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Competitiveness

Downtown plays a central role in Washington, DC’s continuing job growth, office development and fiscal resurgence.  The renaissance that has taken place in Downtown during the past 12 years has helped transform the city’s image and identity into that of a vibrant, thriving and dynamic urban center.

The foundation of this rebirth has been Downtown’s job and income growth, which has generated new commercial office development, as well as retail and residential development. In turn, this new development and the resulting substantial increase in real estate values have translated into significantly increased tax revenues to enable the DC government to meet the city’s basic needs.

Much of the city’s rising fiscal fortunes have been built upon the foundation of additional taxes from office property. Like all world class downtowns, Downtown Washington, DC, not only provides places for residents to work, shop and visit, but its tax revenues support services that also help make DC neighborhoods viable and successful.

Downtown generates much more in tax revenues than it costs the DC government in services. This is what the downtowns of all world-class cities do— provide economic and fiscal support for surrounding neighborhoods and communities.

Today, Downtown is a powerful engine whose impact is far ranging and worth continued public investment to maintain its economic and fiscal benefits. But increasingly, the Maryland and Virginia suburbs are challenging Downtown's office, residential and retail markets, as well as its economic prowess in the restaurant, hotel, cultural and entertainment markets.

The growing disparity between office rents in DC and the rest of the metropolitan region raises serious questions about whether the city can maintain its development momentum. The rental rate disadvantage affects established office markets in Downtown, the Central Business District and Near Southwest, as well as emerging office markets in the Capitol Riverfront, NoMa and Mount Vernon Triangle areas. As of December 31, 2007, Class A office space in Downtown cost $20 to $26 more per SF than in nearby suburbs. Class A office space in the Center City’s emerging markets costs $9 to $13 more per SF than in the suburbs.

Significantly higher operating costs for DC office buildings, as compared to those in the suburbs,
account for the majority of the DC versus suburbs rental rate difference. As a result, the
following outcomes for DC are likely: (1) the office market will develop more slowly than it
would otherwise; and (2) the office tenant base will narrow as cost-conscious tenants leave the
city. In particular, one negative outcome may be losing small to mid-sized organizations and
businesses that find it hard to meet higher rents and the associated costs of doing business in
DC. Another negative outcome may be a continued out-migration of cost-conscious businesses
from the city, along with back-office functions and support businesses. In fact, DC has lost more
than 3 million SF of Class B office space since 2000.

Surrounding regional jurisdictions will continue to pose a very strong competitive threat to the
DC office market’s growth due to two factors other than high operating costs: (1) suburban
areas have lower land costs (particularly in Northern Virginia and Prince George’s County); and
(2) suburban areas will have greater tenant loss from the Defense Base Realignment and Closure Commission’s (BRAC) post-9/11 defense consolidation recommendations, thereby opening up large blocks of available space (4 to 5 million SF of office space in Arlington will be vacated beginning in 2011).

Despite a significant rental rate and operating cost disadvantage, DC’s office market has competed successfully with nearby jurisdictions because in employers’ location decisions, the location and
“quality-of-life” amenities outweigh the cost disadvantages. DC offers easy access to the federal government, national institutions and business leaders in other major industries and associations housed here. A wide range of restaurants, entertainment and cultural attractions exist in DC to a far greater scale, and at a higher quality level, than in suburban areas. Beyond this, the region’s transportation systems are set up primarily to serve DC, particularly the Downtown and Center City areas.

However, DC’s amenity differential may be narrowing as surrounding jurisdictions like Silver Spring,
Rockville, Reston and Crystal City continue to invest in “urban” amenities to improve their competitive
position. In addition, Metrorail’s extension to Tyson’s Corner and Dulles Airport in the next five to seven years will bring rapid transit to more of Northern Virginia. Lastly, Prince George’s County has invested substantially in National Harbor to create a new national and regional convention destination that will compete with several sectors of the DC convention and hotel market. It also is primed to become a significant new residential and office sub-market in the next three to 10 years.

A number of possible initiatives can be posited to address concerns about the DC office market’s
competitiveness. Most important is that the public sector continues to invest in Downtown and
Center City area placemaking amenities and public infrastructure. The DC government’s net
investment over the past 10 years in Downtown is estimated at $300 million, accompanied by $10
billion in private investment. This 3% investment has produced substantial returns in the form of
increased revenues and jobs for DC residents.

In addition to benefiting from economic revitalization during the past decade, Downtown has
experienced significant improvement in its quality of life. A public environment that could
have been characterized as “dull, dirty and dangerous” in 1997 now can be characterized, for
the most part, as “clean, safe and friendly.”

The reasons for the improved quality of life are many: an increased number of Downtown
residents with “eyes on the street”private and public investment that has turned parking lots
and abandoned buildings into productive assets, and the programs generated by public-private
partnerships between DC government and business improvement districts.

It is critical that both the public and private sectors continue to focus on quality of life issues
if the Downtown economy is expected to prosper. Key areas of concentration must be cleanliness,
public safety, homeless services, streetscape and park investment, maintenance and
programming. Established office sub-markets located in the Center City have relatively modest infrastructure and placemaking needs. Emerging office sub-markets—Mount Vernon Triangle, NoMa and the Capitol Riverfront—require more basic investment in transportation, underground infrastructure and place making.

Reducing the commercial property tax rate modestly would decrease the property tax differential between DC and neighboring competitive jurisdictions without having a significant impact on tax revenues. It is important to note that DC has concentrated exclusively on residential income and property tax relief since 2002.

It will take considerable resolve and discipline to ensure that the correct balance of taxation and public
investment continues in the future; however, it is essential in order for DC to fund and achieve many of its important social and economic goals for all of its citizens. With proper public investment, a reasonable goal would be for DC to grow its net fiscal impact from $624 million per year today in Downtown to a Center City net fiscal impact of more than $1 billion in five years and $1.5 billion in 10 years.