Real Estate and Construction
The DC commercial real estate market, historically reliant on the federal government, has had to diversify as government spending and government demand for office space has plateaued. During the 1980s through the early 2000s, federal tenants accounted for 25-30% of leasing activity in DC.1 However, following the 2008 recession and the impacts of sequestration, vacancies increased to 11.5% in 2009 and rents fell. Law firms, traditionally the anchors of the Trophy and Class A office markets in DC, cut costs by shrinking their footprint and real estate portfolios (about 4.5 million square feet)of space was returned by large law firms into the market between 2009 and 2014).2 Stability has recently returned to the office real estate and construction market, with construction activity in the District totaling 2.5 million square feet at the end of 2015, and a significant percentage of construction in established submarkets being pre-leased.3 However, the glut of office space in suburbs such as Tysons Corner is creating a competitive market, with discounts and incentive programs to attract tenants to their jurisdictions.4 Nationally, the DC office market is competing with low-cost places that offer cheaper space, lower taxes, and generous incentives, such as Austin and Raleigh.
In the residential real estate market, the current supply of available homes for sale does not meet demand.5 At recent construction rates, the Washington metro area is producing 13,000 fewer housing units per year than needed to meet job and household growth. While there has been an uptick in construction (the current level of construction in the Washington area is 18% above the long-term average) and improvements in vacancy rates, home affordability continues to hover below the national average.6 In May 2016, the median home price was $570,000 in DC and $375,000 in the DC metro area.7
Visit the initiatives page and filter Core Sector by “Real Estate & Construction” and “All” to see initiatives that support this sector. You can also filter Opportunity Area by “Smart Cities & Civic Solutions” to see additional initiatives related this sector.
Major Trends Affecting the Sector and Implications
DC’s office market will be driven by the private sector, not the federal government
Trends: The negative impacts of federal cutbacks on the region’s office market have been exacerbated by the moves of the General Services Administration (GSA) to consolidate more federal agencies in owned space, reduce the amount of square footage per employee, and relocate several agencies to lower-cost spaces.8 From 2012 to 2015, the total amount of office space leased by GSA in the region declined by three million square feet and the average rent for GSA leases dipped by about $4.50 per square foot, and this is expected to continue.9 In the near term, leasing activity in DC will likely continue to be driven by high-tech, healthcare and media companies, as well as the continued growth of nonprofit organizations, associations, and government affairs entities.
Implications: The private sector office market is more price conscious, more volatile, and has less need for downtown spaces near federal agency headquarters than the relatively stable market of the federal government, law firms, lobbyists, associations and nonprofits. An increased emphasis on private sector leases may thus put downward pressure on commercial real estate market.10
Changing preferences in office space
Trends: While office demand has stabilized, tenants are demanding different, and often smaller, office space configurations.11 Law firms, for instance, are seeking more windowed offices and less interior space in the 20,000 to 30,000 square feet range, not 50,000 to 60,000 square feet.12 Co-working spaces are increasingly popular both nationally and locally. By 2020 an estimated 3.8 million professionals globally will work in co-working facilities.13 With over 70 co-working or on-demand office spaces14, DC is the country’s sixth largest market for co-working, and co-working made up nearly 20% of all leasing activity in DC in 2016.15
Implications: Co-working spaces provide a new set of design, leasing, and occupancy parameters that offer more flexibility and may be better suited for a more demand-based market such as DC. However, while demand for shared office spaces is growing, it is not likely to replace the majority of conventional office space demand in the near future. The changing preferences for office space pose challenges for the office buildings built in 1980-2000 in core markets such as Metro Center and the Pennsylvania Avenue corridor. There may be opportunities to explore how to better match vacant space with newer demands. At a minimum, a concentrated effort to grow emerging sectors of the economy (and thereby increase office space demand) will be needed, and a targeted office market retention, expansion, and attraction approach could help alleviate the challenge.
