An assessment of the office market in the District of Columbia showed that before the pandemic, mixed-use communities and downtown Washington were increasingly competitive, and now these markets have proven to be more resilient to the negative effects of the pandemic. This shows that the diversified use of downtown space will help create a more livable and inclusive environment and protect school district income from future economic downturns.
The impact of the COVID-19 pandemic has triggered a lot of speculation about the future of cities, but many people believe that as people change the way and location of life and work, the use of cities, especially the city center, will change. [1] At the beginning of the pandemic, as workers shifted to telecommuting, businesses closed, and the flow of people dropped, economic activity in the city centres across the country suddenly stopped. [2] At the time, we believed that recovery meant returning to normal business. However, nearly twenty months later, workers, residents, and employers have all become accustomed to a new way of life, which has changed the way they interact with the dense urban environment. Now, the data has only just begun to reveal exactly how preferences have changed, giving us a glimpse of what a resurgence in the city centre might look like, and how the city might begin to adapt.
An important feature of the post-COVID world is the blurring of the distinction between home and office. Therefore, many urban residents may have new or changed expectations for the communities in which they live or work. One expectation (or hope) is that the central business district will gradually be transformed into a mixed-use community with more residents, thereby increasing the amount of economic activity.
To begin to understand whether these changing preferences are likely to be consistent with the actual situation in the city center in the future, we asked: What types of office areas in the District of Columbia are the most resistant to the pandemic? In order to reveal these trends, we first classify the urban office submarkets defined by CoStar into "office-intensive", "mixed-use" or "other" (usually residential-intensive) buildings based on the construction environment and actual conditions of each submarket. Use of things. [3] Then, we checked the office market trends to see if the mixed-use sub-market performed better than other types of sub-markets.
Since many jobs in the city can be done easily from home,[4] workers in the District of Columbia quickly turned to remote work, leaving the city’s densely office community at a disadvantaged position. Due to the lingering effects of the COVID-19 pandemic and the proliferation of Delta variants, the school district’s return to the office has been slow, even though public health restrictions have been lifted and vaccines are available. As of mid-October 2021, the number of office workers working on site accounted for 27% of the pre-pandemic occupancy rate in the DowntownDC Business Improvement District (BID) and 31% of the pre-pandemic occupancy rate in other parts of the region. [5] This unwillingness to return to the office resulted in the city's office vacancy rate reaching 14.1% in the second half of 2021, which is the highest level since the 1997 Revitalization Act was enacted. [6]
The mixed work schedule of office and home is likely to continue. In a September 2021 survey by the Greater Washington Partnership, employers reported that they expect that by the summer of 2022, an average of 68% of employees will be onsite. [7] Many large employers, such as PricewaterhouseCoopers, Deloitte, Google and KPMG, have announced their permanent shift to working from home. [8] Other major employers, including Amazon, have leaned toward a permanent hybrid model. [9]
The long-term, substantial shift to telecommuting will have a lasting impact on cities, especially the city center, because workers can more flexibly decide where they want to live and work. So far, the decline in public transport passenger traffic[10] and the decline in the appraised value of office buildings in the area have proved this. The chief financial officer of the region estimates that by fiscal year 2022, the property tax revenue of the city's large office buildings will decrease by $121 million due to a 9.7% reduction in total appraised value. [11] In addition, even small shifts of workers and residents to the suburbs may have a lasting impact on the school district’s income. These threats demonstrate the importance of adapting to post-pandemic trends.
In the next section, the following CoStar office submarkets are classified as "office-intensive": Central Business District (CBD) and Eastern District. The following submarkets are classified as "mixed use": Southwest, Capitol Hill, Georgetown, West End, NoMa, and Capitol Riverside.
As of 2019, the year before the pandemic, the vacancy rate of the entire office market reached 11.2%, the highest level since 1993. However, not all sub-markets can evenly experience this increase in vacancy rates. In 2019, the vacancy rate in densely populated office areas in the city reached 13%, while the vacancy rate in other areas remained the same as in previous years, hovering around 9%. Although the number of new buildings delivered in 2019 has skyrocketed, submarkets outside the city center are more likely to absorb this space than submarkets with dense offices.
In recent years, competition in mixed-use submarkets such as Capitol Riverfront and NoMa has become increasingly fierce. Since 2017, although the mixed-use submarket has accounted for less than one-third of the office space in the region, it has still contributed to the active absorption of most office buildings in the region. For example, in 2019, the mixed-use submarket accounted for 28% of the district's office inventory, but it accounted for 96% of the city's net absorption. In contrast, since 2018, the region's office-intensive submarket has vacated more office space than leased. Therefore, despite holding 62% of the city office inventory.
