- The Washington Times - Wednesday, April 20, 2005

Although the question of whether commercial or residential development should come first is hardly as timeworn as the chicken-vs.-egg enigma, it is a question faced every day by developers, elected officials and concerned community members.

Should a parcel of land have office space, retail space or residences or a mix of all three uses? The issues are complex.

Developers must decide how to meet zoning requirements that dictate how a parcel of land is to be used, while at the same time determining the most economically viable — read: profitable — way to develop the land.

“As a developer, you make a market call as to the best use of a property, then you look at the zoning and see if a change is needed,” says John E. “Chip” Akridge III, founder of Akridge Real Estate Services.

“If a change is needed, the next question is whether there is a possibility of change,” Mr. Akridge says.

“Developers go to the municipality and look into the planning and zoning decisions which have been made for a particular area,” he says. “The planning department will have figured out what they think ought to be built in a particular area and determined a general layout of where each part should be built. The zoning is more of a legal aspect to the planning that’s already taken place.”

Developers must work with local officials and community groups when making decisions about their projects.

“We want everything to go as smoothly as possible so that the community gets what they want and the developer is able to develop the project profitably,” says Charles Segerman, senior project manager of the Tower Cos.

“Money is better spent on developing a community than in the pockets of attorneys,” Mr. Segerman says.

Adds Mr. Akridge: “In the [District], the ANCs, or Advisory Neighborhood Commissions, generally hold town meetings at which the development team will come in and consult with the public. The public-hearing process can be a three-, four-, five- or 10-step process until the community agrees on what they want and the development team settles on the economic viability of what they want.”

What ultimately determines the outcome?

Each case is different.

“There are a lot of other factors that can influence these decisions, such as historic preservation of buildings or battlefields or even ‘view corridors,’ which were an issue in Manassas when the sightlines of some of the battlefields were going to be affected,” Mr. Akridge says.

“Topographic issues, such as whether a location is a watershed area or a flood plain, or if the area is an environmental habitat for something, could change a project,” he says. “Local citizens may sometimes want a project in the worst way, but if the [Army] Corps of Engineers says it’s a wetland, there’s nothing to be done about it.”

In addition to environmental or historical issues that could affect property decisions, developers and community leaders also look at how future development will create demand for other services.

“A market study always has to be done to determine how much of a project will be commercial versus residential,” Mr. Segerman says. “Residential use has an impact on the resources of an area. This is not necessarily detrimental, but there are costs for things like schools, police and fire support, and other social services.”

“One reason some communities are happier to see active-adult communities being built is because the developers can come in and say there will be less of an impact since there won’t be any kids or any need for additional schools,” Mr. Segerman says.

“Commercial development usually generates revenue through business taxes and can have less of an impact on the community, but from the developer’s point of view, you need to be sure you can lease the space,” he says.

Decisions about commercial and residential development are also affected by whether the property is in the city, in an urbanized suburban area such as Bethesda or Rosslyn, or in a distant suburb. Typically, the farther from the city center, the slower retail and office development will be.

“You have to have rooftops before any retailers will come to a development,” says Leonard S. “Hobie” Mitchel, president of Lansdowne Community Development. “When South Riding in Loudoun County was first developed, there was nothing there in terms of commercial development. Retailers need to see traffic volume and their visibility to traffic before they will come into an area.”

“Offices will usually follow the retailers,” Mr. Mitchel says. “Occasionally, a big user of office space such as AOL … has the vision to look at a plan and know that growth will come to an area like Loudoun County, and they will get in early. It’s important to have a good overall plan for commercial and retail development, and then as a community grows, the market will define the absorption rate of those spaces.”

Office development depends on a different set of factors than does retail development.

“Lots of people need to be next to each other in office space, but some contractors and specialty users such as [the National Institutes of Health] can go to suburban locations,” Mr. Akridge says. “Even when they are in the suburbs, though, they cluster in areas like Route 50 and the Beltway in Virginia or in Bethesda or along 270 in Maryland.”

If someone chooses to locate away from the central area, then the infrastructure isn’t there for workers — places for lunch or to run errands, Mr. Akridge says.

“Some companies do a cost-benefit analysis and find that this can work for them, though,” he says.

Mr. Akridge suggests that the market forces are quite different in urban and suburban areas, although the development process is pretty much the same.

“In the far suburbs, the only thing to build at first is houses,” Mr. Akridge says. “Retailers have the least sense of vision of all planners, and they will wait until the traffic count is high enough and there’s a demographic profile that will meet their sales needs.”

“When you have enough people,” he says, “you’ll get a Safeway and then maybe a CVS and eventually a Domino’s and a Starbucks. Downtown, when we were developing Gallery Place, we sold all the condominiums, but we couldn’t get retail tenants except the movie theater for nearly two years.”

Even though people were working in offices all around the area, the retailers were waiting for more people to move into the neighborhood, Mr. Akridge says.