Baby boomers and millennials define the housing market
Trends: The DC area’s housing market is primarily being influenced by the preferences of two generations: baby boomers and millennials. Boomers are more likely to work than previous generations in their age group – the 2014 national labor force participation rate among the 65+ population was 19%, up from 12% in 199016 – and more likely to stay in their homes and age in place than prior generations, with the mobility rate for individuals age 65 and older dropping from 5.0% in 1990 to 4.1% in 2014.17 Millennials, on the other hand, have been slower to establish households than previous generations. As of 2014, 32% of those aged 18-34 still live with their parents, a figure that historically has been closer to 30%. In addition, DC millennials prefer to live in urban areas. A ULI Washington survey of Beltway millennials suggests that 36% plan to be living inside DC itself in three years, while only 5% plan to move to the suburbs outside the Beltway.18
Implications: Boomer trends of aging in place and desire to remain in the District mean that the population of seniors is likely to increase. This will have an impact on the demand for senior-friendly housing, as well as for services within the ‘silver economy’ (i.e., the economic activities relevant to the needs of older adults). The Age Friendly DC Strategic Plan 2014-2017 already sets out a plan to shape DC’s urban environment and civic supports in a way that promotes active and healthy aging. To continue attracting and retaining millennials, especially as they begin to start families, high quality education, transportation, healthcare, and affordable childcare and housing will be essential.
Impending Infrastructure Upgrades
Various key pieces of infrastructure in the District are aging and expected to undergo major upgrades or investments in the near future, creating opportunities for new jobs and career pathway development. See the Smart Cities and Civic Solutions opportunity area for a more detailed description.
- Jones Lang Lasalle Inc.. District of Columbia Office Market Study. May 2016. <http://static1.1.sqspcdn.com/static/f/1025641/27004434/1462201709427/DCOfficeMarketStudy-May_2016.pdf?token=PwroigQzT4LXFkzWRzHyltGrqnQ%3D>.
- Delta Associates and Transwestern. 2016 Trendlines: Trends in Washington Commercial Real Estate. 2016.
- Merrill, Than. “Washington DC: Real Estate Market & Trends 2016.” 04 August 2016. “What to expect from the 2016 Washington-area housing market.” The Washington Post. 7 January 2016. “Spring started early for DC housing market.” The Washington Post. 31 March 2016.
- Ptaszynski, Alina. “Washington, D.C., Home Prices Hit a Seven-Year High as Fewer Sellers Step Up”, Redfin <https://www.redfin.com/blog/2016/06/washington-dc-home-prices-hit-a-seven-year-high.html>.
- Delta Associates and Transwestern. 2016 Trendlines: Trends in Washington Commercial Real Estate.
- Deloitte Center for Financial Services. Commercial Real Estate Redefined. 2016.
- Jones Lang Lasalle Inc.. District of Columbia Office Market Study. May 2016.
- Small Biz Labs. “Coworking Forecast – 26,000 Spaces and 3.8 Million Members by 2020.” Emergent Research, 2 August 2016. Accessed 21 December 2016. <http://www.smallbizlabs.com/2016/08/coworking-forecast-44-million-members-in-2020.html>.
- “Washington DC Economic Partnership Research (August 2016)”
- Tauren Dyson. “Co-Working Dominates the DC Office Market in Q1.” Bisnow. 6 April 2016. < https://www.bisnow.com/washington-dc/news/office/coworking-dominates-dc-leasing-in-q1-58404>.
- Bureau of Labor Statistics. Civilian Labor Force Participation Rate by Age, Gender, Race, and Ethnicity. https://www.bls.gov/emp/ep_table_303.htm
- Delta Associates and Transwestern. 2016 Trendlines: Trends in Washington Commercial Real Estate. 2016. < https://download.transwestern.com/public/MidAtlantic%20Region/TrendLines/2016%20TrendLines/2016%20Washington%20TrendLines%20Report.pdf>
- Lachman Leanne, and Deborah Brett. Millennials Inside the Beltway. Washington, DC: Urban Land Institute. September 2015. <http://washington.uli.org/wp-content/uploads/sites/56/2015/11/ULI_GenYReport_101415_singles.pdf>.