These trends are partly due to the increase in many development activities in these mixed-use communities in recent years. For example, the office space of a 3.2 million square foot mixed-use project terminal in the southwest region[12] has been enthusiastically sought after, attracting major tenants such as the new Washington Gas Headquarters and the large law firm Williams Connolly.[13 ] Many companies that move to the terminal use convenience facilities as an important recruitment tool. Both employers and workers can enjoy the convenience of working in office spaces close to other community facilities such as parks, retail stores, grocery stores, and residential areas. Mixed-use communities provide this, and the cost is generally lower than in office-intensive downtowns.
In 2019, office rents in downtown Washington DC were 6% higher than in mixed-use areas. Although this is down from the 16% lead of the city center 20 years ago, rents in the city center are still relatively high, forcing some employers to withdraw. This shows that with the increasingly fierce competition between rents and office-intensive areas, the demand for mixed-use sub-markets continues to increase, and the cost of locating the city center is higher compared to other areas in the city or region.
Since the COVID-19 pandemic, the school district has vacated more office space than rented, with a net absorption loss of 3.3 million square feet between April 2020 and October 2021. [14] Most of these losses are concentrated in the city's densely office submarket. Considering the sudden and continuous cessation of economic activity in these areas, this is not surprising. As of September 2021, DowntownDC BID estimates that the operating rate of the downtown economy is 33% of pre-pandemic levels. [15]
Although the DC city center continues to struggle with reduced foot traffic, the economy in mixed-use areas is recovering faster due to the high concentration of residents. In the first quarter of 2021, although the office-intensive sub-market net absorbed the city's negative absorption, the mixed-use sub-market began to show signs of recovery, with a positive net absorption rate for the first time since the pandemic. It was not until the second quarter of 2021 that the office-intensive sub-markets began to recover; however, in the following quarter, these sub-markets once again accounted for the city's negative suction in terms of net value.
At least some of the vacated space is due to the company reducing their real estate portfolio, either no longer using office space at all, or renting smaller space. According to a survey by the Greater Washington Partnership, 10% of employers with 50 to 200 employees (representing most regional companies)[16] said they plan to reduce their real estate portfolio next year—an increase from the December 2020 survey 2%.[17] Whether employers are reducing their real estate footprint or moving to a new space, the remaining demand is concentrated in the mixed-use submarket in the region. This is not only reflected in the absorption rate, but also in the vacancy rate and rent levels relative to before the pandemic.
So far, in the third quarter of 2021, the vacancy rate in the mixed-use submarket is still 2.1% higher than the vacancy rate in the third quarter of 2019, while the vacancy rate in office-intensive areas is still 3.7% higher. In addition, the vacancy rate in mixed-use areas has recently increased, with new construction area of 462,478 square feet, and the office-intensive sub-market has not had any new deliveries since the third quarter of 2020. [18] Perhaps what best illustrates the demand is that compared with the third quarter of 2019, rents in the mixed-use submarket in the third quarter of 2021 have increased by nearly 3%, while rents in the office-intensive submarket are still lower than in 2019 s level.
During the crisis, the mixed-use submarket has been more resilient than other submarkets. After the attacks on September 11 also temporarily halted the region’s economy, the mixed-use sub-market accounted for the majority of the city’s positive net absorption. In the fourth quarter of 2001, the mixed-use submarket in the district only accounted for 22% of the city's office space, but accounted for 76% of the city's net absorption. At the same time, the office-intensive sub-market accounts for 66% of the city's office space, but only accounts for 12% of the city's net absorption. This is different from the situation in previous quarters, when the office-intensive submarket accounted for most of the city's absorption. For example, in the fourth quarter of 2000, the office-intensive submarket accounted for 99% of the district's absorption. Although the economy can recover faster after September 11 than after the COVID-19 pandemic, the initial impact is similar. When visits and spending fall, the city center is most vulnerable.
In the long run, the high concentration of A-level space in the mixed-use submarket may contribute to the relative resilience of these regions. In the mixed-use submarket in the region, 75% of office space is Grade A, compared to 60% in the office-intensive submarket. During the pandemic, the A-type market was actually slightly more impacted than other office-type markets. For example, the vacancy rate for Grade A office buildings in the Central Business District is currently 18%, while the vacancy rate for all other levels in the Central Business District is 16.5%. [19] However, in the long run, the amenities provided by these spaces, such as high-quality air filters and non-contact technology, will be desirable. As leasing activities heat up again, the ability to customize space according to specific needs, such as providing flexible space for workers or solving public health issues, will become more and more important. [20] As the preference shifts from space quantity to space quality, the mixed-use submarket in the region is in the best position to meet this demand.
