Washington D.C.’s commercial real estate industry is also wondering whether feds will return to work

The ongoing question of whether federal employees with offices in the District of Columbia will return four or five days a week, is not just a matter of restaur...

The ongoing question of whether federal employees with offices in the District of Columbia will return four or five days a week, is not just a matter of restaurants and retail stores. The commercial real estate industry, which houses all of these elements, is also looking at a cloudy crystal ball. To get that point of view, the Federal Drive with Tom Temin  spoke with Howard Traul, the senior managing director of the commercial real estate firm Jones Lang LaSalle.

Interview transcript:

Tom Temin  Just give us a sense, if you would, of how big a footprint the U.S. government has in the district, in terms of number of leases and square feet.

Howard Traul Right now, [General Services Administration (GSA)] has 184 active leases within the District of Columbia. Those 184 leases account for about a total of 17.5 million square feet.

Tom Temin Wow. Is that the biggest lessee in the district?

Howard Traul I believe it accounts for about 20% of the total square footage of office spaces in the district.

Tom Temin Probably a little bit more than law firms even, which is a big footprint.

Howard Traul Yeah, absolutely.

Tom Temin All right. And just generally, commercial real estate in the district, since the pandemic, came and mostly went. What is the state of the health, would you say, of the commercial real estate industry?

Howard Traul We’ve been up and down. Vacancy is still very high. I can tell you that for sure. The highest it’s been in quite and while and it remains high, relative to pre-pandemic levels. But you caught me on a good day, because there actually has been, in the last, let’s say, month or two, a decent amount of activity, In the GSA world at least. Active procurements. I’d say, right now GSA is out in the market with over 30 leases, 30 active procurements. That’s great for the market.

Tom Temin Well, then, I guess to a building owner and to a broker, such as yourself, it really doesn’t matter whether people come in or not. As long as the lease is being paid, it might even be less headaches if fewer people are in there.

Howard Traul I wouldn’t exactly say that, Tom. No, a lot of these leases are much smaller than we’ve seen that 30. That is a lot of churn, I’d say. But I’d say before that, it was quite quiet. And I think what you’re seeing is the GSA coming up with a plan for some of these leases and actually executing on it, which is great to see. But to your point, no, I mean, a lot of these deals, like I said, are smaller and they’re becoming less and less. You’re seeing these active procurements when leases expire, go away instead of renew or be completed.

Tom Temin Yeah, that was my question. Does it look as if the government is actively trying to shrink the number of square feet that it has and maybe consolidate agencies that might have had separate leases in separate buildings, or even multiple zones in a given building, and squeezing the people that are there closer together?

Howard Traul Yeah, the short answer is yes. With the large leases that you’re seeing in that area. Prospective size leases, leases that the GSA has to request from Congress to move forward on, they’re shrinking by 20%, if not more. We’re seeing up to 50% of consolidation with these shrinking footprints. So the short answer is there’s a lot of square footage that will be disappearing from the GSA footprint. And I think we’ll continue to see that, quite frankly, as well.

Tom Temin And that’s mostly Class A space, too, isn’t it?

Howard Traul Class B, Class A, yes. Class B plus, but absolutely. Yes. And but GSA is moving, trying to move, I would say, to a flight to quality. And based on some of their minimum requirements that they have for base building, I think you’ll start seeing that as well.

Tom Temin We’re speaking with Howard Traul. He’s senior managing director of the commercial real estate firm Jones Lang LaSalle. And do you have visibility into the types of buildouts that they want for these new leases? Can we tell that is, whether it’s cubicle farms for lots of people or is it more of that hotel drop in type of space, which is a different design and different build out requirements? Do you have that picture?

Howard Traul Yeah. You’re seeing it across the board. A lot of the build out are driven by the mission of those different agencies. And there are instances absolutely, where GSA is building out hoteling and pod desking areas. But there’s also, if you go into a [Department of Justice (DOJ)] or [United States Attorney Office (USAO)] kind of thing, you’re seeing kind of the typical large offices with the open floor plan in the middle. It’s really all just driven by what the agency needs to accomplish in that space.

