by Leslie Braunstein in Urban Land Online
May 10, 2011
Laws and regulations affect all types of real estate in all markets, but perhaps nowhere more profoundly than in the nation’s capital, where the federal government occupies about one-third of the Washington, D.C., metropolitan area’s inventory of office space. Moreover, the federal government has been one of the few expanding sectors during the recession. For this reason, federal rules and regulations for leased facilities are watched closely by private sector owners and developers of office space.
Regulation and user demand were the topics of a panel at ULI Washington’s Real Estate Trends Conference. Moderated by Sherry Cushman, senior vice president of CB Richard Ellis, the panel included Joseph P. Brennan of Jones Lang LaSalle, James Hedges of Brookfield Office Properties, Tim Helmig of Monday Properties, and J. Douglas Koelemay of Science Applications International Corporation (SAIC).
Dealing with conflicting regulations governing federal use of office space can be particularly vexing, panelists agreed. For example, U.S. General Services Administration (GSA) leasing regulations include rent caps and requirements that buildings be located close to public transit. The problem is that office space near Metro stations commands a premium in the market. In some cases, panelists noted, the government has been able to work around its own regulations by “bifurcating” leases, i.e., breaking down a large lease into a series of smaller leases that are not subject to rent caps.
The issue of conflicting requirements for federal office leasing may be eclipsed, however, by a larger issue looming on the horizon: federal budget cuts. SAIC’s Koelemay pointed out that some budget-cutting proposals would stop the federal government from expanding its office footprint, limiting GSA spending to maintenance of existing space. “This would be a death sentence for us,” he said.
In addition to closely watching policies that affect the federal government, office building owners in the nation’s capital must keep a close watch on the demand that comes from two other sectors that lease large amounts of space in the District of Columbia: law firms and nonprofit organizations. For law firms, real estate is the second-largest expense after salary, but it is also important for many of these firms to maintain downtown offices. In response to this situation, law firms have been slashing the amount of space they use—from an average of 1,200 square feet (111 sq m) per attorney a decade ago to 600 to 700 square feet (56 to 65 sq m) per attorney today. As one broker put it: “Everybody is crunch-happy.” Many firms also are standardizing their real estate portfolios, and almost all are looking for innovative designs to optimize space utilization.
Firms developing new Class A office space outside the District hope to lure law firms across the Potomac River or into the suburbs. ULI member Helmig pointed out that his firm, Monday Properties, is trying to change a Virginia Bar licensing requirement that requires attorneys to have five years of consecutive practice in the commonwealth. Revising this rule would make it easier for law firms to relocate from the District to locations like Arlington County’s Rosslyn neighborhood, where Monday Properties owns a large portfolio of office buildings. Hedges pointed out that areas like Rosslyn and Bethesda, Maryland, offer a 20 to 30 percent rent discount and are just a few Metro stops from downtown D.C.
Another major user group in Washington, the nonprofit sector, has taken a hit during the recession, but appears to be making a comeback. Cushman reported that her firm recently conducted a benchmark survey of law firms and nonprofits, in which nearly all respondents expressed the opinion that they have “hit bottom” and are either stabilizing or “on the way up.” Over 40 percent of the survey respondents said that their location is a part of their brand, she added.
Nonprofits have been employing a number of strategies to cope with high real estate costs in the District. Some keep their public headquarters downtown while moving back-office operations to less expensive space in the suburbs. Others find ways to justify and optimize costly downtown space. A recording industry trade association, for example, leased space a few blocks from the Verizon Center in the District’s East End. They designed their space to accommodate performances, so that they can invite top-selling performers over to “jam” while they are in town.