Fe less than 25% of office workers have returned to work in person in the nation’s capital. It’s a trend that is hitting the commercial real estate market and other downtown businesses.
While other metropolitan areas have seen workers return faster, Washington, DC, has fallen behind as many workers in the city have jobs that don’t necessarily require an in-person presence. The problem has crippled the district, which relies on tax revenue, and hurt downtown businesses that depend on sales to commuters.
James Bailey, professor of leadership at the School of Business at George Washington University, said three decades ago people avoided going downtown unless they had to. However, after much work, the downtown areas of many large cities like Washington have become cultural hubs with shops, theaters and sports arenas. He said these centers were under threat due to the lack of people coming to their offices.
“Now all of a sudden the virus comes in… and now everyone is saying, ‘No I don’t want to go to work anymore,’” Bailey told the Washington Examiner.
Bailey divided the business situation in downtown Washington into two categories: the winners and the losers. The big winner is the horde of employees who want to work remotely. He said these 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 confirms what Bailey describes. The Labor Ministry recently found that the number of people leaving their jobs was the third highest on record, with some 4.2 million workers quitting in October, down from a record 4.4 million the previous month.
Workers overwhelmingly love remote work. A YouGov poll earlier this year found that among those who work remotely, 83% enjoy doing it. What’s more, nearly half of workers in the United States say they would accept a pay cut to continue working remotely, at least part-time, after the pandemic.
Bailey said there had been a “fundamental transfer of power” from the workplace authorities, ie management, to the workers.
When it comes to losers, those who try to rent office space end up at the bottom. The shift to hybrid and continuous remote working has been a big blow to the commercial real estate industry.
Bailey said commercial real estate companies are now renegotiating their contracts with businesses for less office space, but have little leverage in those talks. For example, if a business wants to downsize from 50,000 square feet to 30,000 square feet and the real estate company tries to charge more per square foot, the business might say it will go elsewhere given the high number of employees. vacant office spaces in the city.
Ian Anderson, senior director of research and analysis for CBRE Group, the world’s largest commercial real estate services company, told the Washington Examiner that the situation is unlike anything the city has ever seen, especially in the area of commercial real estate.
“The office market in particular, there has been nothing like it historically,” he reflected, adding that the pandemic-induced shift from in-person office work has been “relatively devastating” for the industry. commercial real estate. He said the situation could have been even worse for the industry had it not been for the government’s stimulus measures.
Anderson said the downtown commercial real estate market is possibly the most struggling in decades.
Yesim Sayin Taylor, executive director of the DC Policy Center, told the Washington Examiner that vacant offices are now increasing by 20% in the city center.
Taylor said the city itself is also affected by the lack of office workers. Sales taxes have fallen by around 25% from 2019 to 2020, and it looks like the city will see a further drop in revenue this year.
“You kind of have a much more local economy,” she said, noting that there was more interconnectivity between Washington and the surrounding suburbs before the pandemic. “This means DC’s economy is somehow more dependent on its residents than ever before.”
Businesses take the opportunity to collect revenue.
Bailey said most white-collar businesses have three main expenses: information technology, wages, and real estate. For them, reducing real estate costs is big business as it can result in more money for the business and higher wages.
District public transportation, namely the Washington Metropolitan Area Transit Authority, has also been affected and will continue to be abused, as many people in the area live outside of the city in places such as Arlington, Virginia and in the suburbs of Maryland. Without having to go to the office, fewer people travel to Washington, resulting in lost revenue for WMATA.
The other big losers from the downstream effects of continuous remote working are the restaurant and retail industries. Dozens of restaurants are still closed as they catered almost exclusively to commuters who needed a place to eat lunch or a bar to share drinks with colleagues. While some of the downtown restaurants have reopened, many are a shell of what they once were. Some places that had long waits are in desperate need of customers.
While the new levels of traffic that some restaurants and bars are receiving could pay off in the suburbs, real estate costs are much higher in downtown Washington, which means it takes more customers for a business. survive. Food trucks that parked outside areas with busy offices are also not as common as they were before the pandemic.
“PF Chang’s in Montgomery County are going to be great, but those downtown are the ones going to be burned,” Bailey said, referring to a popular residential suburb of Maryland.
Taylor said the return of the restaurant industry to downtown Washington has been “slow and steady.” She noted that some creativity on the part of the restaurant industry has helped restaurants hold their own, including expanding take-out and delivery options.
What does the future hold?
Bailey predicted that even though less than 25% of office workers have returned, that number will eventually rise again, but it may never be what it was before the pandemic due to the tectonic shift in remote working. He believes it will eventually return to 50%, maybe a little more, but he noted that half of the workers commuted to the central business district before the health crisis.
CBRE predicts that office workers will spend an average of 1.6 days a week working remotely, up from 0.6 days before the pandemic. The real estate services company also predicted that the change would result in a 9% reduction in office space used per employee.
Anderson said that while commercial office real estate has struggled, there are a few exceptions, namely high-end and high-occupancy trophy buildings. Yet, 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 go ahead and decide to do a lot of office buying and selling at this point,” Anderson said.
Anderson said some of the buildings currently used for offices in Washington would undoubtedly be converted to housing, although he noted some difficulties in doing so and there will need to be concessions in the market over the next year. a few years.
Taylor said conversions from office space to housing have become more viable than in the past, when the value for business was much higher. She said there are office buildings in the city center that are almost empty.
Taylor added that some building conversions would be more difficult than others – for example, office buildings with large floor areas without access to windows near the center.
“Conversions present a lot of challenges, but they’re gaining more interest than ever before,” Taylor said. She also said that property taxes levied on residential spaces are lower than those on commercial buildings.
It’s hard to predict what the future holds for downtown Washington, especially given the uncertainty of the coronavirus. While many companies had planned to bring their workers back before Labor Day, those plans were dashed by the delta variant of the virus. Now the omicron variant takes pride of place, and anyone can guess how it will affect people returning to work in the nation’s capital in person.