Luxury on the Rise
Downtown Bethesda is experiencing a building boom in upscale condos and apartments. But is the demand there?
The black sign with its spare lettering oozes an upscale style more common in Manhattan than Bethesda: “Residences from the several millions,” it says.
The residences it refers to are the 40 luxury condos at The Lauren, scheduled for construction on Hampden Lane starting late this year. It serves as just one symbol of the luxury housing boom underway in downtown Bethesda.
With direct-access elevators and condos as large as 6,000 square feet, The Lauren, currently under Montgomery County Planning Board review, is one of several luxury condo and apartment buildings expected to go up over the next few years. Among the others: The Darcy, where the most expensive condos could go for more than $3 million; and 7100 Wisconsin Ave., where the proposed lobby design aims to replicate a boutique hotel and where rent for a three-bedroom apartment could be as much as $5,000 a month.
Asking prices at The Lauren, The Darcy and many of the other proposed developments could yield a new high-water mark for luxury condos in Bethesda. Resale prices at the Adagio and the Lionsgate, two luxury buildings in downtown Bethesda, average $579 per square foot, according to Bethesda real estate agent Jane Fairweather. The cheapest of the new condos are being marketed at $750 per square foot, Fairweather says, with asking prices at The Lauren reaching as high as $1,500 per square foot.
At the same time, 2,000 luxury apartments are expected to be built in downtown Bethesda over the next few years.
Industry analysts say the growth in luxury condo and apartment living is a trend that aims to capture a new market of empty nesters looking to trade their large houses for low-maintenance condos and apartments within walking distance of the shops, restaurants and public transit options in downtown Bethesda. Developers also are hoping to attract young professionals who can afford high-end housing but are opting to stay in an urban area rather than buying a single-family home in the suburbs.
Fairweather says there’s a huge demand for housing in walkable communities such as downtown Bethesda. But even as construction begins on many of the buildings, she and others familiar with the market are wondering if the demand is sufficient for that many high-end units in the Bethesda area.
“Transit-oriented, mixed-use development is all the rage,” Fairweather says. “People want to be able to live close to, if not in the middle of, where they dine, recreate, exercise and socialize. There’s no question there’s a huge demand for this kind of housing—there’s only a question about whether people can afford the prices we’re talking about in Bethesda. For a while, I think we’ll be overbuilt.”
The current boom in luxury condo and apartment construction stems in part from the housing-market crash of 2007, which led to years without new condo or apartment construction in Bethesda.
“What we’re seeing is a regionwide uptick in luxury units due to the real lack of development during the worst part of the recession,” says Grant Montgomery, who analyzes the region’s apartment market as a senior vice president for Delta Associates, a market research firm based in Alexandria, Va. “As the market has started to improve, we’ve seen a backlog of demand in the region, including in Bethesda, and we’ve seen developers start to fill that demand.”
Ross McWilliams, co-founder of the Alexandria-based real-estate sales and marketing firm McWilliams Ballard, says 40 to 50 condos have sold for more than $800,000 over the past five years in Bethesda, providing evidence that there’s a market for similarly priced units. McWilliams also notes that condos at Parc Somerset in Chevy Chase routinely see resale prices of $1 million to $3.5 million.
As for the condos “starting in the several millions,” McWilliams says there’s a “very limited” market. “There is a market for [condos costing] $800,000 to $3 million,” he says. “Beyond that, the market is very, very thin.”
Douglas Firstenberg is a founder of StonebridgeCarras, co-developer of The Darcy, where the condos range in price from $700,000 to more than $3 million. He agrees that there isn’t “a huge depth to the high-end luxury market.” The Darcy will include 64 regularly priced units, plus 24 moderately priced dwelling units (MPDUs) to meet Montgomery County’s affordable housing requirements.
“We felt comfortable with 64 market-rate condos,” Firstenberg says. “We’re also just as happy not to have 164 market-rate condos.”
Fairweather says early sales and reservations at condo buildings such as The Darcy and The Lauren indicate that buyers are especially interested in spacious, ultra-luxurious condos. Some condos at The Lauren are as large as 6,000 square feet. Roughly a third of The Darcy’s condos have sold, with prices averaging about $980 per square foot. That puts a 2,000-square-foot condo at nearly $2 million.
