Biden Administration Brings 'Potomac Fever' Boost To D.C.'s Office, Multifamily Markets
The D.C. area's largest employer will be experiencing a significant amount of turnover come January.
The start of President-elect Joe Biden's administration is expected to bring an influx of new residents to D.C. that could boost the area's apartment market, and an increase in government spending and lobbying could provide a bump to the city's office owners.
The ideal outcome for the D.C. market, experts said before the election, would have been a Democratic sweep, because single-party control of the executive and legislative branches tends to mean more legislative activity and thus more office demand. Control of the Senate is still up for grabs, but Republicans have a 50-48 advantage heading into the two Georgia runoff elections Jan. 5.
Even if the Republicans retain control of the Senate and stymie Biden's legislative agenda, developers and market experts still believe the change in administration will create enough turnover to boost commercial real estate demand in the D.C. area. The surge could come at a much-needed time for the region, as the coronavirus pandemic has hurt the city's office and apartment markets.
"Every time you get regime change here, the old people don't all leave, and the new people do come in, they're not local hires," said Urban Atlantic Managing Partner Vicki Davis, who is developing thousands of apartments in the region. "It's very good for apartments, it's very good for urban locations, so I'm excited about that."
This trend of prior administration employees staying in D.C. after leaving office has been proven out in previous post-election periods, said Newmark Director of National Market Research Sandy Paul, adding that the phenomenon even has a name.
"From a multifamily standpoint, turnover in the administration is typically associated with something known as 'Potomac Fever,' which is this bringing in from the outside of new people who serve in the administration, and yet the people from the previous administration have developed relationships and tend not to leave," Paul said. "So what that means is an increase in the overall demand for housing."
Paul said the benefits from this trend tend to skew toward D.C.'s wealthier residential submarkets, and one developer with a large portfolio in those neighborhoods said he is seeing early signs of the incoming demand.
Eastbanc principal Philippe Lanier, whose firm builds high-end condos and apartments in Capitol Hill, Georgetown and the West End, said his buildings tend to attract government officials, and he has already seen some express interest in the two weeks since the election.
"A lot of Obama's Cabinet and senior officials were living in the buildings that we built ... and I'm already seeing signs of the same thing happening," Lanier said. "I'm seeing a lot of recently elected Congressmen and senators, through relationships, either call me directly or have found our buildings and are already moving in."
Brookfield Properties Executive Vice President Greg Meyer, whose firm owns a large portfolio of D.C. apartments, office and retail, including mixed-use development The Yards near Capitol Hill, said he expects the change of administrations will help the area's economy.
"You get the impact of new people coming in and buying homes and shopping, and some of the service businesses that support them," Meyer said. "And you get the outgoing political appointees, who go to law firms or do advocacy work or think tanks. Things just grow when there's a change, so I'm optimistic about that."
A surge in demand would help a D.C. apartment market that has struggled during the pandemic. Apartment absorption in the District for the 12 months ending Sept. 30 was down 33% from the prior year, according to Delta Associates. Apartment vacancy in the District rose from 4.4% in Q3 2019 to 7.8% last quarter, and Class-A rents in the city fell by 10.7%.
Historical data shows the change in administration could help reverse the market's downward trend. According to Delta Associates, D.C. apartment absorption increased by 279% in 2009, after former President Barack Obama's election, and it increased 37% in 2017, after President Donald Trump's election.
Since 2000, D.C.'s average absorption increase during the first year of a presidential term, including the years after a president's re-election, is 98%, according to Delta Associates. During every other year, the average apartment absorption is 35%.
"Based on historic trends, it is likely there will be an increase in apartment absorption in D.C. in the first year of the Biden administration," Delta Associates President Will Rich wrote in an email. "Now, a pandemic wasn't happening during these prior administration years, so that is a wild card. Perhaps the introduction of one or more successful vaccines will help the market to rebound in 2021."
The expected boost in housing demand is not limited to the District. Alexandria Economic Development Partnership CEO Stephanie Landrum said on a Bisnow webinar last week she expects to see benefits in Northern Virginia.
"A change in administration is really good news," Landrum said. "The most important reason for Alexandria is the churn that will happen with the administration change. You think about new people coming in and buying houses, renting apartments, discovering restaurants and staying in hotels."
Clyde's Restaurant Group President John McDonnell said he "100%" believes that the change in administration will help increase demand in the city's struggling restaurant industry. Downtown restaurants have been hit hard by the slower-than-expected return to offices, but he said people joining the White House and federal agencies likely won't begin their new jobs working from home.
"When you've got new people and new things going on, you've got to have your people together, and there's just no replacing that," McDonnell said. "Changing out a federal government is a lot of onboarding, and that's going to happen in the District in January. Maybe it'll be the kind of churn that we're used to downtown, but there's no question that's going to make for a better situation than we're experiencing now."
While the city's office market may not experience the full benefit of the increased legislative activity associated with alignment of the White House and Congress, developers still expect the change in administration will spur leasing demand.
The D.C. office market could also use the bump in activity, as vacancy has reached record highs. The District experienced negative office absorption last quarter of 177K SF, according to CBRE, which pegged the vacancy rate at 15.4% as of Sept. 30.
"The number of people that are out there looking to lease new office space right now is at an all-time low," Meyer said.
While activity has been low during the pandemic, Meyer said he thinks the D.C. market is well-positioned for the recovery, and he thinks it could benefit from lobbying firms ramping up their activity early next year.
"Usually when there's a change in administration, there's an increase in lobbying spend," Meyer said. "There are new priorities that are set, and those priorities have more money spent on them."
Large lobbying firms make up a significant chunk of D.C.'s office market, and major corporations also rent D.C. space for their government affairs offices. Paul said the change in administration and the prospect of a divided Congress could lead to a growth in these types of offices.
"Historically when we have seen split government it leads to more fights over the federal pie, and that means a growth in lobbying activity," Paul said. "Turnover from one administration to the next, even when it's the same party, introduces new players into the equation, so that tends to lead to more activity. All of that benefits the office market, it enhances demand."
Rockefeller Group Regional Development Officer Hilary Allard Goldfarb said she saw an increase in leasing activity from the lobbying industry during the Trump administration, and she expects the same will happen during Biden's presidency.
"What we learned from tax reform is the amount of lobbying dollars spent in any given year drives leasing activity," Goldfarb said.
Technology companies have ramped up their lobbying activity in recent years as the industry has come under greater federal scrutiny, and companies like Facebook, Amazon, Google, Twitter and Yelp have grown their D.C. office footprints. Lanier said the Biden administration could likely increase regulation of the technology industry, growing their need for larger lobbying offices.
"Regulation of technology companies is going to be a priority of the Biden administration, so they'll be front and center reacting to that," Lanier said. "I think they're going to keep growing."
Carr Properties CEO Oliver Carr said full Democratic control would be better for the D.C. office market because it could mean more legislation passed, but he still expects a major economic stimulus package will pass by the first quarter of next year regardless of who controls the Senate.
"I think a disproportionate amount of that government spending and stimulus will go to the D.C. area," Carr said. "So that should bode well, and we definitely should see an uptick in demand both from the government on a direct basis as well as government contractors and other recipients of government spending."