The Washington, D.C., metro area is a hotspot for office-to-residential conversion projects, driven by an oversupply of commodity office space amid a housing market in short supply.
Conversions and demolitions have exceeded new office supply deliveries in the nation’s capital for the past three years, according to a CBRE analysis. Between 2016 and 2024, the D.C. metro area averaged four office conversions per year, totaling six million square feet. However, 32 office conversions totaling seven million square feet have been planned or announced for completion in 2027 and beyond.
A bifurcated office market is playing into this trend, with consistent strong demand for top-quality space and soft demand for commodity space, said the analysis. Law firms, which are a key demand driver for the District, have contracted and moved to more efficient buildings, and the federal government is reducing its footprint, while remote work has persisted following the pandemic. All of these factors have driven overall office vacancy in the D.C. metro area to 22.6%, while the trophy rate is 11.5%.
As such, vacancy is concentrated in commodity Class A, Class B and Class C properties. Thirteen percent of buildings in Washington, D.C., have rates exceeding 50%, nearly all of which are commodity Class A, Class B and Class C properties.
“A perfect storm of high vacancy, historic-high concessions, the cost of financing and the timing of loan maturities has caused an increase in commercial real estate distress,” said CBRE. “At least 25 properties foreclosed in 2024, up eight from the prior year.”
Meanwhile, Washington, D.C.’s need for housing remains strong as population growth has increased while high interest rates have prevented many from becoming homeowners. As a result, the rental market in D.C. has had positive rent growth and CBRE expects that to continue over the near term.
Washington, D.C.'s local government recognizes the benefits of office conversions, including boosting the vibrancy of locations where office-occupancy levels have declined and delivering much-needed housing close to job centers. To spur projects, Washington, D.C., has established economic incentives to support the conversion of office buildings to residential or other uses, including the Housing in Downtown program, which provides a 20-year tax abatement for eligible projects. In addition to local tax and zoning incentives, projects can receive a variety of federal grants, financing programs and tax credits. Some programs are targeted specifically to conversion, while others are focused on sustainability, transit-oriented development, or historic preservation, said CBRE.
Washington, D.C., also implemented the Office to Anything program, which will provide a partial 15-year tax abatement to incentivize the repurposing or conversion of outdated office space to nonresidential uses. The program allows for $8 million in total funding to be released from 2027 to 2029 for abated property to be redeveloped.
Office conversions in the city aren't challenge-free. The issues include height restrictions to preserve the district’s historic horizontal skyline and the need to address older floor plates that impede natural light.
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