Trump 2.0 Could Dent Further an Already Beat-Up D.C. Real Estate Landscape

With a record-high vacancy rate and business activity still well-below pre-pandemic levels, Washington, D.C., once lauded as “recession-proof” due to its federal workforce and ancillary industries such as law and lobbying, has found itself in a doom spiral in the wake of the COVID-19 pandemic that is likely to continue tumbling before it can rise. Whether the incoming Trump administration’s emerging policies toward returning federal workers to the office full time and cutting bureaucracy will improve or worsen that prognosis remains to be seen.

“Downtown economic activity is down, the District’s ability to attract new workforce has diminished — in fact, our private sector employment did not grow at all last year,” Yesim Sayin, executive director of the D.C. Policy Center, a nonpartisan think tank, told Commercial Observer. “That also means that because the relationship between where we live and where we work has broken down, the demand for the city from residents is also weakened.”

On paper, the office statistics for the District are abysmal. Office vacancy hit 22.7 percent after the third quarter, continuing a trend beginning even before the pandemic hit the U.S., according to CBRE. Average monthly office occupancy is still below 50 percent of pre-pandemic levels, which has a direct impact on building values, according to an annual report by the D.C. Policy Center. Twenty-one office buildings over 50,000 square feet, sold throughout 2023 and the first half of 2024, traded for an average of 42 percent less than their 2023 assessed values, per the report. 

The sheer and overwhelming amount of financial distress backing D.C.’s commercial real estate market is also acute. While an exact number of underwater properties this year is unclear, the examples are legion: the foreclosures and/or auctions of the 580,000-square-foot property at 1800 M Street NW, the four-building portfolio at L’Enfant Plaza, and the 12-story high-rise at 1111 19th Street NW, to name a few. All of those were just in the past two months.

And this is not a problem entirely connected to the logy office market. Among the most notable, coincidentally, was the default earlier this year on $285 million of debt tied to the Waldorf Astoria Washington, D.C., formerly the Trump International Hotel, less than two years after CGI Merchant Group acquired it from the Trump Organization. Affiliates of lender BDT & MSD Partners acquired the 263-key hotel for $100 million at foreclosure auction in August. 

“It’s our perspective that things will probably get a little worse before they get better,” said Max Saia, head of investor research for real estate data firm VTS. “The increases we’ve seen in vacancy rates over the course of the post-COVID time period have started to slow, but it’s unlikely that’s over yet. We haven’t seen enough demand enter the market to make up the gap and drive vacancy downward yet.”

The interconnected causes of the District’s troubles are, like the city’s colorful history, complicated. High cost of living, poor return-to-office statistics, volatile crime rates, stadium woes, and, naturally, the downsizing of the city’s biggest tenant all play a factor. Details of how exactly Trump and his allies could help the city reverse course are, like other specific aspects of their agenda still six weeks until inauguration, murky. But Trump has proposed a number of policies that give a glimpse of where the business environment in D.C. could go. 

For over a decade, the General Services Administration, which manages the federal government’s nonmilitary real estate footprint, has systematically shed vast amounts of its owned and leased space. The agency said at the end of last year that it had disposed of nearly 12 million square feet of owned space and some 14 million square feet of leased space since 2013 — a trend reinforced by the Biden administration’s $425 million budget proposal earlier this year to continue the policy. The examples lately have been myriad: the State Department, Treasury Department, Department of Housing and Urban Development, and the Court Services and Offender Supervision Agency have all seen their footprints consolidated or shrunk throughout this year. 

Where Trump stands on that exact policy is currently unclear, but the former president has made general cuts to federal bureaucracy a central aspect of his agenda. As part of his plan to “clean out the deep state,” Trump plans to “reissue [the] 2020 executive order restoring the president’s authority to fire rogue bureaucrats” and “overhaul federal departments and agencies,” according to his website. 

Trump’s picks of Tesla and X owner Elon Musk and former presidential candidate Vivek Ramaswamy to lead the newly created Department of Government Efficiency (codenamed DOGE, in reference to Musk’s affinity for a certain cryptocurrency) are evidence of his intentions. Both Musk and Ramaswamy have been vocal advocates for cutting what they view as federal bloat, with the latter recently telling Fox News that he expects “certain agencies to be deleted outright.” A prime target on their list is likely the Department of Education, which Trump has previously pledged to abolish. 

Aside from outright cuts, Trump has made clear that he wants to move significant numbers of federal staff outside of Washington, D.C. — up to 100,000 positions, according to his website. Where or when those moves could take place is vague, but such a policy is not without precedent. Trump in 2019 announced the transition of the Federal Bureau of Land Management headquarters out of D.C. to Grand Junction, Colo. Yet the effects were relatively minor — the move affected about 328 positions, though only 41 workers actually relocated, according to the Department of the Interior. The agency’s headquarters was moved back to D.C. less than two years later. 

“We will take over the horribly run capital of our nation in Washington, D.C., and clean it up, renovate it, and rebuild our capital city,” Trump said at a campaign event in July. 

D.C. Mayor Muriel Bowser, for her part, has vowed to defend the District’s autonomy, publicly saying at an event in November that her administration had been planning for months “in case the District has to defend itself and its values” from a second Trump term. Bowser added at the time that her administration had attempted to communicate with Trump’s team, but that it had not yet heard back.

Bowser’s office did not respond to a request for comment. 

Meanwhile, both Musk and Ramaswamy are proponents of returning federal workers to office full time — which Bowser has also pushed for in the past — but only as a way to coerce those workers to quit. Nearly 161,000 federal jobs are in D.C., with another 140,000 in Virginia and 139,000 in Maryland, according to a September report from the Congressional Research Service. 

“Requiring federal employees to come to the office five days a week would result in a wave of voluntary terminations that we welcome: If federal employees don’t want to show up, American taxpayers shouldn’t pay them for the COVID-era privilege of staying home,” the pair recently wrote in an op-ed for the Wall Street Journal on Nov. 20, outlining their reform plan. Of the nearly 2.3 million civilian federal workers, 1.1 million are currently eligible for telework, while 228,000 work entirely remote, according to a lengthy report published by the Office of Management and Budget in August. 

“Bringing the workers back is good for the local economy overall,” VTS’s Saia said. “These things take a long time, but that will eventually increase spending at the local level — more people around, more people sharing ideas in close proximity to one another; eventually that will have positive spill over effects like new firm creation, new ideas, new companies, etc. All of those things are going to be positive very long term, but it’s going to take a while to play out.”

What these policies ultimately mean for the District’s business climate remains to be seen, but experts such as Saia think that things are likely to get worse for the District before they get better. In the long run, that isn’t necessarily a bad thing.

If D.C. is to regain its health as an urban center, analysts say that a diversification of its economy, and a shift away from being dominated by the federal government, is really the only way forward. If the federal government continues to shrink away from the District under the new Trump administration, then, that leaves room for other entities and industries to move in. 

D.C.’s interdependence with the federal government “was something that lifted the city for a very long time,” Sayin said. ”The city was recession-proof because the feds would hire if the private sector employment went down. But it really prevented us from diversifying our economy.  

“So it’s like we have this one big ginormous egg sitting in this one basket with a fraying bottom. And a transition away from that is difficult, but a healthy thing, and I think if done in collaboration with the federal government it’s going to benefit both entities.”

Nick Trombola can be reached at ntrombola@commercialobserver.com.