Fewer than 25% of office employees have returned to in-person work in the nation’s capital. It is a trend hitting the commercial real estate market and other businesses in the downtown area.
While other metro areas have seen workers begin to return quicker, Washington, D.C., has lagged because many of the city’s workers are at jobs that don’t necessarily require an in-person presence. The problem has hamstrung the district, which relies on tax revenue, and has harmed businesses in the downtown area that depend on sales to commuters.
James Bailey, professor of leadership at George Washington University’s School of Business, said that three decades ago, people avoided going downtown unless they had to be there. Still, after much work, downtown areas in many major cities like Washington have become cultural hubs with shops, theaters, and sports arenas. He said those hubs are at risk because of the lack of people commuting to their offices.
“Now, all of a sudden, the virus comes along … and now everybody says, 'Nope, I don’t want to go to work anymore,'” Bailey told the Washington Examiner.
Bailey broke Washington’s downtown business situation into two categories: winners and losers. The biggest winner is the horde of employees who want to work remotely. He said those workers now have a “unique power” to leverage their careers to force employers to allow remote or hybrid work by threatening to quit.
The data bear out what Bailey is describing. The Department of Labor recently found that the number of people quitting their jobs is the third highest on record, with some 4.2 million workers quitting in October, down from a record of 4.4 million the month before.
Workers overwhelmingly like remote work. A YouGov poll earlier this year found that among those working remotely, 83% enjoy doing so. Additionally, nearly half of workers in the United States say they would take a pay cut to continue working remotely, at least part time, after the pandemic.
Bailey said there has been a “fundamental power shift” from the authorities in a workplace, i.e., management, to the workers.
As for losers, those attempting to lease office space are coming out on the bottom. The shift to hybrid and continued remote work has been a gut punch to the commercial real estate industry.
Bailey said commercial real estate firms are now renegotiating their contracts with businesses for less office space but have little power in those talks. For example, if a company wants to downsize from 50,000 square feet to 30,000 and the real estate company tries to charge more per square foot, the business could say it will go elsewhere given the high level of vacant office space in the city.
Ian Anderson, senior director of research and analysis for CBRE Group, the largest commercial real estate services company in the world, told the Washington Examiner that the situation is unlike anything the city has ever seen, especially in the commercial real estate space.
“The office market especially, there has been nothing like this experience historically,” he mused, adding that the pandemic-induced shift away from in-person office work has been “relatively devastating” to the commercial real estate industry. He said the situation could have been even worse for the industry if not for some government stimulus.
Anderson said the downtown commercial real estate market is probably the most distressed it’s been in decades.
Yesim Sayin Taylor, executive director of the D.C. Policy Center, told the Washington Examiner that office vacancies are now pushing 20% in the downtown area.
Taylor said the city itself is also affected by the lack of officegoers. Sales taxes were down about 25% from 2019 to 2020, and it looks like the city will see a further decline in revenue this year.
“You kind of have a far more local economy,” she said, pointing out that there was more interconnectivity between Washington and the surrounding suburbs before the pandemic. “This means D.C.’s economy is sort of more reliant on its residents now than ever before.”
Businesses are using the opportunity to recoup revenue.
Bailey said most white-collar firms have three main expenses: information technology, salary, and real estate. For them to reduce the real estate costs is a big deal because it can result in more money for the business and higher salaries.
Public transportation in the district, namely the Washington Metropolitan Area Transit Authority, has also taken a hit and will continue to be pummeled because so many people in the area live outside of the city in places such as Arlington, Virginia, and suburban Maryland. Without the need to commute to the office, fewer people are traveling into Washington, resulting in lost revenue for WMATA.
Other big losers from the downstream effects of continued remote work are the restaurant and retail industries. Dozens of restaurants are still shuttered because they catered almost exclusively to commuters who needed a place to grab lunch or a bar to share drinks with coworkers. While some of the downtown restaurants have opened back up, many are a shell of what they once were. Some places that used to have long waits are desperate for customers.
While the new levels of traffic that some restaurants and bars receive might be profitable in the suburbs, real estate costs are much higher in downtown Washington, meaning that more customers are needed for a business to survive. Food trucks that used to park outside areas with busy offices are also not as commonplace as they were before the pandemic.
“The P.F. Chang’s out in Montgomery County is going to do just fine, but the ones downtown are the ones that are going to get burned,” Bailey said, referencing a popular residential suburb in Maryland.
Taylor said the return of the restaurant industry in downtown Washington has been “slow and steady.” She noted that some creative thinking on the part of the food service industry has helped restaurants hang on, including expanded takeout and delivery options.
What does the future hold?
Bailey predicted that while less than 25% of office workers have returned, that number will eventually tick back up, but it might never be what it was before the pandemic because of the tectonic shift in remote work. He thinks it will eventually return to 50%, maybe a bit more, but he noted that half of the workers commuted into the central business district before the health crisis.
CBRE forecast that office-using workers will spend an average of 1.6 days per week working remotely, up from 0.6 days before the pandemic. The real estate services firm also predicted the shift will result in 9% less office space used per employee.
Anderson said that while commercial office real estate has struggled, there are some exceptions, namely upper-end and high-occupancy trophy buildings. Still, for most of the market, people are keeping their distance.
“People are just too risk-averse at this point, and there’s too much uncertainty for people to jump in and decide to do a lot of buying and selling of offices at this point,” Anderson said.
Anderson said some of the buildings now being used for office space in Washington would undoubtedly be converted into housing space, though he noted some difficulties come with doing so and that there will have to be some give-and-take in the market over the next few years.
Taylor said that conversions from office space to housing have become more viable than in the past, when the value for commercial use was so much higher. She said there are office buildings in the downtown area that are almost empty.
Taylor added that some building conversions would be more difficult than others — for example, office buildings with large footprints that lack window access near the center.
“There are many challenges to conversions, but there is more interest in it than before,” Taylor said. She also said the real estate taxes collected from residential spaces are less than those for commercial buildings.
It is hard to project what the future holds for downtown Washington, especially given the uncertainty of the coronavirus. While many companies had planned to have their workers return by Labor Day, those plans were dashed by the delta variant of the virus. Now, the omicron variant looms large, and it’s anyone’s guess how that will affect people returning to in-person work in the nation’s capital.