Many developers in transit-oriented, urban residential areas such as Manhattan, Baltimore, Chicago and Philadelphia are taking advantage of the live-work-play lifestyle sought by young professionals by converting functionally obsolete office space to make room for new apartments. For example, the Reston-based Metropolitan Partnership is converting a 34-story office building at 10 Light St. in downtown Baltimore into a 445-unit apartment building slated to open in 2015.
The trend has been slower to catch on here in Washington. Filled with a steady supply of government agencies, law firms and defense contractors, the area has been relatively insulated from market swings and had little incentive to remove office space. Net office absorption here as a percentage of inventory is more than double that metropolitan areas elsewhere, with year-over-year growth at 1.4 percent compared to 0.6 percent for the other markets.
However, that may be changing. Federal base closings and the General Services Administration’s “Freeze the Footprint” initiatives have sharply curtailed office leasing activity by federal tenants. Law firms are also reducing the amount of office space they lease by as much as 30 percent, relocating back-office functions to the suburbs, and creating more multipurpose spaces to fit the preference of millennial associates. The Nixon Peabody law firm, for example, is reducing the amount of office space it leases by 30 percent when it moves to 799 9th St NW.
These recent trends are having a major impact on the local office market. The Washington office vacancy rate has climbed 5.4 percent, from 8.9 percent just before the recession to 14.1 percent in the most recent quarter to date. Office rental rates declined last year and are projected to continue trending lower through 2014.
With apartments on the rise in the area (more than 23,000 apartment units under construction) and the relatively weak recovery in the office market, momentum is shifting toward converting office space into apartments. Since 2011, a flurry of office conversions have resulted in apartment deliveries in the area.
Projects such as the Sky House East and West in the Southwest/Waterfront area converted 460,000 square feet of office space in two buildings into 530 apartment units at the beginning of this year. Vornado Realty Trust also recently announced plans to convert a 50-year-old office building at 2221 S. Clark St. in Crystal City into 300 micro-units. Also, the JBG Cos. is planning to convert 7900 Wisconsin Ave. NW into 445 apartment units next year.
In addition, developers are recasting projects formerly proposed as office buildings into apartment projects. Donahoe Co.’s 1111 New Jersey Ave. SE and W.C. Smith’s 800 New Jersey Ave. SE are two recent examples of projects originally planned as office developments that switched to multifamily before breaking ground.
Although there are concerns over the impact of all the new apartments in the region, converting older office buildings into other uses is expected to help office supply more closely match demand and reduce vacancy levels.
D.J. O’Brien is a research manager for CoStar Group in the District.