Economic Pressures Renew Calls For D.C. Height Act Changes
Facing a declining office market, a housing shortage and capital markets that have ground to a halt, leaders in Washington, D.C.'s business community are calling for changes to the federal Height Act to make the economics of redevelopment of the District's older office properties pencil out.
Speaking at the site of a planned office-to-residential conversion, former D.C. Mayor Anthony Williams said Tuesday that District officials should support changes to the Height Act, arguing it was an important way to add housing and revitalize the District's struggling downtown.
"We need to seriously consider modifications to the Height Act to at least marginally bring down the cost of housing, at least to have a conscience at night," Williams said at Bisnow's Multifamily Annual Conference, hosted at the Universal North building at 1875 Connecticut Ave. NW.
Williams said the modifications should be in the range of 30% additional density for certain parts of the District. He argued a limited boost in density would bring D.C. in line with modern capital cities that can house far more people while still preserving important and historic sightlines.
"That would be wonderful," said Pestronk, whose firm acquired 1875 Connecticut Ave. and is leading its conversion. "That would be gasoline."
The federal government has long kept a lid on development in the District. After an outburst of 19th-century NIMBYism — the original Height of Buildings Act of 1899 was crafted in response to community uproar over the construction of the 14-story Cairo Hotel — lawmakers enshrined a 130-foot maximum height for most commercial buildings with the passage of the Height Act of 1910.
Congress has tweaked the law eight times since, most recently with an amendment signed by President Barack Obama in 2014 allowing occupancy in residential penthouses that were up to 20 feet tall.
In 2013, the National Capital Planning Commission, which includes both federal and District representatives, released a study advising against major changes to the Height Act in much of the city's downtown, warning against "significant adverse impacts to national resources from increasing building heights."
But federal limits on local building regulations, like the larger debate around Home Rule, have always been controversial. The 2013 study evaluated a proposal from D.C. that would have added density to specific corridors, including along North and South Capitol Streets and K Street, only for NCPC to conclude that it would harm the viewsheds of federal properties like the U.S. Capitol and Armed Forces Retirement Home.
In the nine years since that study was released, the District's economic prospects have dimmed.
The federal government has mounted a steady retreat from its leased office space, releasing older office properties into the market. As private sector tenants have also begun to shift to trophy office markets in other neighborhoods, the District's downtown core has suffered from record-high office vacancies, with the central business district and East End both surpassing 22% in the third quarter, according to CBRE.
Making matters worse, rising interest rates and construction prices have made financing new projects in the latter half of 2022 extremely difficult, leaving many developers to believe it's too difficult to finance a project downtown.
“The thing that's probably driving locational decisions for us as developers is the construction costs and being able to build with lower-cost materials like wood, which usually can be accommodated more in suburban environments,” Toby Millman, senior vice president of development at Brookfield, said at Bisnow's event.
The distressed office market — especially among older buildings that have little future prospects, many of which are built to the maximum allowable height — has led to rising calls for creative solutions to downtown’s meager activity.
Some developers who spoke with Bisnow before the event said changes to the federal Height Act could be a beneficial component of that strategy, even as they expressed skepticism that such a change could gain traction in a divided Congress.
“I think it would be a great idea to provide more height relief in certain parts of downtown,” Oliver Carr, CEO of Carr Properties, told Bisnow. “We should always honor the important monuments in the city and the key government buildings, things that are important to the federal city, but there are other parts of the city that we could do a lot more with more height.”
Local support for changes to the Height Act are far from a guarantee. At her second inaugural speech in 2019, D.C. Mayor Muriel Bowser called for taller buildings in the District to help address affordability concerns without explicitly mentioning the Height Act. Both Bowser and D.C. Council Chairman Phil Mendelson have opposed efforts to amend the Height Act in the past.
Earlier this year, two D.C. council members also weighed in on amending the Height Act. Housing Committee Chair Anita Bonds said she was open to “raising the Height Act only for buildings that will produce more affordable housing than required by inclusionary zoning,” and Kenyan McDuffie, the current Ward 5 council member who will take an at-large council seat next year, said he was open to “Removing or raising the Height Act within 1/4 mile of Metro stations,” in response to a questionnaire from Greater Greater Washington published in August.
The fallout from the pandemic has made the prospect of additional density more attractive as a means of adding value to existing lots.
Williams said the changes would most closely align with another strategy District officials have held up as a solution to the crisis: residential conversions.
The strategy has been popular in Washington, D.C., for years — by some measures, the District led the nation in office-to-residential conversions in 2020 and 2021. But developers estimate only a small percentage of properties are good candidates for such a difficult redevelopment, in part due to high costs.
“We have two conversions, we have made offers on five or six … We’ve looked at probably no less than 50 to convert,” Brigg Bunker, managing director at Foulger-Pratt, said at the event. “The idea that you can convert a significant proportion of office buildings is a flawed thought.”
Carr said that the financials of residential conversions were difficult downtown in part because land values, while depressed, are still higher than the basis needed to make a conversion profitable. Allowing greater density, he said, would make the land values easier to overcome.
“It makes any kind of building more economical if you can go up in height,” Carr said. “When you look at New York or Boston, the cities work because there’s such a density of people. We don’t have that in D.C. because there’s shorter limits.”
Pestronk, who started Post Brothers in 2006 but said he grew up in Northern Virginia, said he’s still bullish on opportunities for conversions downtown.
The developer admonished D.C.’s real estate community for opposing inclusionary zoning in areas where conversions are expected, noting the economics still worked out for his firm’s conversion at 1875 Connecticut Ave.
“The development community is being its own worst enemy when it comes to one thing, which is inclusionary zoning,” Pestronk said. “Fighting it is pointless. There will be nothing done by any government if the development community as a whole is against inclusionary zoning.”
Pestronk also said that despite concerns that high taxes in D.C. would push out residents, he believes the District is still a desirable place to live for many. As a result, he anticipates there will be more opportunities to acquire prime downtown real estate and restore commercial corridors to their former vibrancy.
“Never in my entire lifetime, and certainly in my real estate career, has there been an opportunity to buy a piece of a lot on K Street,” Pestronk said. “And that is an easy lift compared to the Wharf.”
At the event, Williams praised the leadership of Bowser, who was recently re-elected to a third term and has looked for ways to boost office-to-residential conversions downtown for over a year.
But Williams urged officials to pursue a strategy on the scale of the $3.6B Wharf development in order to restore the vibrancy of D.C.’s downtown core.
“We can do this in the downtown if we can build these layers and have this vision,” Williams said. “How can you be the capital of the world without an ambitious, aspirational plan?"