Slow return to in-person work transforming downtown DC real estate and businesses | News
F.Less than 25% of office workers have returned to the country’s capital for personal work. It’s a trend hitting the commercial real estate market and other businesses in the downtown area.
While workers in other subway areas are returning faster, Washington, DC, has lagged as many of the city’s workers have jobs that don’t necessarily require face-to-face attendance. The problem has crippled the tax-dependent district and damaged downtown businesses that rely on commuter sales.
James Bailey, professor of leadership in the School of Business at George Washington University, said three decades ago people avoided going downtown unless they had to be there. Nevertheless, after a lot of work, the inner cities of many large cities like Washington have developed into cultural centers with shops, theaters and sports arenas. He said these hubs are at risk because not enough people are commuting to their offices.
“Now all of a sudden the virus comes in … and now everyone’s saying, ‘No, I don’t want to go to work,'” Bailey told the Washington Examiner.
Bailey divided 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 these workers now have “the unique power” to use their careers to force employers to allow remote or hybrid work by threatening to quit.
The data confirms what Bailey is describing. The Department of Labor recently found that the number of people leaving their jobs is the third highest on record, with about 4.2 million workers quitting in October, up from 4.4 million the previous month.
Most workers prefer to work remotely. A YouGov poll earlier this year found that 83% of remote workers enjoy doing this. In addition, nearly half of workers in the United States say they would accept a pay cut in order to work remotely at least part-time after the pandemic.
Bailey said there has been a “fundamental shift in power” from the authorities in a workplace, i.e. management, to the workers.
As for the losers, those trying to rent office space are on the lower end. The move to hybrid and continued remote working has dealt a blow to the commercial real estate industry.
Bailey said commercial real estate firms are now renegotiating their contracts with companies for less office space but have little control over those talks. For example, if a company wants to shrink from 50,000 square feet to 30,000 square feet and the real estate company tries to charge more per square foot, the company could say it will go elsewhere given the high vacancy in the city.
Ian Anderson, Senior Director of Research and Analysis at 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.
“In the past, there was no comparable experience in the office market in particular,” he mused, adding that the pandemic-induced shift away from personal office work was “relatively devastating” to the commercial real estate industry. He said the situation could have been worse for the industry had it not been for some government incentive.
Anderson said the downtown commercial real estate market is likely the worst in decades.
Yesim Sayin Taylor, executive director of the DC Policy Center, told the Washington Examiner that downtown office vacancies are now rising 20%.
Taylor said the city itself was also affected by the lack of office visitors. Sales taxes have dropped about 25% from 2019 to 2020, and it looks like the city will see another drop in sales this year.
“They have a much more local economy,” she said, pointing out that there was more connectivity between Washington and the surrounding suburbs before the pandemic. “This means that DC’s economy is now more dependent than ever on its people.”
Companies seize the opportunity to regain income.
Bailey said most business enterprises have three main issues: information technology, salaries, and real estate. For them, lowering the cost of real estate is a big deal as it can translate into more cash for the business and higher salaries.
The district’s public transportation system, the Washington Metropolitan Area Transit Authority, has also suffered and continues to suffer with so many people living in areas outside of the city, such as Arlington, Virginia and suburban Maryland. Without the need to commute to the office, fewer people travel to Washington, resulting in lost revenue for WMATA.
Other big losers from the downstream effects of continued remote working are the hospitality and retail sectors. Dozens of restaurants are still closed because they almost exclusively served commuters who needed a place for lunch or a bar to share drinks with colleagues. While some of the downtown restaurants have reopened, many are just what they used to be. Some restaurants that used to have long waiting times are desperately looking for customers.
While the new traffic that some restaurants and bars get could be profitable in the suburbs, the cost of real estate in downtown Washington is much higher, meaning more customers are needed for a business to survive. Food trucks that used to park outside of busy offices are no longer as commonplace as they were before the pandemic.
“The PF Chang in Montgomery County will work fine, but the ones downtown will be burned,” Bailey said, referring to a popular Maryland suburb.
Taylor said the return of the downtown Washington restaurant industry has been “slow and steady”. She found that some creative thoughts from the hospitality industry have helped restaurants hold out, including expanded take-away and delivery options.
What does the future hold in store?
Bailey predicted that while less than 25% of office workers have returned, that number will rise again at some point, but because of the tectonic shift in remote working, it may never be what it was before the pandemic. He believes it will be 50% again at some point, maybe a little more, but he found that half of the workers were commuting to the central business district before the health crisis.
CBRE predicts that office workers will work remotely an average of 1.6 days a week, up from 0.6 days before the pandemic. The real estate services company also forecast the shift will result in a 9% reduction in office space per employee.
Anderson said that while commercial office properties have problems, there are a few exceptions, namely upper-priced trophy buildings and high occupancy. Still, for most of the market, people keep their distance.
“People are just too risk averse at this point and there is too much uncertainty for people to go in and buy and sell a lot of offices at this point,” said Anderson.
Anderson said that some of the buildings that are now being used for office space in Washington would no doubt be converted to housing, although he had indicated that there would be some difficulty doing so and that there would be some give in the market for the next several years and take must give a few years.
Taylor said office-to-home conversion has become more profitable than it was in the past when the commercial value was so much higher. She said there are downtown office buildings that are almost empty.
Taylor added that some building conversions are more difficult than others – for example, office buildings with large floor plans that don’t have window access near the center.
“Conversions pose a lot of challenges, but the interest in them is greater than before,” said Taylor. She also said property taxes levied on residential properties are lower than those on commercial buildings.
What the future holds for downtown Washington is difficult to predict, especially given the uncertainty surrounding the coronavirus. While many companies had planned to bring their workers back by Labor Day, those plans were thwarted by the Delta variant of the virus. Now the Omicron variant is a big issue, and it is unclear how this will affect people returning to personal work in the country’s capital.
Original place: Slow return to personal work transforming downtown DC homes and businesses
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