At The Lauren, developers are marketing units ranging from $1,100 per square foot to more than $1,500 per square foot in the “reservation and conversation” phase, where buyers reserve units at a certain price. Two units are already reserved, says Larry Goodwin, founder of Washington, D.C., based 1788 Holdings, which is co-developing the property.
“Our market research suggests the larger units of 2,000 square feet and above typically trade at a higher price point than smaller on a per foot basis,” Goodwin says. “There’s a dearth of those [larger] units in the Bethesda area. Our opinion is that this is an underserved segment of the market.”
Still, developers acknowledge that they’re selling to an untested market. The highest-priced units are being sold almost exclusively to empty nesters.
“This is an emerging market,” Firstenberg says. “It’s not clear yet how many people want that kind of lifestyle. I don’t know how many of the announced condo projects will actually get built.”
Goodwin says that although research indicates there’s a market for large luxury units such as those proposed for The Lauren, “I honestly don’t know how deep that market is. It’s the $64,000 question.”
Even as condo developers pursue empty nesters, apartment developers are trying to capture that submarket, too.
The 139-apartment building that Bethesda-based Washington Property Co. is planning for 7100 Wisconsin Ave. will include some “empty-nester units”— 1,430-square-foot apartments with large terraces and rents of $4,500 to $5,000 per month—says Daryl South, the company’s senior vice president of development.
“We were mostly focusing on young professionals,” South says. “But as we talked to people in the market, we started getting feedback from people who were looking to sell their homes but still stay in the area, asking if we would have any larger units. So we feel pretty confident that there’s some demand for that.”
Donohoe Development Company is developing Gallery Bethesda, a 17-story building with 234 apartments on Auburn Avenue. Jad Donohoe, senior vice president of the Washington, D.C.-based firm, says empty nesters may rent luxury apartments for a year or two while figuring out their retirement plans. The first of two planned buildings at the site, Gallery Bethesda will feature high-end amenities such as a coffee bar and a rooftop pool and sundeck.
“A lot of folks are looking at the for-sale market and are thinking that now is a good time to cash out,” Donohoe says. “Some of them are going to end up renting for a year or two because they want to move [to downtown Bethesda] but aren’t ready to commit to a purchase yet. Then there are the younger folks moving to the D.C. area for work who don’t want to commit to a place for longer than one or two years.”
Fairweather says Bethesda is a hard sell when compared with other apartment markets already well-established among 20-somethings.
“We are competing with Penn Quarter, the H Street corridor, Arlington, Ballston, and all those places where there is hip stuff going on, and where young, upwardly mobile people already live, work and play,” Fairweather says. “The bulk of 25- to 34-year-olds [who] these units are being marketed to don’t consider Bethesda hip.”
That lack of hipness worries Montgomery County officials, too. A new Nighttime Economy Task Force is exploring how to improve the county’s generational mix and economic future in downtown Bethesda and other urban areas.
Meanwhile, concerns remain that the Bethesda market will end up with a glut of high-priced apartments and too few people renting them. Donohoe says fears about oversaturation are “realistic,” and could lead to lower rents than developers had anticipated.
“I don’t think there’s going to be a problem filling units that are well-located and well thought-out, and that deliver a high degree of quality,” Donohoe says. “What [developers] are concerned about is that rents aren’t going to meet people’s original projections, or that rents are going to be a little bit softer or lower [than needed] to make these projects work.”
Fairweather says she anticipates developers will offer concessions, such as a month of free rent or free parking for six months, to make it through the slower times. “Eventually, for both condos and apartments, the market will adjust by prices dropping if we’ve overbuilt,” she says. “But it might take awhile.”
On the other hand, it’s equally likely that units being built near Woodmont Triangle will spur a new wave of redevelopment in that area, she says, which will, in turn, draw even more new residents to Bethesda.
“Bethesda has Metro access, it has great schools, and it has more advanced degrees per capita than any other ZIP code,” she says. “I wish to believe it will be successful in the development goals it has now. I think we all have hope that the vision that is before us actually materializes.”