Tom Temin But the trend is less space as leases expire and you are seeing consolidation.

Howard Traul That’s right. Absolutely.

Tom Temin And as you know, Muriel Bowser, the mayor of D.C., has said that she would like to see more space freed up for other purposes to, I don’t know, develop entrepreneurs or whatever. And so if a building has 100,000 square feet of government and now under the new consolidation, it’s got 75,000 square feet of government. That leaves a fresh 25,000 square feet. Who’s coming in? Or who could potentially come in there?

Howard Traul I don’t know that you’d see buildings multi-talented with mixed uses, a residential and an office building. Not certain you’re going to see that, almost very unlikely. But should some of these buildings that are of a certain vintage, and maybe, less useful as office buildings get converted,  you are seeing that across D.C. in several instances. But I think really, the attention needs to be paid to just getting workers back downtown in the office space. The life and vitality of downtown D.C. really depends on workers being downtown, the restaurants, all the retail that you can think of around the city. And quite frankly, one of the bigger issues I think that you’ll see down the road, are tax revenues dropping. All the municipalities around the DMV run on these tax revenues from commercial and residential buildings. And a lot of those owners, if they don’t have tenants paying rent, they’re not going to be able to pay their taxes or the tax revenues are going to be severely depleted.

Tom Temin Yeah, this is kind of a nationwide phenomenon if you follow real estate. And just out of curiosity, we mentioned law firms earlier. You’re the government side of Johns Lang LaSalle. But what do you hear from the rest of the companies? That is to say, law firms have gone heavily into remote working. From my experience, because I talked to a lot of them. And is that similar type of consolidation happening for that type of tenant?

Howard Traul I think you’re seeing a little bit different firm the firm. And I think for the new associates, I’m being told, they do wish to work from home. But I do also hear the being in the office and being able to collaborate with those senior partners, is something that they do wish to do. There’s this meeting in the middle, I think, within the law firm practice right now.

Tom Temin But the objective then of the real estate industry is to be tenant agnostic. You just want the square footage leased, one way or the other. The reason I ask, is there’s a little bit of a disconnect between having a building fully leased and that street vitality, because they may lease it, but not everyone is coming in of the population of that given lessee on a given day.

Howard Traul Yeah, and I think what you see there really, Tom, is once the leases expire, that’s when you see a decrease in the occupancy of the building. But yes, there’s a lot of leases that were, maybe, ten year leases that were signed right before the pandemic. A lot of that leased space hasn’t been occupied since then, and there might be four or five years left on those leases. But that’s really why,  getting people back downtown and figuring out, really from the GSA agency perspective, what is the long term solution. Because I can tell you, in my dealings at least, things are taking longer. And I think that you’re seeing that frustration, not just in my world, by any means, but you see it on the Hill with different acts being proposed. You see it just from a consumer basis, I think. A lot of the customer service, if you will, from a government standpoint, they’re just not meeting the grade right now. And that’s really what I’d like to see, is some actual direction from our commander in chief, quite frankly, to kind of get everybody back in and figure out what the long-term solution is and not, these kind of kick the can temporary solutions.

Tom Temin And just a final question. Have any building owners, that you’re aware of or have they talk to you about this, considered just kicking all the tenants out that are commercial and converting to housing or condos or apartments, if that’s even physically feasible?

Howard Traul No. Like I mentioned before, there are absolutely buildings of a certain vintage where those office building owners look to sell to a residential developer, but not if you have decent occupancy and you’re a class B, class A trophy building.

Tom Temin Now you’re speaking to me from Washington, D.C. Jones Lang LaSalle is a national company. JLL. What are you seeing in terms of federal occupancy and general occupancy in other cities?

Howard Traul From the federal standpoint, I speak with government employees and brokers and building owners. And I do see outside of the D.C. metropolitan area, a lot more people in the office working. Regardless, if it’s a very vanilla office job or something that, maybe, is more mission related. For whatever reason, outside of the DMV, I’m just hearing and talking to people more that are in the office versus out of the office.

 

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