More than 75% of the built environment in downtown Washington is dedicated to office space. [21] This made downtown DC vulnerable even before the pandemic. Any recession that leads to an increase in the unemployment rate, or in this case, the complete cessation of economic activity, will have a profound impact on businesses and the real estate market in densely office areas. In addition, after the real estate market is hit, the urban property tax revenue from these areas will also be affected. These areas depend to a large extent on the appraised value of commercial office space.
A wider range of uses and amenities will increase the resilience of the city center and its attractiveness to residents and businesses. As evidenced by the rebound in the multi-family housing market,[22] even if future jobs are changing or still uncertain, there is still an incentive to live in the city. The rise of telecommuting does not necessarily mean the "death" of downtowns or cities. Conversely, residents who work remotely may not work from home, but in a coffee shop or co-working space near their home. They may still choose to meet with colleagues at lunch or dinner and spend money at local businesses. This change in behavior has been going on for many years, but it has been exacerbated by the pandemic, marking how to best use the remaining developable land in the area and how to best redevelop the space.
Where feasible, transforming office space into residential multifamily buildings will help increase the number of people in downtown areas outside of working hours, thereby supporting local businesses. Even if workers do not do this, residents will provide support to the community, and these new units will provide more downtown job opportunities. [twenty three]
In other cases, it may make more sense to transform large old office buildings into smaller, more flexible spaces that provide high-quality amenities. Many companies choose to shrink their real estate investment portfolios and look for smaller spaces. [24] Others are more likely to prioritize high-quality space over space size. In the long run, being able to meet these needs will help reduce the vacancy rate.
These trends not only hint at how the region adapts to changing preferences, but also reveal new opportunities in the region. Although the occupancy rate is very low, the city has the opportunity to diversify the types of businesses concentrated in the city center. Many small businesses and start-ups owned by ethnic minorities face obstacles in obtaining funding, and it is difficult to pay the high office rents in downtown Washington. [25] Encourage and incentivize these companies to set up offices in downtown, especially when rents are low. The next step will help realize the diversified economy of the district. As the market begins to recover and rents begin to rise again, it is also important to help these companies retain their own space, for example through programs to help small businesses own their own space. Although the region provides incubators, accelerators, and co-working spaces[26], there are still opportunities to provide more companies starting in these spaces with the ability to stay in the region during expansion.
Finally, some nuances that are not covered by this analysis need to be further explored. This may include a deeper understanding of the zoning of the area and which types of uses of developable land and redeveloped buildings are most valuable to the city. There are other factors that affect the community’s ability to recover during a crisis, such as the accessibility of parks, subway access, crime rates, and walkability. understand:
It will help advance efforts to make the DC city center more livable and resist economic recession.
In this analysis, we used a simplified definition of mixed use, focusing on the mixing of buildings in the community based on primary use, rather than buildings based on zoning or vertical mixed use. The boundaries of the office submarkets are defined by CoStar, and each of these submarkets is classified as "mixed use", "office intensive" or "other" (such as residential intensive or mixed use without a large amount of office space). These categories are determined by DC Open Data using the integrated tax system public extraction database and the common ownership land parcel database to calculate the number of office buildings relative to the number of vertical multi-family houses. Then compare this indicator with the ratio of offices to multi-family houses based on (1) total building area (GBA) and (2) land area. All three indicators will produce similar results.
A simple ratio of multi-family residences to offices is used instead of evaluating all types of use combinations, because we assume that communities with a large amount of office space paired with multi-family residences are mixed-use, because other amenities, such as retail, may follow suit .
The following filters were applied before calculating these metrics:
[1] See, for example, Richard Florida, Andrés Rodríguez-Pose, and Michael Storper (2021). Cities in the World after COVID, Urban Studies 1-23. Available at https://doi.org/10.1177/00420980211018072
[2] For more information on how the COVID-19 pandemic has affected the area so far and an assessment of the city’s recovery, please see the "2021 State of Business Report: Reconstruction", available at https://www.dcpolicycenter. org/publications/2021-state-of-business/
[3] For example, "mixed use" reflects a combination of buildings based on primary use in the community, rather than buildings based on zoning or vertical mixed use. For the purpose of this analysis, we only focus on the combination of office buildings and vertical multi-family houses. The “office-intensive” sub-market refers to the sub-market where at least 80% of the buildings under consideration are offices, the “mixed-use” sub-market refers to the sub-market where 30% to 80% of the buildings are offices, and the “other” sub-market Those buildings with less than 30% are offices. For additional details on these groupings and how to define each submarket, see the methodology section.
