Dozens Of 'Zombie' Buildings Dragging Down D.C.’s Office Market

While D.C. is facing record-high office vacancy, many of the buildings with large blocks of empty space that appear to be part of the competition for tenants are effectively dead to the market. 

These buildings, referred to by CBRE as “zombie” offices, have owners that are unable or unwilling to spend money — from tenant improvement allowances to attorney fees — to sign new leases, effectively making their vacant spaces unfillable.

New data released by CBRE sheds light on just how much of this space lurks beneath the surface of D.C.’s 123M SF office market. According to its second-quarter report, of the city’s 80 large blocks of space on the market — those over 50K SF — more than 30 aren’t actually able to sign new lease deals. Combined, these buildings have 5.6M SF of “zombie” space.

The epidemic is taking large chunks of available space off the leasing market and has led tenants to be on high alert, leasing experts tell Bisnow, steering them toward only the best capitalized properties and away from those that may pose a risk.

“A significant portion of the space being marketed throughout the city can't actually transact, and that's due to maturing loans approaching or buildings operating with cash flow that don't necessarily cover their debt service,” Jon Glass, co-lead of the D.C. region for Savills, told Bisnow.

“So broadly speaking, there's a lot of space available,” he added. “When you peel back the layers, you realize that not everything being marketed is truly available for a number of reasons.”

The capital issue that leads to “zombie” buildings has been growing over the past few years after interest rates rose sharply, office values decreased and the realities of postpandemic workplace dynamics solidified. 

In some cases, lenders that have taken control of office properties are unwilling to put more money into them after already taking a loss. 

In other cases, owners who have had their equity wiped out or are in danger of losing a property aren't willing to lose any more on it. 

Sometimes owners simply don’t have the money: They can’t get a loan or aren’t making the required income from the building to cover their debt and also make new investments.

“Certainly there are buildings where people don't want to throw good money after bad or that owners can't get access to the capital they need to do tenant improvements, even to sign leases,” said Tammy Shoham, director of D.C. market research for JLL. 

Because of the capital constraints many landlords face, tenants and their brokers have become extra cautious to ensure the owners they’re talking with will be able to spend money to sign deals and improve the building. 

“We've had to be very diligent in evaluating opportunities for the tenants that we advise to ensure that we've got an owner on the other side of the table that's actually able to transact and able to invest capital,” said Bradley Wilner, an executive vice president for CBRE who represents tenants in the D.C. area. 

To be sure that they won’t end up in a “zombie” building, tenants are flocking toward the other end of the spectrum — buildings where the landlords are in the best financial positions. 

According to CBRE’s report, since the start of 2024, office buildings that have had a reset in the cost basis of their owner, or that have no property-level debt, have captured 55% of all new leases. 

Wilner said he has seen the dynamic in his tenant advisory practice. 

“Most of our clients are moving to and have signed leases with buildings that either don’t have property-level debt, have recently sold at a lower basis and have fresh capital,” Wilner said. 

This means landlords whose books look to be the strongest are capturing most of the demand, leaving the rest of the properties on the sidelines — and further bifurcating the office market. 

As for the others, not all debt is a red flag, brokers told Bisnow. But some buildings are in especially precarious situations.

“Any building that has a near-term loan coming to expire that was purchased longer than three years ago, which are a number of them, those are likely buildings that are in trouble, that aren't able to transact,” Wilner said. “So that's just something we think about, which is when loans are coming due and how does that impact an owner's ability to perform?”

While these zombie buildings may be a drag on the city's office vacancy rate, they also represent an opportunity for the market.

When these properties are eventually sold at steep discounts or handed to lenders, their next owners are in a position to infuse new capital into the properties, ramping up leasing and making upgrades. 

“We're seeing owners come in with a lower reset basis, willing to invest capital and actually create some nicer buildings in the marketplace,” Wilner said.

Those types of transactions are starting to become more common, he said, as office values have bottomed out.

Last year, Taicoon Property Partners paid $26.7M for the office building at 1899 L St. NW. The firm launched a $10M renovation and retained Newmark Vice Chairman Doug Mueller to lead leasing on the 152K SF building with 53K SF of availability. 

“There are a segment of buildings that just cannot transact right now,” Mueller told Bisnow in March. "There are a tremendous number of buildings that have to go through either a basis reset or a conversion, all of which will be healthy for our market.” 

At the end of last year, BXP purchased a 302K SF, fully vacant office building at Metro Center from Hines for a heavily discounted $24M. The REIT plans to demolish the existing office building and construct a new 320K SF property in its place. The building is already around 90% preleased to two law firms: McDermott Will & Emery and Cooley LLP. 

“So while the options today may be limited in terms of high quality space, we do think that there'll be new buildings coming back online that get taken out of that ‘zombie’ classification and put back into reset basis, no debt or lower debt and fresh capital to invest,” Wilner said.