Washington, D.C.
“The District” Could Face Atypical Headwinds in the Coming Months
By Carole VanSickle Ellis
In 1783, a mutiny of Continental Army soldiers in the new United States’ then-capital city of Philadelphia, Pennsylvania, demonstrated to the Founding Fathers that their future nation’s capital city must not, as James Madison would argue roughly five years later, “rely on any state for its own security.” Just a few years later, Article One, Section Eight of the United States Constitution would permit the establishment of a “District (not exceeding 10 miles square) as may…become the seat of the government of the United States.”
At that time, the Constitution did not designate a specific area for this district, but by 1790, it had been agreed that the new national capital would be located on the Potomac River. Eventually, President George Washington selected specific lands donated by Maryland and Virginia to create the District of Columbia, residents of the area lost their representation in Congress, and the region would go its own unique way from the rest of the nation from that point forward.
True to its history, the D.C. housing market usually stands out from national market trends. Historically, it has been recession-resistant to downright recession-proof, and home prices have risen relatively steadily in the area since the 1980s, although there was a dip during 2008 and 2009. Even then, however, prices did not fall as substantially as in many other major markets, and the market reached bottom in March 2009. At that point, it began to climb rapidly, only recently showing indications that it may have peaked.
In January of this year, there were 31% more active listings year-over-year, but much of the for-sale inventory was a result of longer times-on-market rather than a dramatic increase in active sellers.
“We are in a very unusual market where we are seeing a pullback not only on the demand side, but on the supply side,” observed Bright MLS chief economist Lisa Sturtevant. She explained, “There are fewer sellers in the market, but inventory is growing…simply because homes are sitting on the market longer than they used to.” However, she added, “The underlying fundamentals in the D.C. area are quite strong. The economy is doing well, demographic fundamentals are good, [and] I expect we will see more buyers coming back to the market in the spring along with sellers.”
D.C. realtor Susan Isaacs said although spring and summer markets could be relatively strong, her brokerage is expecting the second half of 2023 to “slow considerably due to looming recession combined with the start of the 2024 election cycle.”
Isaacs added that if interest rates “unexpectedly” take an early drop at year-end, this could trigger a holiday rush on home purchases. She also noted that retail buyers are currently unwilling or unable to dedicate much of their budgets to improvements after closing, so fix-and-flip investors should expect these buyers to “exercise more caution with home inspection and careful evaluation of price.”
The area is also expecting a series of school-zone boundary changes, which could affect which neighborhoods are “hot” by the fall. Isaacs observed, “Redrawing school boundaries affects D.C. real estate values in a significant way…. Take away the [advantageous] school assignment, and homeowners could potentially lose tens of thousands of dollars in home appreciation value.”
Subject to the Political Winds & Ongoing Pandemic Policy
It is no secret that the year leading up to a presidential election tends to be a slow one in D.C. real estate. In the immediate D.C. area, in particular, home sales growth may slow to zero or even drop into negative numbers, while the broader metro area slows less but still tends to experience healthy, outsized growth the year following the election.
“From the buyer’s perspective, [the] housing hunting process is expected to be more competitive [in an election year], while sellers can benefit from the anticipated busier activity,” said National Association of Realtors (NAR) senior economist and director of real estate research Nadia Evangelou.
In D.C., the 2024 elections could have a particularly outsized effect on the local housing market because President Biden’s remote-work policies have resulted in D.C. boasting one of the largest remote-working populations in the country in 2023. Three-term D.C. mayor Muriel Bowser used her inaugural speech this past January to warn the president that if he refused to end telework for federal employees, her administration would be forced to find other uses for the empty government office buildings currently populating the nation’s capital.
The federal government currently owns about one-third of properties owned or leased in Washington, D.C., and, prior to the pandemic, was directly responsible for about one in four D.C. jobs.
Unlike many of her peers on the left side of the aisle, Bowser is demanding “decisive action by the White House to…get most federal workers back to the office, most of the time.” She said one of her goals for her third term in office will be to add 15,000 residents to downtown D.C. over the next five years and implement policies that will result in about 100,000 new residents “before it’s all said and done.” This would require the conversion of large amounts of commercial office space, something Bowser said could be an option if remote work policies remain unchanged.
In March of this year, the city’s chief financial officer, Glen Lee, warned that remote work represents a “serious, long-term risk to the District’s economy and its tax base.” In his revenue projections for the upcoming fiscal year, Lee estimated the city would generate revenue under $10 billion, reducing his forecasts by a total of $500 million between FY2024 and FY2026.
