Revisiting Adaptive Reuse: The Future of Office Space in the District
Commercial real estate is booming in the District of Columbia and surrounding areas. Multifamily and office are the trendiest of all property types as supply of both have increased dramatically and will continue to do so. One major concern with the District commercial real estate market is the amount of vacant office space downtown.
At year-end 2019, the District had a vacancy rate of 14.2%, up from 13.7% in the third quarter. Two deliveries in particular led to the increase. Property Group Partners’ 539K SF building located at 250 Massachusetts Ave. NW delivered with no tenants. JBG Smith’s 271K SF building located at 1900 N Street NW delivered with 27% vacancy. The District has not had vacancy rates this high in office space since 1993. There is currently 7.7 million SF of empty office space per a report from the DowntownDC Business Improvement District. Moreover, supply is not slowing down anytime soon. As of December 2019, The District of Columbia has 2.6M SF under construction, 6.0M SFplanned, and 3.2M SF proposed.
The District office market consists mainly of law firms and federal government agencies. As GSA and law firms look for smaller, more personalized space, the market is left with excess inventory. Amenity-rich and built-to-suit spaces are becoming the new norm and buildings that fail to have top-notch amenities to offer their tenants are becoming obsolete.
Space that was considered Class A just a few years ago easily loses its value because of the constant innovation of office space, creating opportunity for residential developers. Office to residential conversion is not a new phenomenon but rather a dated one. For example, in the mid-1990’s New York City made revitalization efforts in lower Manhattan through an office to residential reuse scope. At the time of the efforts, 25% of the area’s 100 million SF was vacant.
While lower Manhattan was making a transition, notorious real estate mogul and current president, Donald Trump was doing something similar in midtown. Trump converted the first modern high-rise office building at Columbus Circle into the Trump International Hotel and Tower. Furthermore, the 1996 conversion of the Chicago Motor Club created a spur of 30 similar redevelopments in the two-decade tenure of Windy City mayor Richard Daley. Philadelphia has experienced something similar with over seven million SF of office space transformed into hotels and housing.
More recent data proves this trend to be on the rise but for a much different reason. COVID-19 has forced the transition from traditional office workspace to a residential home set-up. A city like New York City that has borne some of the worst effects from the virus now looks ahead to the future of their office space. On March 27, 2020, The Real Deal New York Real Estate News released an article stating “Some real estate pros maintain that companies and employees will be happier than ever to return to their offices after the crisis subsides, while others are predicting a more permanent decline in demand for office space. And they already have a solution in mind for how commercial landlords could handle this: turn their offices into residential buildings to help alleviate New York’s housing crisis.”
Whether or not the industry takes on this movement in commercial real estate, it could be beneficial to develop research regarding the readapting of office space. This type of investment could present potentially more stable returns with less hard and soft costs in comparison to traditional ground-up development. Prior to the pandemic, the DowntownDC and Golden Triangle BIDs lobbied the DC Council to offer property tax abatement for office owners who converted their buildings in the CBD to residential. While the legislation stalled, the likely further rise in office vacancy due to the pandemic may spur its reconsideration. Whether the idea of repurposing office space because it provides monetary benefits or because of the COVID-19 virus is fully adopted is unknown and only the future will tell.