Chip Akridge: New Administration Will Help Improve D.C.'s 'Dire' Office Market
Chip Akridge has built 20M SF of office in the D.C. area over the last four decades, and he has always started construction on a speculative basis, confident that the building will lease up once the project is under construction.
That confidence is now waning, as record-high vacancy in the District makes the founder and chairman of development firm Akridge more hesitant to start new office projects.
"The office market in the D.C. area has really dropped off, so we're not excited about building commercial space in the D.C. area anytime soon," Akridge said last week on a Bisnow Town Hall webinar.
While the market has struggled this year, Akridge said he believes the change in administration next month will spur new office leasing in the nation's capital, and he thinks the D.C. market is better-positioned than other gateway cities.
The developer has delivered three spec office projects in Downtown D.C. in recent years, and each of them is now more than 90% leased, Akridge said. He said the remainder of his existing portfolio has remained stable, allowing him to ride out the storm until the market improves.
"In terms of new leasing, it's pretty dire," Akridge said of the D.C. office market. "We're not leasing much new space. That's the bad news. The good news is we don't have much new space to lease."
The District experienced negative absorption of 780K SF through the first nine months of the year, according to CBRE, which pegged its Q3 vacancy rate at a record-high 15.4%. The vacancy rate had already hit all-time highs in D.C. before this year, as new supply has outpaced demand, but the coronavirus pandemic has exacerbated the market's problems.
Akridge said he has worked in the D.C. office market for 45 years and he had not seen double-digit vacancy rates until the last few years. He said many tenants are pushing off long-term leasing decisions as their future workplace strategy remains unclear, while other tenants are looking to get out of leases.
"Obviously, the market is not in prime condition," Akridge said. "We have people looking to get out of leases that have five to six years left to run to get to cheaper space somewhere else."
The Electoral College Monday affirmed Joe Biden's victory in last month's election, and the president-elect will be sworn in Jan. 20. Akridge said he has been in D.C. for 11 inaugurations, and even when the White House stays with the same party, a new presidential term always benefits the District's office market.
"Changing administrations brings in a whole new wave of people," Akridge said. "Most people who are here for at least four years get what we call 'river fever,' and they don't want to leave Washington. They may not work for the government anymore, but they work for a law firm, lobbying firm or nonprofit."
The holdovers from the last administration staying in D.C., combined with the people moving to D.C. to work for the new administration, adds to the total number of office-using jobs in the District and creates more demand for space, he said.
"It's been a positive thing for the District every time we've changed administrations, so I don't see this being any different," Akridge said.
The level of office activity in D.C. is also impacted by the amount of legislation the new administration can pass, and that will depend on Georgia's Jan. 5 runoff elections, which will determine which party has control of the Senate.
"It is crucial to both the Republicans and Democrats to get control of the Senate, and this is just another unknown," Akridge said. "In business, the things you don't like are the things you don't know, and here's another big one. Probably the biggest issue facing the country at the moment is who's going to control the Senate."
The company has an additional 2M SF of development planned on Buzzard Point, and he said it aims to break ground in Q4 2021 on the first phase. He said the project will be primarily multifamily and retail, with a small office component. The development has been planned to include a hotel, but he said he doesn't think it can finance a new hotel in today's market.
The developer also has a 3M SF development planned above the rail tracks at Union Station. The project, Burnham Place, has been in the works for years, but Akridge said it has made progress over the last 12 months. He said the Federal Railroad Administration has completed its environmental impact statement, and the project has been approved by all but one of the necessary parties.
"Things should begin speeding up now," he said of Burnham Place. "I'm hopeful with the new administration that the infrastructure and transportation and stimulus aspects of this project ... obviously it will take federal funding, and there seems to be an interested FRA to do that, and hopefully the new administration will agree with that."
As the D.C. market looks to recover from the pandemic, Akridge said he thinks it is well-positioned to benefit from the change in administration, and it could capture demand leaving New York City.
"We'll get back on track. We're one of the two or three best office markets in the country," Akridge said. "We're certainly better than New York at the moment, and many of the California markets are not doing well either. ... I think we're doing as well or better than most and will continue to do so."