Rowhouses on Jefferson Place, at left, are among the few residential units in downtown Washington’s business district.
WASHINGTON — In a 43-square-block portion of the booming central business district, there are just 23 residential units, condos in a row of four late-19th-century townhomes on Jefferson Place, just south of Dupont Circle. It’s a minuscule number compared with the 33 million square feet of office space in the same area.
With construction cranes for new office buildings dominating the skyline, owners of older buildings may face a choice: Upgrade to current standards to compete — an expensive proposition — or convert to residential use. The choice has been clear elsewhere, from downtown Manhattan to downtown Los Angeles, where a combined 18.1 million square feet of office space has been converted in the last 10 years. But in the nation’s capital, the change is just starting to emerge.
In Baltimore, some 38 miles to the north, conversion of 1.9 million square feet of office space since 2013 has reduced office vacancies by 30 percent, according to an analysis by JLL, a real estate services firm. In Philadelphia, vacancies in older “Class B” office buildings, a notch below higher-quality “Class A” buildings, have dropped by 40 percent in 20 years because of conversions.
Alexander Court, in Washington’s Golden Triangle Business Improvement District, is an example of buildings that have been “re-skinned” and upgraded to premium Trophy building standards.
To encourage conversions in the nation’s capital, where the office vacancy rate is around 11.4 percent, the district’s Council members are considering legislation to provide a tax abatement of up to $20 per square feet for 10 years, capped at $5 million a year. The DowntownDC and Golden Triangle Business Improvement Districts, two adjoining associations of property owners that represent the area, back the legislation.
In a report released last month, the DowntownDC Business Improvement District said the new market-rate residences would be worth $600 a square foot, compared with empty office space valued at $450 a square foot. “Even with worst-case assumptions,” the report said, the net cost of the program would be no more than $2 million to $3 million a year in forgone tax dollars.
But the office of Mayor Muriel E. Bowser, who must sign the bill into law, has some reservations.
“I would say, we’re listening hard,” said Brian T. Kenner, deputy mayor for planning and economic development. “We’ve got to see what the cost is and how much revenue that can create and be put to affordable housing,” a key priority of the Bowser administration. The district requires 8 to 12 percent of housing to be lower-cost units. Still to come is an essential statement of the bill’s fiscal impact from the city’s chief financial officer.
An estimated 89,000 people work in the so-called Golden Triangle, an area of prime real estate that extends from the White House to Dupont Circle. The hope is that conversions will give it more of a 24-hour neighborhood feel.
Construction cranes overlook downtown Washington. Local officials want to encourage building owners to convert older offices into residences.
The only conversion underway involves the renovation of the former Planned Parenthood headquarters, on 16th Street Northwest, four blocks north of the White House. To be known as the Adele, the high-end project will have 13 condos ranging from $859,000 to $2.4 million.
The situation is not yet dire: Washington’s office vacancy rate is lower than the region’s, which is 16.3 percent and expected to rise to nearly 17 percent by late 2019, according to Newmark Knight Frank, a New York-based real estate services firm. But the fear is, with more office buildings being built, the overall commercial vacancy rates in the district will also climb, leading to lower office rents.
Proponents hope that the conversion bill will help both the market and the neighborhood.
“We believe this bill will strengthen city’s tax base while adding residents and ensuring the longtime economic vitality of our downtown,” said Leona Agouridis, executive director of the Golden Triangle Business Improvement District. “It is a policy question: Do we want to have residents in the downtown area? If so, what are we willing to do to help realize it? This is a catalyst.”
Gerry Widdicombe, a consultant to the DowntownDC Business Improvement District, said the idea behind the legislation was to “educate the market on how this can be done” without hurting the city’s tax base or the building owner’s bottom line. “It’s working in the suburbs because their office markets are really, really weak.”
A building under construction in downtown Washington. The District Council is considering legislation to encourage conversions of older office buildings into condos.
Jack Evans, a Democratic member of the Council and the bill’s sponsor, said the bill would enable a “Manhattanizing of the District of Columbia,” bringing more vitality to the city’s core by encouraging an influx of full-time residents who could walk to work while patronizing nearby shops and restaurants. “But for the city’s involvement, we would not get what they are looking for.”
In the Golden Triangle, 77 percent of the office buildings were erected from 1960 to 1990. Ms. Agouridis suggested that owners must soon decide whether to demolish and rebuild or renovate them to the higher Class A or premium Trophy building standards.
“It’s natural in the cycle of buildings,” she said. “It’s like your home, you get to certain point, you need to replace major systems. But with renovation comes opportunity. From a neighborhood perspective, it makes a lot of sense to get that conversion going.”
In Washington, some owners have sought to upgrade older buildings to Class A by “re-skinning” the facades, giving them a more modern look and reducing energy costs. So far, building owners in Washington continue to favor such cosmetic face-lifts over more substantial conversions.
The Octave 1320, in Silver Spring, Md., is a 1964 office building that was converted into a 102-unit condo development.
Another factor contributing to rising office vacancy rates, according to Mr. Widdicombe, is that some companies, notably law firms, are relocating to newer buildings, where they are leasing less space per employee, a workplace trend known as densification.
A new concept in Washington, conversions have been implemented elsewhere. More than 37.5 million square feet of “older office space that has reached functional obsolescence” in the nation has been converted to residential use over the last decade, according to JLL.
In Washington’s Maryland and Virginia suburbs, for instance, higher office vacancy rates have resulted in more conversions of older buildings without the use of government incentives.
In Old Town, a neighborhood in Alexandria, Va., the former offices of the Sheet Metal Workers International Union are now the Oronoco, a 60-unit luxury condominium on the Potomac River waterfront, with prices ranging from $1.3 million to $2.8 million. In Fairfax County, Washington’s most populous suburb, the county government recently voted to streamline rezoning for the “repurposing” of commercial buildings.
In nearby Silver Spring, Md., a 1964 office building was converted into the 102-unit condo called Octave 1320, without the kind of tax abatement proposed for Washington, and other conversions are scheduled to take place.
But in Washington’s core, the argument goes, the shift will occur only with government action. “Mixed-use neighborhoods create a more livable area, better use of infrastructure and expand the income tax base,” said Ms. Agouridis. “It is unlikely residential development in the central business district will occur naturally without the kind of incentive this bill will involve.”
Thus, proponents say, residential housing will continue to be in great demand but short supply.
The three-story Jefferson Place townhouses, built originally as single-family homes during the Gilded Age, are a notable exception. But they have a mixed zoning history. They long housed commercial tenants, but the buildings were converted in 2006 into condos, ranging from $499,000 for a one-bedroom to $2 million for three-bedroom units.
According to the DC Condo Boutique website, the townhouse row “combines historic details with modern conveniences.” A one-bedroom, one-bath unit there — the only residence currently for sale and available for immediate occupancy in the entire Golden Triangle district — is on the market for $650,000. “Incredible location,” the listing says.