D.C.'s suburbs, not just downtown, are feeling the crunch of remote work

Apr 21, 2024

A decade ago, no one would have questioned that 1776 Wilson Blvd. was a worthy investment.

The five-story Northern Virginia office tower was built just a short walk away from the Metro, with big windows, a fitness center and a green roof to host corporate events. It became the first property to be certified LEED Platinum in Arlington County. These days, there’s a neighborhood bar and a buzzy Peruvian restaurant on the ground floor.

But when it changed ownership last fall, the building looked like much more of a losing bet: An Atlanta-based investment firm sold it off for $55 million — a steep drop from the $90 million it paid for the structure in 2014.

The building’s much lower selling price, analysts say, underscores the existential threat facing landlords and local officials in the D.C. region — and much of the entire country — even in areas outside the most expensive neighborhoods downtown, and even in properties that are mostly filled on paper.

“Is anyone ever going to lease these suburban offices again?” said Tracy Hadden Loh, a fellow at Brookings Metro who studies the commercial real estate market. “For a very specific product, that is the multibillion dollar question right now.”

Unlike some buildings in downtown D.C., where law firms and lobbyists are leaving entire floors vacant, 1776 Wilson is not much emptier than it was a decade ago. Its street-level stores appear as busy as ever, fueled in part by the condos and apartments that put plenty of customers within walking distance.

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Yet the financial picture is still troublesome on this side of the Potomac. While there may be more foot traffic along Wilson Boulevard, drops in property value — including at buildings like this one — stand to drain tax revenue and chip away at the sources of funding for public services in places like Arlington.

According to Loh’s analysis of figures from CoStar, a real estate data firm, more than a quarter of all office space is empty in Crystal City and in the nearby Ballston neighborhood — as is the case in smaller, more outlying office markets like Oakton in Fairfax County.

More crucial, she said, is the value of the space sitting vacant in some of those areas: Nearly $8 million in Tysons and $2.78 million in Rosslyn, the mixed-use neighborhood that includes 1776 Wilson Blvd.

As the office vacancies drain taxes and drag down the value of buildings nearby, she said, the situation in areas like this one could eventually jeopardize “the overall value proposition” of living, working, or putting an office in Northern Virginia or the Maryland suburbs at all.

By now, the story about remote work and real estate is a familiar one: With white-collar employees still spending more than a quarter of their workdays at home, downtowns and other business districts are not back to being as busy as they were before the pandemic.

Michael Hartnett, Mid-Atlantic research director at the commercial real estate company JLL, cautioned that the story looks a little different in some parts of Northern Virginia.

Most of the business districts in Arlington — known to some as the birthplace of the “smart-growth” movement — do not rely solely on offices, which are often down the street from apartments or mixed-use developments that are increasingly catering to the remote work crowd. The real estate is generally less valuable than in D.C.'s main downtown regions, and there is often less of it to begin with.

Rosslyn, for example, “has that distribution of offices, residential, restaurants and hotel,” he said, with areas like Crystal City and Pentagon City transforming themselves into a similar mix as Amazon opens its second headquarters. (Amazon founder Jeff Bezos owns The Washington Post, and the newspaper’s interim CEO, Patty Stonesifer, sits on Amazon’s board.)

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But the rising vacancy rates — even in mixed-use neighborhoods — nonetheless present woes for commercial property owners and for local governments that depend on these buildings to fund schools, police and other services.

“It’s like a ticking time bomb for us,” said Ryan Touhill, director of Arlington’s economic-development arm.

The county historically depends on commercial property for about half its property tax revenue. According to figure compiled by Touhill’s office, however, about 40 million square feet of office space in Arlington was empty in the first quarter of this year.

That has put the county’s commercial vacancy rate at a record-high 21.7 percent, which he said could ultimately mean the county will collect less tax revenue off those buildings. A lack of liquidity in capital markets have in some cases led to buildings going into default, as has already started occurring with one major Los Angeles landlord.

Property assessments for 1776 Wilson show how county finances may begin to feel the burn. Before the coronavirus pandemic, the building’s assessed value peaked at just over $83 million in 2019. Its previous owner, the Atlanta-based firm Invesco Advisors, paid $1.02 million in taxes that year to the county.

This year, it was assessed at nearly $65 million. Its new owner is on track to pay $760,000 in property taxes to Arlington by the end of the year, according to county records. (Neither Invesco Advisors nor Oaktree Capital, a Los Angeles firm whose affiliate owns 1776 Wilson, immediately responded to requests for comment.)

Multiplied many times over, that dip in revenue could force some difficult choices for county leaders — and it only stands to get worse in the coming years.

Some buildings are also filled with “shadow space” that is functionally leased but practically empty in actuality. Because most office leases were signed well before 2020, real estate observers said the shift to remote work is likely to only start rearing its head slowly over the next few years.

Touhill’s office has taken to loosening zoning regulations on the kinds of businesses that might be able to go into empty office space as a way to increase demand for buildings that are empty or on track to become empty. They are now looking at simplifying the process and regulations to upgrade existing properties, tear them down for redevelopment, or convert them to apartment buildings — a much-buzzed about idea being floated by officials in D.C. and many other big cities nationwide — or redevelop them as something entirely new.

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In Crystal City, Amazon’s growing footprint also points to another dynamic that could further scramble the commercial market. As brand-new buildings come online, companies will leave older buildings for these amenities.

The tech giant, which recently opened two office towers in Pentagon City, plans to end nearly all of its leases on space it has been leasing a few blocks away in Crystal City, executives have said.

That will put close to 1 million square feet of commercial real estate back on the market — even as the company opens up another 2.1 million square feet. (JBG Smith, which owns the leased space, has said it is confident that it can fill that space.)

Loh said that a similar dynamic is likely at play along the Silver Line in business districts such as Tysons and Reston, which have the highest asset value for any business district outside the District. With new inventory being added along Metrorail, commercial tenants may be relocating from older buildings to newer ones that keep construction and vacancy up.

That could mean any buildings that don’t try to update or add amenities will be left behind, Hartnett said. Indeed, as Bisnow reported, the property manager at 1776 Wilson is renovating the building’s gym and rooftop terrace and turning a first-floor suite into a game room.

“The challenge now — or the opportunity — is that there’s winners and losers within those submarkets” he said. Buildings that update their facilities “are going to capture a disproportionate share of the leasing activity than a building that is sitting idle.”

What that means for Arlington’s coffers, though, is an open question.