Red drought further threatens DC office market

Red drought further threatens DC office market

Government gridlock is coming for the DC office market.

A historically strong midterm performance from the president’s party will mean a tightly divided House and Democrats once again barely in control of the Senate. That means dim prospects for new legislation – which means fewer office upgrades for lobbying firms and advocacy groups seeking to advance policy priorities.

In other words, the red wave that was not 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 persuade.

“We won’t see such a real impact,” said Andy Eichberg, Stream Realty’s DC’s general manager “And the matter of returning to work muddies an already muddy water.”

Lobbyists, law firms, business representatives, trade groups, nonprofits, and advocacy organizations that help shape policy and legislation play an important role in the DC office market , a market that is struggling to resume its functions. The federal government exercising a rather generous distance policy and plan for a significant reduction in office staff in the future to boot, a lot of office space in DC sits unused and the number of new lease signings has plummeted.

The lobby-industry complex represents a “needle-moving percentage of our market,” said Lucy Kitchin, general manager of government services at Transwestern. Lobbying just hit a record high in 2021, where a rush in COVID relief spending and a voice in new regulations generated a record $3.7 billion in industry revenuewith trends pointing to even more spending this year. Law firms, many of which lobby, and nonprofits account for about a quarter of DC’s office market gross leases this year, by CBREalthough demand is down about 350,000 square feet from 2021.

A midterm result where one party won big and could push its legislative agenda could have boosted lobbying and the DC office market, regardless of party.

A blue wave could have meant more federal spending, more federal employee hiring, and increased office occupancy, while a red wave could have meant more congressional leaders skeptical of telecommuting pressure the government to return to office. More, either direction would also have meant pushback; some of 2021’s record lobbying spending came from corporate opposition to progressive Democratic policy positions. (But a split-the-difference outcome could have been the worst possible end result for real estate.)

Good humor, networking and promoting an agenda with pols could be considered life sciences, another driver of DC office rentals – it’s an activity that simply 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 cannot be done on Zoom.

But that’s not the whole reality of Beltway’s post-pandemic influence peddling. A Public Affairs Council investigation last year found that 87% of government affairs officials believed video conferencing lobbying was here to stay, with 46% saying it was even more effective than face-to-face.

Fall polls that found the Republican Party poised to assume control of Congress likely sparked preliminary conversations about possible office expansions and new leases. Power shifts on Capitol Hill and the White House have typically spurred big moves within the lobbying and advocacy industries. The year leading up to an election is usually slow in anticipation of change, according to Josh Peyton, chief executive of Avison Young and general manager of its Mid-Atlantic region. Once the winners are decided, brokers continue the conversations they had with clients about potential office expansion and upgrades. Moreover, lobbyists, seeking espionage opportunities, often break away from their old businesses and start their own companies, which suddenly need new offices.

“In 2016, when Trump took office, Republicans knew there would be a huge amount of money spent, so lobbying firms took advantage and were hired as such,” Peyton said. “Now everything has become much lighter. The office is not exactly that place where they go to organize fundraising events and pay for these beautiful constructions.

Peyton doesn’t expect a contraction in lobbyist leases, but he doesn’t foresee growth outside of a few select niches. These include lobbying and advocacy firms that may be involved in large expenditures arising from the Infrastructure Act and the Inflation Reduction Act.

The DC market entered the COVID era on a weaker basis due to some anomalies and tenant changes, according to Vadim Goland, regional DC portfolio manager at landlord Nuveen. Over the past few decades, a combination of defense contractors that closed in the wake of military base closures and large law firms that lost a lot of space between 2010 and 2020 by digitizing their operations meant that the office market was already weak.

Lobbyists have also joined the flight to quality, with many targeting space in trophy office buildings, including migration to other areas of DC, particularly The Wharf (where pharmaceutical research and manufacturers in America signed a new three-story lease earlier this year) or the East End. They leave behind older offices on K Street, the strip long synonymous with lobbyists. These properties are in turn see their resale values ​​plummetmaking them in some cases candidates for office to residential conversions.

Lobby groups have always been at the forefront of office usage by nature, Goland said; they must have the flexibility to host people, manage remote work and organize meetings. They too often have to have the bells and whistles before typical corporate clients.

“You have to keep up appearances,” said Eichberg of Stream Realty. “You want to make sure these top lobbyists are happy. Everyone would like a better space. Tenants are gobbling up all the big space.

While there won’t be the kind of rental frenzy seen after a flurry of elections, expect the corporate and talent musical chairs of 2023 to move in to contribute to demand for renovations from offices in DC

Peyton said he sees lobbying firms decide to downsize, lose some space and seek a new, more impressive address, such as at 101 Constitution, a project offering prime space for rent to a few thousand people. feet of the Capitol. Since concessions have been so outrageous for tenants lately, it’s worth resizing your office.

But there just isn’t a whole lot of new space to move into. K Street, the traditional home of these businesses, hasn’t seen much new construction, just a few scattered upgrades, Transwestern’s Kitchin said. And there probably won’t be any new offices anytime soon that will meet the needs of high profile tenants, due to the overall economic uncertainty. DC’s build pipeline as a whole is a third of what it was before the pandemic.

Currently, the lobbying industry does not offer many benefits to landlords. Peyton says if Republicans manage to retake the White House in 2024 there will be a massive influx of lobby shop expansions, but today there just aren’t enough changes to warrant serious growth. new offices. At least there aren’t as many additional disadvantages that other cities face. DC has little exposure to the struggling tech industry, and many types of tenants, like government defense offices for large corporations, are unlikely to decline.

“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”

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