$29B Budget Boost Drawing Contractors To Navy Yard Offices

The U.S. government is pouring tens of billions of dollars into the Navy to build more ships and naval technologies, and one D.C. office submarket stands to benefit. 

Government contractors have historically clustered in Northern Virginia, but landlords and local officials in the District see office demand rising from the sector, especially in the Southeast D.C. neighborhood anchored by the Washington Navy Yard and the Department of Transportation. 

"What we're seeing is an incredible influx of new Navy contractors, defense technology contractors coming to the Navy Yard because the Navy is requiring them to have proximity," Garfield Investments CEO John Mason said last week at Bisnow's Developing Southeast D.C. event, held at Capital Turnaround. 

Garfield in June acquired an office building at 300 M St. SE in the Navy Yard neighborhood for $28M. The building was 53% occupied when it sold, and Mason said at the time that his strategy centered around capturing the increased demand from defense contractors. In August, Garfield landed a 22K SF lease with naval contractor Reliability & Performance Technologies. 

Other contractors to move to the neighborhood over the last year include Blue Water Autonomy, a Boston startup building autonomous ships for the Navy that opened an office at an unspecified Navy Yard building in August, and Saalex Corp., which relocated its headquarters from California to D.C.'s Navy Yard with a 2,300 SF lease at 1 M St. SE.  

Mason told Bisnow on Wednesday that his team is in talks with several other defense contractors to lease space in the building, but he declined to share their names because the deals haven't closed. 

"A number of Navy-aligned defense companies are in the market looking for space," he said.

As much of the demand Mason is seeing is still companies touring space and negotiating leases, it has yet to be reflected in the neighborhood's office data. Cushman & Wakefield's third-quarter report shows the Capitol Riverfront submarket, which includes Navy Yard, has a vacancy rate of 25% and less than 100K SF of leases signed through the first nine months of this year.

JLL's third-quarter report says the defense contractor industry is a growing segment in the market. 

"Technology companies, including defense tech firms, drove the expansion trend," the report says. 

This surge in prospective defense contractor demand is coming in part because of increased federal funding. The One Big Beautiful Bill Act, signed into law in July, allocated $29.2B for Navy shipbuilding programs, plus additional money for developing emerging technologies. 

While the government shutdown has thrust uncertainty into the contracting sector, President Donald Trump on Sunday told a group of Navy sailors that they would still get paychecks during the shutdown. He said he plans to use an increase in military spending to add more than a dozen new ships to the fleet. 

A significant chunk of this spending will benefit the Washington Navy Yard, Mason said, leading to spillover office demand in the area. 

In addition to Navy contractors, Mason said he has seen firms working with the Federal Aviation Administration start to look for space in the Navy Yard neighborhood. The Department of Transportation said in August that it would relocate FAA employees from the agency's headquarters in Southwest D.C. — which the government has eyed for disposal — into the larger DOT headquarters building in Navy Yard. 

"We've had FAA contractors contact us about space," Mason said. 

Mason said he sees government contractors as a long-term demand driver for the neighborhood and would like to acquire more office buildings there if they come up for sale. 

The D.C. government is also looking to capture more office demand from defense contractors, Deputy Mayor for Planning and Economic Development Nina Albert said at Bisnow's event. 

"These are the growth opportunities: technology, and specifically defense technology," she said. 

"The District has always punched below its weight class, and we have not had our fair share, and we ceded a lot of that to Virginia and Maryland," she added. "What we are doing now is we're stepping into this space intentionally."

Albert highlighted Station DC, a tech hub that a Texas-based entrepreneurship firm opened in the Union Market neighborhood last year with $2M in D.C. funding. The 10K SF space is intended to connect tech startups with government leaders and venture capitalists, and Albert said its initial focus has centered around defense tech. 

"The demand is there," Albert said. "People want to be in Washington, D.C."