Wed. January 30, 2008
Washington, DC – Location is the mantra of the real estate industry and in that regard, Downtown DC’s appeal is without rival for organizations needing access to national and international policy leaders and decision makers. Yet, however attractive it may be, the city can be an expensive place in which to operate. As a result, companies often are forced to consider situating their offices in suburban areas due to savings on opportunity costs, especially rents and property and deed taxes.
The Downtown DC Business Improvement District (BID) has released a new leadership paper entitled, “The District of Columbia’s Competitive Position in the Regional Office Market,” which examines possible challenges ahead to the city’s continued office market growth.
“Our goal is to raise awareness about sustaining DC’s competitive position against regional competition,” said Richard H. Bradley, Downtown BID executive director. “In particular, we hope to make city leaders aware of the differential between operating costs in DC and surrounding suburbs, and to suggest new ways of addressing the disparity.”
The report cites solid job growth and low vacancy rates as reasons for strong office rental growth in DC. Over the past 10 years, the city has added an average of more than 2 million square feet of office space annually, providing substantial financial returns to office developers and higher real property taxes to DC government. DC’s transportation, cultural and entertainment amenities as well as important government offices, companies and institutions, continue to serve as drivers helping to sustain this momentum and further economic expansion.
DC has continued to grow its office employment base and prosper in the face of regional competition. However, the report raises serious concerns about maintaining its competitive position, particularly in light of disproportionate rents between Downtown DC and nearby suburbs, where the cost differential ranges between $20 and $26 per square foot. Although much of the differential can be attributed to simple office space demand, higher operating costs are a major distinguishing factor. Last year, a Staubach Company study ranked the DC market seventh in the world and second in the U.S. in terms of office workstation space costs.
Highlights from the report:
- Class A office space in Downtown DC costs $26 more per square foot than in neighboring Silver Spring and $22 more than in Crystal City.
- Class A office space in DC’s emerging markets (Mount Vernon Triangle, NoMa and Capitol Riverfront) costs $13 more per square foot than in Silver Spring and $9 more than in Crystal City.
- Downtown DC Class A office property taxes average $11.10 per square foot, up 94% from $5.72 in 2004.
- Since 2002, the DC government has concentrated exclusively on residential rather than commercial income and property tax relief, while increasing deed recordation and transfer taxes from 2.2% to 2.9%.
- With 8 million square feet of office space under construction at year-end 2007 and a historically low pre-leasing rate of only 20%, DC vacancy rates may jump from 7.1% today to 10.4% in 2010
Continued office market growth remains vital to funding local government’s key social and educational goals. The commercial office market accounted for $877 million in fiscal year 2007’s gross local taxes and other revenues of $5.8 billion, or 15%of gross local revenues — a substantial increase from 11% in 2002. This growth has helped support public school modernization, affordable housing, healthcare investments, job training, neighborhood redevelopment, resident tax relief and infrastructure repairs and construction throughout the city.
Public investment and policy alternatives such as targeted industry assistance tied to development in DC’s emerging office sub-markets; modest commercial property tax reductions; and continued investment in Downtown, as well as emerging office market areas in the NoMA, Mount Vernon Triangle and Capitol Riverfront neighborhoods, are suggested ways in which city officials can work to help thwart declining cost and amenity competitiveness.
A copy of the current report is available at www.downtowndc.org/competitiveposition. Visit www.downtowndc.org/programs/ecomomic_ development view a copy of the November leadership paper, entitled “Downtown: The Economic and Fiscal Engine of the District of Columbia,” as well as the Downtown BID’s annual State of Downtown Report.
About the Downtown DC Business Improvement District
The Downtown DC Business Improvement District (BID) is a private, non-profit organization that provides safety, hospitality, maintenance and beautification, homeless, economic development, transportation, streetscape and marketing services to Washington’s center city. Property owners agree to tax themselves to provide services to the Downtown BID area, which covers 138 blocks from Massachusetts Avenue on the north to Constitution Avenue on the south, and from Louisiana Avenue on the east to 16th Street on the west. For more information, visit www.downtowndc.org.
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