The Blue Bottle Coffee on the ground floor of downtown Washington, D.C.'s Midtown Center office complex was dark and barren on a Monday morning just a few months ago. Now, with a steady return of employees commuting for in-person work, the cafe has ramped up its hours.
The local public transit system recently reported its busiest Monday morning rush hour since 2020. Metro stations are breaking records for customers passing through, packed like sardines, with a constant reminder over loudspeakers for crowds to not block the doors as people navigate to and from work.
The gradual office recovery is taking hold in the nation's capital. Executives said office leasing is picking up along with foot traffic, fueling an optimism over the return of the area's workforce that seems to be — at least for now — beating out the uncertainty caused by whipsawing federal directives, large job cuts and a plan to slash the U.S. government's real estate holdings.
Property owners are looking beyond the short-term upheaval to focus on what some now expect to be a slow but steady rebound.
"There has been a clear vibe shift over the past few months, we can feel it, as bigger groups of tenants are now finally ready and able to commit to office space," Kaitlyn Rausse, the senior vice president of leasing for D.C.-based office developer Carr Properties, told CoStar News. "Larger blocks of space are now being taken off the market, and many of these tenants are ready to commit to larger deals. All of that is trickling down and is having a domino effect on the rest of the market."
There are challenges. Vacancies are still higher in the Washington area than before the pandemic. And, combined with the record-high vacancy rates plaguing other markets across the country, landlords and property owners in the market are contending with a unique hurdle in the form of political uncertainty that's clouded the outlook for one of the region's largest workforces and office tenants: the federal government. The government in the past week made public a list of hundreds of buildings it planned to shed, then quickly withdrew the list.
On-the-ground recovery
Even so, for Washington-area workers, the sense that more people are out and about during the workweek is not imagined.
Out of more than 2 million federal civilian employees across the United States, Washington, D.C., had at least 162,000 as of September 2024, according to the U.S. Office of Personnel Management. More than 300,000 work in the greater D.C. region that includes parts of Maryland and Virginia, according to the U.S. General Services Administration.
The bump in employees trading their kitchen tables for office desks has been reflected in the transit happenings across the nation’s capital, already ranked as one of the most congested cities in the U.S. by transportation data company INRIX.
The District’s Department of Transportation issued a warning for expected road delays and announced it would adjust traffic signals to help manage flow when thousands of federal employees returned to work earlier this year. A military base in the Navy Yard neighborhood in Southeast D.C. has been figuring out how to accommodate the return of personnel with limited parking availability.
Area restaurants have started expanding their operating hours to once again include lunch services, according to Gerren Price, president and CEO of the DowntownDC BID, the nonprofit that aids in economic development in the city’s core.
On a recent Tuesday, more than 60% of D.C.-area employees were in the office, according to Kastle Systems, a security firm that tracks building access data.
Meanwhile, the new presidential administration continues to push for federal employees to return to work in-person.
“When the largest employer in the region orders return to the office for five days a week, the region itself, and in particular the companies that work closely with the federal government, stand up and take notice,” Leona Agouridis, president and CEO of the Golden Triangle Business Improvement District, told CoStar News in an interview.
Several area companies and organizations instructed their workers to return to the office full time before President Donald Trump took office, including the Washington Post and the region's public transportation service. A number of other firms are phasing in plans to put people back at their desks.
Signs of certainty
Over the past year, greater D.C. office tenants have signed roughly 3,650 deals totaling upward of 21 million square feet, according to CoStar data. While annual leasing volume remains about 25% lower than pre-pandemic levels, signs have surfaced in recent months that show the market has hit bottom and is slowly making its uphill climb.
For the first time since early 2023, tenants agreed to take on about as much space as they let go, with deal volume in the final months of 2024 hitting its highest point in more than a year.
Following Trump's mandate that workers be in the office five days a week, issued shortly after his inauguration, the return of thousands of federal workers has meant clogged thoroughfares, a shortage of parking and sidewalks filling up with employees bundled against the winter weather on the way to their respective offices.
The increasing foot traffic has been a positive sign for developers such as Boston-based BXP, which owns 34 properties across the D.C. area that collectively span more than 9.2 million square feet.
Still, landlords and employers are contending with fast-changing government policies. Most recently, the GSA cut the workforce of the group that oversees its real estate portfolio. That portfolio could dwindle in the coming years, as the government considers offloading what it calls “non-core” assets totaling nearly 80 million rentable square feet.
Meanwhile, the Department of Government Efficiency, the special commission that the administration created to cut government spending, has been working to terminate leases in Washington.
That uncertainty is not overshadowing the momentum driven by the in-office return, real estate professionals noted.
"Even if the federal workforce is rationalized and the [General Services Administration] reduces space requirements, having federal workers returning to their offices should be a significant positive for BXP's business in the Washington, D.C. region," CEO Owen Thomas recently told analysts. "More street life would be a positive for the urban environment and local retailers, and many of our users are government contractors who would be more likely to return to their offices in line with their government clients."
Building for future demand
Private companies across the legal, financial services, lobbying and defense industries have also steadily called employees back to the office more regularly. As a result, a number have chosen to invest in upgrading space in order to retain and attract talent across their workforces, meaning competition among tenants for the D.C. region's dwindling pool of premium office space is likely to keep climbing.
At the Carr Properties-owned Midtown Center — also home to the Blue Bottle Coffee now open six days a week — the landlord over the past several months alone has landed large new and renewal deals that have helped solidify the notion that tenants in the D.C. area are fueling demand for premium office space.
Rents among some of the highest-end properties are commanding up to $75 per square foot, according to CoStar data, almost double the regional average of less than $40 a square foot.
"A lot of these companies aren't even looking at what the rent is," Carr Properties' Rausse said. "They're willing to pay for space that provides a hospitality environment with retail and restaurants and amenities that help create a sense of place and culture. Since nothing new is getting built, if these tenants want the best of the best, they're starting to realize they better commit to space today."
Many real estate professionals are betting the D.C. region's near-total absence of new construction will boost the office market turnaround. Financing challenges and weak office market fundamentals over the past several years meant not a single developer broke ground on a new trophy project in D.C. last year, and current construction levels are at 30-year lows, CoStar data shows.
New office projects are "not penciling out because of higher borrowing costs, labor and building material costs, and risks," said Tammy Shoham, JLL's director of research for the Washington area. "While we expect the slow pace of new construction to continue throughout 2025, the drought is ending, but there will still be a shortage of trophy office space in the near future."
Looking to capitalize on that constrained demand, BXP set the stage for its first major post-pandemic office development that — in addition to the landlord's return to the capital markets — solidifies its long-term commitment to the area.
The developer plans to break ground later this year on a 320,000-square-foot trophy office redevelopment three blocks from the White House. The project would replace the existing 12-story property at 725 12th St. NW that BXP acquired for $34 million in the final days of 2024 from a joint venture between Hines and Swift Creek Partners.
The developer has already cemented a 15-year prelease agreement with global law firm McDermott Will & Emery. The firm committed to 150,000 square feet across the top five floors of the future property.
What's more, BXP said it is "currently negotiating" with a potential tenant interested in taking on most of the project's remaining space. That prospective tenant is said to be another notable law firm, Cooley LLP.