The D.C. office market’s normal supply and demand dynamics are being thrown off-kilter by what's known as the "zombie" building.

The term is used for properties where office owners don’t have the ability to do leasing deals, usually because they lack the money for brokers, tenant improvement allowances, concessions or the renovations that are required in today’s office market.

CBRE measures 30 large blocks of office space — 50K SF or more — in D.C. proper this year where owners can’t sign new deals, according to data provided to Bisnow. Those blocks equate to a total of 5.5M SF of zombie space. They make up a substantial chunk of the city’s 125M SF office market, without accounting for zombie space across smaller blocks.

That number hasn't meaningfully changed since last year.

“So many buildings can't transact because their capital stack is underwater, their owners are out of money,” Garfield Investments founder and CEO John Mason said onstage at Bisnow’s DMV Office Summit last week. “They cannot transact and provide what tenants are looking for today.”

The amount of that type of space in the D.C. market sitting quietly idle is putting a strain on and creating confusion in the leasing market for the owners that are willing to do deals, as well as the tenants looking for the right space and landlord, panelists said at the event, held at 1 Thomas Circle NW. 

“There's this horrible problem with these buildings that are out there that can't provide TIs or leasing concessions for the tenants,” Monument Realty co-founder Michael Darby said. “So it's hard to tell who's actually going to be able to transact. So it's a very unusual, very interesting market right now, especially for people like us that look for opportunity.” 

Darby, who said he prefers to call these types of office properties “imposter” buildings, rather than zombie buildings, argued that they create a false sense that tenants have more options than there actually are.

“We're now still competing against other people that may not be real, and that's not good for us, probably for the tenants, to tell you the truth,” he said. 

On the tenant side, the zombie problem means that prospective office occupiers and their brokers need to wade through a desert of mirages to find landlords who are able to sign deals now, and remain attentive to their buildings throughout the lease. 

“The worst thing that can happen is if you go down the road that is ultimately a dead end and that you're being either misled or told information in hopes that your letter of intent is going to unlock something in the capital stack to get it done,” Savills Executive Vice President Jon Glass said. 

Meanwhile, little information is available about which owners and which buildings fit into the zombie category, creating an opaque leasing landscape.

“There needs to be a foundational level of transparency in terms of the financial health of the building,” Glass said. “Who's making the decisions? What is lender approval? What kind of deals and what parameters can you do?” 

Darby’s firm has made its own zombie building database by reading between the lines. 

“We have a long list of people that we think in this market aren’t transacting through certain tells that you can find through the ownership over time,” he said. 

But zombies do have some redeeming qualities.

The fact that there is this glut of buildings where owners can’t do deals means less supply and thus higher rents for the ones that can. It also presents a compelling opportunity for investors who can buy buildings for cheap and infuse cash into leasing and upgrades. 

“The majority of the tenants are looking for nice, well-amenitized Class-A buildings. You see a very strong demand there,” Taicoon Property Partners co-founder and CEO Hai Chien Wang said. “And the supply we feel is still under because many of the Class-B buildings are still — balance sheets still upside down, still suffering and unable to transact.” 

During the third quarter, Class-A rents grew 6.2% from the same time last year, the Washington Business Journal reported, with D.C.’s average Class-A rent coming in at roughly $80 per SF. 

“It's nice to see rental rates going up for the first time in a while, and doing so in a rather aggressive manner if you can actually transact,” PRP Real Assets Chief Investment Officer Jon McAvoy said.