Federal Agencies' Slow RTO Putting More D.C. Office Buildings At Risk

It has become increasingly clear in recent months that the federal government isn't coming to the rescue in D.C.'s effort to revitalize downtown and save its large stock of older office buildings. 

As the private sector has been doubling down on return-to-office mandates and enforcement this year, the federal government’s progress has stalled. That stagnation is imposing an increasing threat to a massive supply of office buildings downtown, panelists said at Bisnow’s Office Market Update on Wednesday at Franklin Court. 

In August, the Biden administration asked agencies to “aggressively execute” return-to-office plans for employees this fall. It is unclear what kinds of policies followed, but a survey from the Washington Business Journal in August found that agencies have guidelines spanning from three days a week to two days per pay period. 

A major roadblock in the government's office return efforts has been federal employee unions pushing back against stricter in-office policies. 

“The administration is really not in a position to challenge the unions at this time,” CBRE Senior Vice President Marcy Owens Test, who is on the brokerage’s federal government team, said at the event. “And so I think we're going to continue to see a slow evolution or slow return.”

Cushman & Wakefield Executive Vice Chairman Bill Collins also said he sees organized labor standing in the way of the government's return to office. 

“I do believe it would be great to have the federal government back. I wouldn’t bet on that anytime soon. Unions are pretty powerful,” Collins said.

The GSA owns or leases 25% of downtown’s office space, according to the Office of the Deputy Mayor for Planning and Economic Development’s 2024 budget, amounting to 25M SF. Meanwhile, more than half of its leases downtown are expected to come due in the next five years. 

The government has been working to cut its footprint for years, and a study in July by the Office of Management and Budget found that the majority of the 24 agencies it surveyed used 25% or less of their space.

Mayor Muriel Bowser has long called for the federal government to bring more of its people back to help spur a recovery of downtown, and last week at a Bloomberg CityLab event, she said there needs to be more of a plan for all the underutilized federal office buildings. 

"We need the federal government to rethink its properties and either have a purposeful plan for conversions or let us do it. Turn them over to us, and we’ll figure it out," Bowser said, according to a post from Washington Post Columnist Heather Long. 

The older buildings that the government has long occupied in D.C. are now becoming less attractive in the market, commercial real estate executives said at the Bisnow event. 

“My whole career here, there was always a tenant for that $40 building and that $90 or $80 building and everything in between,” Tishman Speyer Managing Director Dan Dooley said onstage.

Now, those properties are becoming “functionally obsolete,” he said. 

It has been a record year for D.C. office vacancy, with the third quarter at 20.9%, according to CBRE. But panelists said that distress is concentrated in 10% of the buildings — an increasingly vulnerable segment.

The government, which could once be counted on to fill those types of spaces, is no longer taking them as the General Services Administration intensifies its goal of decreasing its footprint and looks for higher-quality space. 

“If you have B- product or C+ product in the District and you think, ‘Well, the federal government will go here. I can be cheap and it’s a good solution.’ The answer is really no because GSA and their agencies are really focused on column spacing and ceiling height,” Owens Test said. 

“When those B and C buildings are looking at exit strategies, that’s not one of them,” she added. 

The GSA has already cut back or signaled it plans to lose large chunks of its footprints this year. It is looking to cut 40% of the National Labor Relations Board’s space in the Navy Yard, shrink the Department of Justice’s NoMa office space by about 150K SF and significantly condense the footprints of both the Commodity Futures Trading Commission and National Transportation Safety Board. 

Advocacy organizations are on the hunt for smaller footprints in better space as well, panelists said, meaning that they also can’t be counted on to take the $40-per-SF buildings downtown. 

“Specifically up and down L Street, 14th, 15th Street, we typically had a lot of nonprofits and associations in this market, and we've seen that they've been fleeing the older products and moving into the renovated product, taking less space but moving into a better-quality space,” Lincoln Property Co. Managing Director and Senior Vice President Adam Biberaj said. 

“One thing that's happening as a result of those moves is you've got a lot of vacancy in the Class-B and C buildings around this neighborhood,” he added.

The muted demand in that corridor has fueled many of the announced office-to-residential conversions, according to Biberaj.

“We haven’t seen a lot deliver, but [we're] hoping like hell that those buildings will be successful,” he said.

The silver lining amid the distress is that most of these buildings lacking demand are destined for a new life — once the price drops low enough, Dooley said.

“A lot has to happen. But once it breaks loose, there's going to be a lot of opportunity, there's going to be reset, there's going to be people picking up buildings for $200 and $250 a foot,” he said. “And that's going to cause some disruption too.”