until not that long ago, did not operate as successfully. People were amazed that we did a development at 11th and M street, an area five years ago where people wouldn’t have walked. We have to forget about the past and truly build a city, so it’s like London and those cities around the world where the moment you walk into it you think, wow, isn’t this a great city. Washington hasn’t quite got there, but it’s getting there.
Lanier: Washington has the ability to be an accumulation of neighborhoods. To me, the ideal city is London, which has an accumulation of neighborhoods. So I think Washington has the best of London, and the capability of the best of New York which is the speed of commute from one spot to the other. So you take the better of those two worlds: the village character and the neighborhoods one after the other, and the ability to travel from one to the other quickly and you’ve got Washington.
Bisnow: Where do each of you live and why?
Hoffman: I live in Potomac because it’s a balance of fine urban living during the day and I’m home decompressing on the weekends and nights. But I’m only twenty minutes from the office.
Darby: I’m a wanderer but I live in McLean right now. I have an acre and a half and I have two kids. I love living there and we travel all the time, but I like it for the children. I’m from Australia and I’ve grown to love this city because of what it can become.
Lanier: With me all big decisions in life have been by default. Women…(Chatter about the reason being a woman) I live in Georgetown because I think it’s the cat’s meow. I live and build there because I believe that I know more about the area than anybody else and it’s easier to build high-end stuff in a high-end area. I’m very focused on one product type, one goal, which is lifestyle.
Bisnow: One word response please. What is one
thing you would each change about this city?
Darby: Cooperation. People should spend more time cooperating, it would help the city.
Bisnow: What is the one thing that distinguishes
Washington from any other city in the world?
Lanier: It has the most dynamic mixture of power and opportunity.
Darby: It’s the center of the world financially and politically. That’s something that we have that no one else will ever have.