Red drought further threatens DC office market – Commercial Observer

Government gridlock is coming for the DC office market.

A historically strong mid-term performance by the president’s party will mean a tightly divided House and once again the Democrats will barely control the Senate. That means little prospect for new legislation, which in turn means fewer office updates for lobbying firms and advocacy groups looking to push policy priorities.

In other words, the red wave that hasn’t been means a missed opportunity for DC’s struggling office market. It also doesn’t help that the pandemic shutdown has made lobbying executives more comfortable than ever with working remotely, even for meetings with clients and officials they’re trying to woo.

“We’re not going to see much of a real impact,” said Andy Eichberg, Stream Real Estate CEO in DC “And the back-to-work issue is muddying the already muddy water.”

Lobbyists, law firms, corporate representatives, trade groups, nonprofits and advocacy organizations that help shape policy and legislation play a significant role in the DC office market, one that is struggling with a return to office . With the federal government exercising a rather generous distance policy, e plan for significant office downsizing in the future to boot, a lot of DC office space goes unused and the number of new leases has plummeted.

The lobby-industry complex represents a “needle moving percentage of our market,” said Lucy Kitchin, chief executive officer of Government Services at Transwestern. Lobbying is coming off a record high in 2021, where a rush on COVID aid spending and a voice in new regulations have spawned a record $3.7 billion in industry revenuewith trends pointing to even more spending this year. Law firms, many of which are in lobbying, and nonprofits make up about a quarter of the DC office market’s gross leasing this year, for CBREalthough demand is down about 350,000 square feet compared to 2021.

A mid-term outcome in which one party won big and could push its legislative agenda forward, may have strengthened lobbying and the DC office market, regardless of which party.

A blue wave could have meant more federal spending, more federal employee hirings, and an increase in office occupancy, while a red wave could have meant more Congressional leaders skeptical of telecommuting pressuring the government to return to office. More, either direction would also have meant a pushback; Some of the record 2021 lobbying spending came from corporate opposition to progressive Democratic political positions. (But a split-the-difference result may have been the worst possible end result for real estate.)

Happy delivery, networking, and promoting an agenda with politicians might be seen as akin to life sciences, another driving factor of renting office space in Washington—it’s an activity that can’t be done at home. Attending fundraisers, greeting delegations, showing new staff the ins and outs of persuasion and publicity, and meeting clients on Capitol Hill can’t be done over Zoom.

But that’s not the whole reality of Beltway flu peddling after the pandemic. An investigation by the Public Affairs Council last year found that 87% of government affairs executives believed videoconferencing lobbying was here to stay, with 46% saying it was even more effective than face-to-face.

The fall polls that found the Republican Party poised to take control of Congress likely kicked off preliminary conversations about potential office expansions and new leases. Power shifts on Capitol Hill and in the White House have typically spurred big moves in the lobbying and advocacy industries. The year before an election is typically slow in anticipation of change, according to Josh Peyton, principal at Avison Young and chief executive officer of its mid-Atlantic region. Once the winners have been determined, the brokers continue the conversations they’ve had with clients about potential office expansions and upgrades. Even lobbyists, spy opportunities, often break away from their old companies and start their own companies, which suddenly need new offices.

“In 2016, when Trump took over, Republicans knew a huge amount of money was going to be spent, so the lobbying firms benefited and were hired as such,” Peyton said. “Now, the whole thing has gotten a lot more streamlined. The office isn’t exactly the place they’re going to host fundraising events and pay for these beautiful buildings.”

Peyton doesn’t expect contraction within lobbyist leases, but he doesn’t expect growth outside a select few niches. These include those lobbying and advocacy firms that may be involved in significant spending resulting from the Infrastructure Act and the Inflation Reduction Act.

The DC market entered the COVID era on a weaker footing due to some anomalies and tenant changes, according to owner Nuveen’s DC portfolio regional manager Vadim Goland. In recent decades, a combination of defense contractors going out of business in the wake of military base closures and large law firms that lost significant floor space between 2010 and 2020 as they digitized their operations have meant that the market for offices was already weak.

Lobbyists have also joined the flight to quality, with many targeting space in trophy office buildings, including migrating to other sectors of DC, most notably The Wharf (where Pharmaceutical Research and Manufacturers of America signed a new three-story lease earlier this year) or the East End. They are leaving behind the old offices of K Street, the street that has always been synonymous with lobbyists. These properties are in turn seeing their resale values ​​decreasein some cases making them candidates for office to residential conversions.

Lobbyist groups have always been at the forefront of using the office by nature, Goland said; they must have the flexibility to host people, manage remote work and hold meetings. They too often have to have bells and whistles in front of typical corporate clients.

“You have to keep up appearances,” said Stream Realty’s Eichberg. “You want to make sure the best lobbyists are happy. Everyone would like a better space. The tenants are eating up all the big space.

While there won’t be the kind of leasing spree seen after an election wave, expect 2023 corporate and talent musical chairs to move to contribute to demand for office upgrades in Washington

Peyton said she’s seeing lobbying firms decide to downsize, free up some space and look for a more impressive new address, like at 101 Constitution, a project that offers upscale space for rent a few thousand feet from the Capitol. Since concessions have been so outrageous to tenants lately, it’s worth downsizing your office.

But there simply isn’t much new space to move into. K Street, the traditional headquarters of these companies, hasn’t seen much new construction, just a few scattered updates, Transwestern’s Kitchin said. And there likely won’t be any new office space that can cater to upscale tenants any time soon, due to the general economic uncertainty. The DC construction pipeline as a whole is one-third of what it was before the pandemic.

Right now, the lobbying industry doesn’t offer many benefits to landlords. Peyton says that if Republicans can win back the White House in 2024, there will be a massive influx of lobbying shop expansions, but there aren’t enough shifts today to warrant serious new office growth. At least there aren’t many of the added disadvantages other cities are facing. DC has little exposure to the now-struggling tech sector, and many types of tenants, such as government defense offices for big companies, are unlikely to shrink.

“Don’t get me wrong, every time there’s an election, there is some impact on the DC economy,” Eichberg said. “We rarely lose people. People don’t leave DC”

Leave a Reply

%d bloggers like this: