A Democratic Sweep Could Boost D.C.'s Struggling Office Market

Office vacancy in D.C. has reached an all-time high this year as the coronavirus pandemic has slowed leasing activity, but the outcome of the Nov. 3 election could create a new surge in demand for the struggling market. 

Despite efforts to diversify its economy, D.C. remains a government town with an office market that is heavily impacted by federal spending. Direct government leasing accounts for 28% of D.C.-area office activity, according to CBRE, and several private sector industries such as contracting, lobbying and law firms are directly tied to federal activity.

While Democratic presidents haven't been inherently better historically for the D.C. office market, research shows that a change in administration creates more growth in the lobbying and law firm sectors. And when the White House and Congress are controlled by the same party, the government tends to pass more laws and create more direct real estate activity.

Former Vice President Joe Biden has consistently led President Donald Trump in national and swing state polls, and FiveThirtyEight projects the Democrats are more likely to win back the Senate and control both chambers of Congress.

A Democratic sweep in the November elections could lead to more office demand from the federal government, said Colliers Executive Vice President Kurt Stout, who leads the firm's Government Solutions group. 

"If Biden wins the election and the Democrats capture both chambers of Congress, we're going to see the potential for a short-term sugar rush," Stout said. "They will move very aggressively to implement both spending and taxation legislation in that first two-year Congress, and I think the result of that could be to cause some growth in government."

A CBRE analysis of the last 30 years of government spending shows that when the House of Representatives and the Senate are controlled by the same party, the D.C. office market benefits. 

When the two chambers have been aligned since 1990, Congress has increased federal discretionary spending by 1.4%, and the D.C. office market experienced 4.8M SF in demand growth, according to CBRE. 

When control of Congress is split, the result has been a decrease in federal spending by 0.5% and a loss of 378K SF in office demand, according to CBRE. 

"When you have a politically aligned environment, funding comes through and then action gets put in place, and it activates the private sector industries that depend on that funding," CBRE Associate Director of Mid-Atlantic Research Wei Xie said. "When there's gridlock, meaning policies can't get put in place, that spending doesn't come through."

Cushman & Wakefield Executive Vice Chairman Bill Collins, a leading office investment sales broker, said he thinks a change in administration would lead to an increase in spending that could benefit the D.C. market, especially in certain sectors. 

"My thinking on this is that a change in the administration with Biden means there will be more spending, and so, overall, the region would do really well," Collins said.

Because it takes time for Congress to pass bills and for spending to flow from the government, Xie said she sees it as a longer-term impact on the D.C. office market. The more immediate impact of the election, Xie said, could be growth in the lobbying sector. 

"Every industry has to look at how they can influence policy and appropriations to advocate for their own industry," she said. "We have seen that the past few cycles when there's a change of party, lobbying ramps up."

This increase in activity leads to the growth of not just lobbying firms, but law firms, public relations firms and government affairs offices for large corporations, Xie said, sectors that make up a large portion of the D.C. office market. 

"They tend to all have a presence in Washington for their government affairs and federal sales offices," she said of large corporations. "So when there's greater demand for lobbying activity, it has a cascading effect on their hiring and space use."

The complicating factor this year is whether an increase in federal spending and lobbying activity could translate to more office demand at a time when companies are rethinking their workplace strategies because of the pandemic. 

But the sectors that benefit from government spending also tend to rely more on the physical office and are less likely to shift to remote work, Xie said. Government agencies often have security reasons for needing to keep employees in the office, while lobbyists need to have an in-person presence to meet with lawmakers. 

"The political capital is the capital of influence," Xie said. "You go out and you network with people. That physical presence is really significant ... It's a different skill set, a different nature of work. Washington is far less about technical skills and more about networking and influencing, so from that perspective we're better positioned."

Newmark Senior Managing Director of National Marketing Research Sandy Paul also said a change in administration could increase office market activity in the District. 

"For the office market, turnover means more lobbying on Capitol Hill because of the need to build new relationships and to lobby members that may be new," Paul said.

The election's impact on the office market can also play out on a national level. A Newmark report released Tuesday found that the U.S. office market as a whole has performed better during periods of unified control of government.

When the White House and Congress have been controlled by the same party since 2000, the U.S. has averaged 23.8M SF of annual office absorption, according to Newmark. When there is split control, the U.S. has averaged 2.7M SF of annual absorption. 

But Paul said this correlation doesn't prove that the political control caused the office activity, and he thinks the market has been more impacted by larger events such as 9/11, the Great Financial Crisis and the coronavirus pandemic. 

The D.C. market has diversified its economy with the growth of technology companies in a way that has made it more resilient than other markets during the current downturn, Paul said. But the federal government remains the dominant industry in the region, he said, and an increase in spending would benefit the D.C. office market. 

"The government still has a significant influence on the local office market," Paul said. "For a very long time, the Washington area has captured a disproportionate share of federal spending. We've done a good job of keeping a lot of that money here."

The government remaining in D.C. does not necessarily translate to an increase in leasing demand, though. The General Services Administration, through the last Democratic and Republican administrations, has pursued a policy of reducing its leased footprint to save taxpayer money. Stout said he expects this practice will continue under the next administration regardless of which party wins.

The GSA could potentially shift its footprint more into owned office space if the next administration passes a major infrastructure spending bill that includes money for federal buildings, Stout said. The GSA's new construction and renovation accounts have been underfunded for many years, Stout said, and this has bolstered its demand for leased space. 

"My worry is that if even a small portion — a few billion dollars, which, depending on the bill, could be a rounding error — is put into federal buildings, that could have a significant negative impact on leased space," Stout said. He added that an infrastructure bill could also have the positive impact of growing the agencies that administer and oversee the funds. 

Office investment sales could pick up after the election regardless of which party wins, experts say, because there will be more certainty in the market. 

The D.C. region has recorded $5.8B in investment sales for the 12 months ending Sept. 30, down from $8.6B in the previous year, according to Newmark.

"I think even in the final months of the fourth quarter, we could see an increase in investment volume once the election has been decided," Paul said. "There is a lot of dry powder waiting on the sidelines."

Collins said many investors have temporarily paused activity while they wait to see the results of the election and he expects to see a surge in deals closing in Q1.

"[Investors] don't really care who gets elected, you just want to know what the menu's going to be after the election," Collins said. "A temporary pause allows you to see 'OK, a Republican got elected therefore my strategy is going to be X,' and then you have a spike up in the first quarter."