[4] According to recent research, 61% of jobs in the Washington area can be done at home, compared to the national average of 37%. Dingle, Jonathan, and Brent Neiman (2020). "How much work can be done at home?" University of Chicago Becker-Freidman Institute for Economic Research, research/white paper.
[5] Kastle data comes from DowntownDC BID (2021), "DowntownDC Economic Update: Early Autumn 2021". The report defines "pre-pandemic" as the control period from February 3, 2020 to February 13, 2020.
[7] Capital COVID-19 snapshot (fall 2021), Greater Washington Partnership.
[8] DiNapoli, Jessica (2021). "Exclusive PricewaterhouseCoopers provides full-time remote work for American employees." Reuters.
[9] Reuters, Dominica (2021). "Amazon gave up the plan to resume work and will now allow most employees to work from home indefinitely." Business Insider.
[10] WMATA estimates that the decline in passenger flow and revenue will continue until fiscal year 2023. Total passenger flow will be 53% of the pre-pandemic level and operating income will be 45% of the pre-pandemic level. See: General Motors/CEO's proposed operating and capital budgets for fiscal year 2021 and capital improvement plans for fiscal year 2023-2028.
[11] DowntownDC BID (2021), "DowntownDC Economic Update: Early Autumn 2021"
[12] The first phase of the terminal (approximately 2 million square feet) was delivered in 2017, and the second phase (approximately 1 million square feet) is expected to be delivered in 2022. For more details, please refer to: "Regional Terminals". The second phase of the Urban Land Institute or The Wharf project site.
[13] Sernowitz, Daniel (2018). "Exclusive: The Wharf signs well-known anchor tenants and starts the second phase." Washington Business Magazine and Sernovitz, Daniel (2017). "The terminal just landed as a major tenant in a large utility company." Washington Business Magazine.
[15] DowntownDC BID (2021), "DowntownDC Economic Update: Early Autumn 2021"
[16] Kathpalia, Sunaina (2020). "How many small businesses are there in Washington?" District of Columbia Policy Center.
[17] Capital COVID-19 snapshot (fall 2021), Greater Washington Partnership.
[18] Since the second quarter of 2020 (the pandemic began), there have been 557,000 square feet of new deliveries in the office-intensive submarket, of which none will be delivered in 2021. During the same time period, 462,000 square feet of new food was delivered in the mixed-use submarket, all delivered in 2021. CoStar will visit on October 13, 2021.
[20] CBRE 2021 Americas Outlook Event Series: Office, can be accessed here.
[21] According to DowntownDC BID calculations, 75.6% of the building space in DowntownDC BID is dedicated to offices. Although DowntownDC BID is not the research area of this analysis, it accounts for a large share of the office-intensive sub-market. DowntownDC bids (2019). "The state of the city center in 2019."
[22] Bannister, Jon (2021). "As the recovery accelerates, the demand for apartments in Washington, DC is at a record high." Bisno.
[23] For more detailed information on residential conversions in the area, please visit: Kathpalia, Sunaina and Sayin Taylor, Yesim (2021). "Check the office-to-residential conversion in the area." District of Columbia Policy Center.
[24] As mentioned above, there are several reports covering this trend: CBRE 2021 Americas Outlook Event Series: Office, accessible here; Capital COVID-19 snapshot (fall 2021), Greater Washington Partnership.
[25] In 2019, the Federal Reserve Bank of New York estimated that 58% and 49% of black and Hispanic companies face financial risks, respectively, compared with 27% of white-owned companies. In another study, the Kaufman Foundation estimated that more than 70% of new black, Hispanic, and Asian companies rely on personal funds to conduct business, while white entrepreneurs usually get loans from banks. Misella, Lucas (2020). "An uphill battle: COVID-19 has caused huge losses to minority businesses." Federal Reserve Bank of Cleveland.
[26] A partial list of spaces provided can be found here: incubators, accelerators and co-working spaces | downgrade
Featured image: Aimee Custis (source)
Researchers at the DC Policy Center are independent writers, and we are happy to encourage the expression of various opinions. The views of our researchers published here or elsewhere do not reflect the views of the DC Policy Center.
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