“We have all this space to fill, and there are not enough lawyers and probably not enough nonprofits to move here and fill it up,” said Gerry Widdicombe, director of economic development for the DowntownDC Business Improvement District.
The question of whether the 9-to-5 ethos of downtown Washington will return after a year of mostly virtual work looms large as the city looks toward recovery from the pandemic. The mass exodus to makeshift home offices has led many businesses to reconsider whether they need large and expensive offices. The trend is exacerbating the emptying of downtown as organizations were already downsizing office space in the city’s core and some were moving to cheaper, newer buildings in the region before the pandemic.
With the city’s commercial center seeing its highest commercial vacancy rate in more than 20 years, D.C. officials are making difficult decisions about the city’s budget, which forecasts a dramatic decline in real property tax revenue in the coming years. Authorities also fear drops in sales tax revenue without workers supporting coffee shops, restaurants, bars and other businesses downtown.
“We get half a million people a day commuting into the city,” said David Umansky, public affairs officer for the office of the chief financial officer. “If that number drops a whole lot, there will be a lot of pain.”
D.C. isn’t the only major city grappling with the identity of its downtown in the aftermath of the pandemic. The Downtown San Francisco Community Benefit District has plans to create a public plaza in its commercial center to help bring back its office workers. In Philadelphia, the Center City District is preparing a social media campaign with images of colleagues enjoying lunch breaks together to help resuscitate its office culture.
But D.C. is especially vulnerable to flight from downtown buildings because of its high percentage of white-collar workers relative to the rest of the nation.
Long before the pandemic, city leaders were wrestling with how to attract new businesses and keep current tenants from downsizing — or leaving the commercial center for cheaper or nicer spaces elsewhere.
Between 2014 and 2017, the vacancy rate in D.C.’s central business district hovered around 9 percent, according to data from real estate brokerage firm Colliers International. It climbed to nearly 11 percent in 2018 before surging in 2020 and reaching almost 17 percent in the first quarter of this year.
“This has been occurring for the greater part of a decade or so,” said Neil Albert, president and CEO of the DowntownDC BID.
Before the pandemic, Rabbi Jack Moline, president of the religious advocacy group Interfaith Alliance, rented several offices in a co-working space downtown on L Street. He recently transitioned from six offices to two, saving about $8,000 per month in rent. He’s unsure whether he’ll ever go back to more space.
“We will evaluate moving forward as to whether we’ll expand back to where we were — or somewhere near it,” he said. “Or if we’ll continue allowing people to work from scattered sites.”
Local leaders and real estate brokers attribute much of the vacancy trend to an explosion of construction in NoMa, the Wharf and Navy Yard neighborhoods over the past five years.
Downtown’s offerings are also up against cheaper alternatives in Maryland and Virginia. The average rent in the central business district is $53 per square foot compared to $41 per square foot in Northern Virginia, according to John Falcicchio, deputy mayor of planning and economic development.
While the vacancy rate climbed in D.C., the rate in Northern Virginia was trending downward until the pandemic struck, according to Colliers. Amazon’s selection of Arlington for its corporate expansion boosted the surrounding area’s appeal.
“There’s almost a functional obsolescence that’s happening with these older buildings [in D.C.],” said Ryan Rauner, a broker with Century 21 New Millennium. “There’s no space, you can’t build anything new … that’s the opportunity for those submarkets.”
Experts emphasized that the federal government provides a critical stabilizer for the city’s real estate market. It is the single largest leaseholder in the District, with about 16 percent of D.C.’s office space, according to commercial real estate technology company Squarefoot. But in recent years, the federal government also started to consolidate and relocate. In the summer of 2017, Citizenship and Immigration Services left downtown in favor of Prince George’s County.
The pandemic sent vacancy rates soaring across the District, cutting leasing activity almost in half over the past year, according to Compstak, a crowdsourced real estate information site. Many landlords have increased incentives such as months of free rent to get companies to sign leases — especially given new development in other areas.
“Right now we have simply a supply issue, and therefore vacancy is continuing to rise,” said Mark Sullivan, an executive vice president of Colliers.
‘The Washington address’
Before the pandemic, nearly 200,000 people traveled to the central business district each day to work, patronizing bars, restaurants, shops and hotels that helped bolster revenue from sales taxes. The District’s chief financial officer this year estimated that sales tax revenue decreased by more than 23 percent in the last fiscal year and may not fully recover until fiscal 2023.
Jonathan Wasserstrum, CEO and co-founder of Squarefoot, urged local officials to encourage businesses to return and continue to reopen locations downtown as safety permits.