“Office workers are there, but they don’t have the time to browse and shop the way residents do,” he says.

One factor that slows retail development, Mr. Segerman says, is that retail leases are typically longer than apartment leases — sometimes as long as 10 years.

Retailers may be quicker to move into urban areas than suburban ones, though.

“It’s more important in the urban and revitalization projects to have commercial and retail development right away,” Mr. Mitchel says. “It’s a different product mix in urban areas that’s usually geared to singles more than families. People who live in these areas don’t care about baseball or soccer fields, but they expect the convenience of services, shops, restaurants and being close to work.”

Changing attitudes toward the city and suburbs have also affected the choices developers make.

“The real estate cycle once was that people moved out of the city as soon as they were successful,” Mr. Segerman says. “Now people don’t want to move out of the city because they are in their cars all the time. People wanted shopping malls, but now they don’t want to park so far away, and strip centers are making a comeback.”

“Now people want to live near what I call a ‘lifestyle center’ with something for everyone in one location, such as movie theaters and other entertainment, a coffee shop, and restaurants,” he says. “People are more willing to move into the city, too, because of the high cost in time and money of transportation. They may have less space, but they can live without a car.”

The trade-off between having less-expensive housing with more space and a longer commute and having more-expensive housing with less space and a shorter commute is also felt in communities with fewer conveniences.

Suburban communities with plenty of restaurants, stores and entertainment venues often carry higher housing prices than those that have few amenities.

“At South Riding, the prices weren’t as high when it started, partly because of the lack of services,” Mr. Mitchel says. “Residents had to go to Chantilly to do everything. Having services and conveniences are important to people, so now there’s a grocery store out there, along with other shops.”

“That area (southern Loudoun County) still needs more roads and commercial development, so I expect we’ll start to see more regional retail areas as time goes on and more homes are built,” Mr. Mitchel says.

In the past, developers usually stayed in either the commercial or the residential field. Now many partner with other companies or extend their expertise to meet the demand for mixed-used development.

“Counties want to see a mix of commercial and residential development these days, and part of the marketing of these communities is to sell the conveniences of them,” Mr. Mitchel says.

“You need a balance of both residential and commercial development out in the suburbs,” he says, “but the rooftops have to come first. Developers will do both the commercial and residential portions of the building more often these days, or they will partner up with another developer with more experience in one type of building or the other.”

Akridge Real Estate Services used to develop commercial properties primarily, but the business has changed in recent years to cover all types of development.

“‘Build it and they will come’ may work for baseball, but developers need to change their business to meet market demand,” Mr. Akridge says. “For the first 20 years we were in business, we didn’t do any residential work, and then for the last five years, we’ve done 300 units. We have about 1,000 units on the drawing board now, too.”

Mr. Akridge says the popularity of mixed-use development comes in part from the consensus that people are fed up with the suburban-sprawl lifestyle, which demands a car to do anything. More new communities are including either an urban-style town center (such as Bethesda Row and Reston Town Center) or a more low-key village center.

“Lansdowne was lacking a village center or town center, a place where people could gather, where families could go out to eat and friends could meet for coffee,” Mr. Mitchel says.

“Residents had to go up to Route 7 toward Sterling or Leesburg to socialize or shop,” he says. “So we replanned the community to introduce a new component, a suburban town center. We’ve added live-work condominiums to the mix of housing there, with the condominiums built on top of commercial space.”

The live-work-play concept is what appeals to so many people about city life. But many city neighborhoods are still in the process of being revitalized. In areas that have deteriorated and have little appeal to developers, it is often new commercial development that leads the way for other types of development.

“A perfect example of what I call ‘blight busters’ is the old D.C. Convention Center,” Mr. Akridge says. “When that building went up, that area had so deteriorated that no one went east of 15th Street, even at noon. It was just not an acceptable neighborhood for anyone. The idea was that it would spur development right away, but it didn’t.”

Its effect on the area outlasted the neighborhood blight, though.

“After the 1968 riots, the areas, block by block, along 16th Street to 21st Street were developed, but then even the infill locations were developed and the price of land skyrocketed and development gradually started moving east,” Mr. Akridge says. “Now, block by block, development is pushing past 15th Street to 8th Street and 7th Street and into 6th Street. It’s a long process.”

Mr. Akridge points to the planned developments along South Capitol Street in Southeast as the beginning of a similar revitalization process, which began when the Department of Transportation and government contractors moved into office space in the area.

“We’ll start to see some more mixed-use development in the area, and some of the blight, like the recycling plant and the cab-repair shops, will probably be knocked out, plus the ballpark …will go in,” Mr. Akridge says. “Development there will probably proceed one block at a time, this time moving east to west away from South Capitol Street.”

Although a planned community such as South Riding and urban Southeast Washington are very different neighborhoods, in both cases builders are responding to market demand in planning commercial and residential developments.

And though each case is individual, the decisions builders make with elected officials and community groups are often dependent on similar factors.

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