For executives deciding where to lease office space in Washington, the decision used to be straightforward if not inexpensive: Downtown or Georgetown?
Not so anymore.
The District’s building boom since the recession has spawned the construction of new office buildings outside the capital’s traditional hubs. That’s brought jobs to increasingly distant corners of the city but prompted consternation in the more customary locations that are also defending against government cutbacks and companies squeezing their employees into ever smaller spaces.
A new report outlines how developers and landlords expected the area’s robust commercial real estate business to quickly return to normal following the 2008 economic collapse, especially given the region’s recent run of strong job numbers.
“Following two decades of strong tenant demand and significant occupancy gains, developers were optimistic that public and private sector growth would continue to drive demand for more office space,” write researchers from the real estate services firm JLL about post-recession Washington. “However, that was not the case.”
Indeed from 1985 to 2006, Washington was one of the priciest office markets in the country, buoyed by a congressionally imposed height limit that prevents taller buildings and a federal government that never seemed to cease growing. Rents increased an average of 5.1 percent annually.
But following a brief bump driven by federal stimulus spending, a more grim reality set in for owners of the office buildings along K Street from the White House to Georgetown. Law firms and other professional offices jumped to more efficient, glass-skinned buildings in emerging neighborhoods. The federal government finally cut back, repeatedly, through the mandatory cuts know as sequestration. And the District government began driving construction to previously industrial or residential areas behind Union Station, in Southwest and in parts of Southeast around Nationals Park and Metro stations east of the Anacostia River.
Since 2006, eager developers have added another 19 million square feet of new space in 62 office buildings across the city, according to the 51-page report, which was funded by commercial property owners through the city’s business improvement districts. Vacancy doubled by 2008. From the capital’s traditional downtown to the East End, vacancy levels increased nearly 65 percent from 2006 through 2010 as new buildings went up.
“This development, much of it speculative, created a problem of excess supply in the District of Columbia just as weakness in the national economy escalated,” says the report, which is online here.
Things have steadied recently but prospects remain uncertain for the return of the kind of regular rental increases that once were commonplace in Georgetown and the downtown area.
“It’s musical chairs except instead of taking away chairs we’re adding more,” said Joe Sternblieb, chief executive and president of the Georgetown Business Improvement District. Sternlieb argued the District still has strong advantages over competing suburban jurisdictions, namely walkable neighborhoods rich with restaurants, bars and transportation options.
But he said the city needed to continue building on those advantages, particularly in the area of transportation. The Georgetown BID has separately commissioned a $200,000 study to see if a gondola can be built connecting to Arlington over the Potomac River and is urging Metro leaders — once they handle myriad more pressing issues — to eventually add a station there as well. The report recommends that the D.C. government reorganize its incentive and economic development efforts to remain competitive in attracting firms that might consider other jurisdictions.
“Our takeaway are things are really good in the District right now but that doesn’t mean they’re going to stay good, and that there are a lot of things going on in the larger economy and the region that could have an impact on this golden goose,” Sternblieb said.
The executive director of the Downtown Business Improvement District, Neil Albert, said one of the growing problems for downtown landlords is how to re-lease older space that is being vacated by law firms and professional service companies in favor of new buildings that allow more efficient use of space. Owners of some older offices have turned them into apartment buildings.
Albert said he was hopeful that firms like WeWork and Cove offering shared offices or so-called co-working arrangements could occupy some of the offices vacated by traditional employers moving into newer buildings or reducing their footprint. “Buildings with large floor plates just don’t have the kind of spaces that a lot of companies today are looking for,” Albert said. “We are hoping some of these new companies can fill around the edges.”
For those in the stalwart neighborhoods, however, co-working firms have perhaps been more aggressive than other firms in moving out of downtown, to U Street, Dupont Circle, Capitol Hill and elsewhere.
Follow Jonathan O’Connell on Twitter: @oconnellpostbiz