“It’s time for people to get back to work, and the city needs it — if you want the city to still be there,” he said. “It’s all the small businesses that cater to the lunch crowd, and the bars that cater to the after-work crowd, too.”
The Office of the Chief Financial Officer said in February that fewer people occupying buildings downtown could hurt assessment values, negatively affecting the city’s revenue growth. While taxes are collected from all buildings — even vacant ones — D.C.’s estimated real property tax revenue was revised downward by $40 million for fiscal 2022 and $80 million for fiscal 2023.
Umansky said the city is meeting frequently with developers and building managers to assess how bad the damage could be, and whether businesses will return.
“If they’re working at home or if they discover they can move stuff to the outer suburbs where the rents are cheaper, they will do that,” Umansky said. “Nobody really knows what’s going to happen. A big fear of mine is they’ll discover they don’t need the Washington address.”
D.C. business owners who for decades have thrived with corporate life downtown are desperate for customers to return. Eric Heidenberger, who co-owns several city restaurants including Madhatter near Dupont Circle and Bottom Line on Eye Street, said he has struggled to attract business without the flood of regulars who lived for lunch meetings and happy hour.
Some have even told Heidenberger that their companies were moving to areas such as the Wharf and City Center.
Cafe Soleil, another restaurant that Heidenberger’s family operated near the White House for 12 years, was up for lease renewal soon after the pandemic began raging in Washington. The family decided to shut it down permanently.
Others are more optimistic about post-pandemic life downtown. Ashok Bajaj owns the Bombay Club, which is known for hosting D.C.'s power brokers. He said business at the restaurant has increased with vaccinations, and the allure of being near the White House will always be an attraction.
“I don’t think that glamour will ever go away. It may stall for a little while, but there’s a sex appeal of being downtown,” he said. “The powerful want to be close to power. Navy Yard won’t give you that.”
An uncertain future
Fearful of a scenario where remote work prevails, District officials have put their thumb on the scale to compel workers and their employers to return.
Falcicchio partnered with the Federal City Council to circulate a pledge asking employers to commit to returning to their offices as soon as local health guidelines allow. He said 139 organizations that together employ more than 30,000 people have signed.
Barbara Mullenex, managing principal at global design firm Perkins Eastman, said she signed the pledge in early spring and hopes to have all 130 of her employees back in the office on a flexible work schedule by September.
“I love having an office downtown. I love walking in the city, saying hey, where do you want to go for lunch? I love the relationship that I have with the hot dog guy around the corner,” she said. “And I want to be part of bringing it all back.”
D.C. also forged new partnerships with companies, namely WeWork, that promote shared work spaces. And the Golden Triangle and DowntownDC BIDs have embarked on projects to generate a vibrant outdoor scene — such as public park seating and a “multi-restaurant, multi-retail destination” on S Street. The BIDs have also hosted webinars to advertise new safety features in their buildings and provide resources to help tenants coordinate a gradual return.
“Because of all the head winds that we do face, we have to make sure we have a concerted effort to market the amenities that we have,” Falcicchio said.
Still, city leaders are preparing in case they can’t inspire corporate movement. They have their eye on retaining leases from the federal government, contractors and lobbyists while attracting additional university researchers and medical professionals.
Falcicchio said that the city is seeking satellite campuses of schools outside the city such as Johns Hopkins University, which has invested in building a space at the former Newseum site. Officials are also optimistic about the Walter Reed National Military Medical Center, where Children’s Hospital is setting up a research center.
Others such as Albert and Golden Triangle BID President Leona Agouridis have encouraged the city to consider filling unused office space with workforce and affordable housing.
“It is a working neighborhood right now. But can it be a work-and-live neighborhood like just about every other neighborhood in the city?” Agouridis said. “We’ve been talking for years about the need to do this, and the pandemic has sped it up.”
As the weather has warmed and vaccination increased, there is still little indication of how exactly the city’s white-collar workforce will emerge from the shutdown. But many remain hopeful.
In early April, 11 to 15 percent of people were working from their offices downtown, up from 2 to 5 percent at the worst point of the pandemic, according to DowntownDC BID. A survey the BID conducted showed 30 to 50 percent of businesses plan to be back in the office by Labor Day.
Data provided by WeWork suggests that an abbreviated in-person workweek might be the way of the future.
Thomas Fulcher, vice chairman and co-regional manager of real estate service provider Savills, helps larger organizations including law firms, associations and federal clients find office space. He said that after a year of standstill where few people were looking at buildings, his clients have begun to tour office sites. Most of them have wanted to see spaces downtown.
“It’s still about the energy, the restaurants, the culture. When you are trying to hire people, you want that buzz,” he said. “And frankly, if someone says I have a job out in Reston or a job downtown, of course you want the one downtown.”