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What does $30 million mean for the DC office market?23 Jun 2021
DC Mayor offering incentives to bring office tenants to the region
In a press conference June 14, DC Mayor Muriel Bowser unveiled initial details of a $30 million “employment center vitality and job creation fund” aimed at luring “high-impact employers” to the District, creating a projected 3,000 new jobs in the process. The initiative could not come at a better time for DC’s office market, which has seen vacancy shoot up 220 basis points during the COVID-19 pandemic (measured from Q4 2019). But while this initiative is a step in the right direction, is it enough to affect meaningful change in DC’s office fundamentals?
Using a generous 250 sf per employee, and assuming the fund successfully creates 3,000 office-using jobs, the initiative would generate 750,000 sf of office occupancy, or roughly 20% of what the market has lost since the end of 2019. This high-end estimate would be sufficient to bring vacancy down to 13.2%, still 170 basis points above pre-pandemic levels. Moreover, a company’s employees need only occupy their office space 50% of the time to qualify for these new incentives, which could limit the benefit to the city’s office market; each company could, in theory, lease half as much space. If that turned out to be the case, vacancy would fall only about 25 basis points to 13.4%.
It’s worth noting that the DC Government isn’t the only entity shelling out millions to attract office tenants. Office landlords have been forced to grant increasingly large concession packages to attract tenants: the average free rent period on a 10-year new lease (across all office classes) has now hit 16 months, while the average TI package is $111 (for reference, the average rental rate is $53 full-service). If the new DC incentives did, in fact, generate 750,000 sf of leasing, DC landlords would have to give away a whopping $136.6 million worth of concessions – more than 4x the amount set aside for the incentive fund.
It is exciting to see the mayor’s office take steps to actively recruit office tenants to the District. However, several hundred tenants will be up for expiration annually over the next several years, each reevaluating their office needs after more than a year of working largely from home. Keeping these tenants in the District, or in an office at all, will likely take more than what this incentive fund will be able to offer.