These losses could result in the cancelation of ambitious city projects that investors might have expected to add value to residential properties, such as access to a fare-free bus system that was scheduled to debut in July of this year. At present, the project is considered “in jeopardy” because there are no longer funds to support it. Readers should note the local transit agency had not officially announced a suspension of the program at time of writing.
Bowser said she believes the key to resolving the financial shortfall lies in bringing in more permanent residents and tourists. Lee’s report indicated sales tax revenues and the local tourism industry are recovering. “Workers?” Bowser queried in a response to the projections. “We continue to focus on that, but also festivalgoers and people who are coming to enjoy Washington, D.C.”
Part of this “focus” could involve changes to federal design permissions currently affecting office buildings in the area. Many in the local business community are calling for changes to the federal Height Act, which imposes a 130-maximum height on most commercial buildings. One of the only modern adjustments to this 1899 legislation came in 2014, when President Barack Obama amended it to permit residential penthouses up to 20 feet tall. Former D.C. mayor Anthony Williams publicly supports modifying the Height Act again, saying it will “at least marginally bring down the cost of housing.”
He supported modifications “in the range of 30% additional density” and argued that this would still preserve historic sightlines. The National Capital Planning Commission has long opposed this type of adjustment, warning in a 2013 study that changes to the act would have “significant adverse impacts to national resources from increasing building heights.”
Investors considering acquiring assets in the downtown area should consider how another four years under the incumbent president could affect property use and values in the area and how ongoing battles over historic preservation and building height might play out in the near future. There is certainly room for profit when an entire area’s traditional uses are overturned, but the process could be particularly tedious in heavily regulated D.C.
Investors may find more opportunities farther away from the center of the city, particularly if most area workers still have the option to work remotely or only must commute to work a few days a week.
Still Home to One of the Nation’s Leading Regional Economies
Despite pandemic-related pressures and the ongoing volatility that comes with a near-obsessive and constant focus on election cycles, Washington, D.C., holds its own when it comes to comparisons with other metro areas of its size around the country. In a recent report from WalletHub that ranked 2022’s “Best and Worst State Economies,” D.C. ranked 10th-best overall based on 30 economic indicators, including “hard data points” like unemployment and “softer economic indicators” like GDP growth, startup activity, and shares of jobs in high-tech industries. These latter data points indicate “the innovation potential” in an area, explained WalletHub analyst Jill Gonzalez.
According to that report, D.C. ranked first for the number of fast-growing firms in the area and for average educational attainment of recent immigrants. The area ranked 9th-best for economic activity, 14th-best for economic health, and 13th-best for innovation potential. Bowser hopes to repurpose some of the District’s empty commercial space for entrepreneurial development in order to enhance the economic benefits that come with a thriving startup community.
Interestingly, with so much of the square footage in central D.C. tied up and uncertain, some would-be homebuyers in the area are opting to buy what Washingtonian reporter and home and features editor Mimi Montgomery calls “second homes” even though they are first-time homebuyers. These “second homes” are located outside the city and are often more like vacation homes than full-time residences. District-based professionals are often electing to rent inside the city, where renting remains more affordable than buying, and Airbnb their actual homes when they cannot leave the city for a long weekend. Zillow named this trend “one of 2022’s trends to watch,” although analysts say there is not yet enough trend-specific data available to comment on it exclusively in 2023.
If D.C. continues to lead the nation in remote work, this burgeoning second-home-first market could represent another potential business option for local real estate investors, especially since these first-time homeowners do not typically have experience managing short- or long-term rentals and handling routine property maintenance.
One thing is certain, however. The District is going to continue to be a real estate “hot spot” because there will always be movers and shakers coming into the area and shaking up the local market. For investors, the question is simply, “What are they going to do next?”
Sidebar 1
How a Recession Could Affect D.C.
Although conventional wisdom states that Washington, D.C. is largely recession-resistant since it is the “home base” for political power, some experts argue that the much-predicted recession likely to hit the nation in late 2023 or sometime in 2024 could signal bad news for The District.
“Relying on the federal government isn’t what it used to be,” explained Axios D.C. reporter Cuneyt Dil, citing ongoing remote work policies in the area as one reason that D.C. is no longer as protected from recessions as it was in the past.
“With the hollowing out of downtown and business travel still down, the region depends on the feds today nearly as much as it did in 2010 when about 40% of the local economy relied on the federal government. To escape this dependence, the area must continue to bolster support for startups and other independent businesses, which could mean three-time mayor Muriel Bowser is on the right track with her idea to bring in 100,000 new residents. Those residents could fill up unused commercial spaces (if they are converted to residential properties, of course) and work in the growing business community.
However, in the near term, a recession could hurt the growth of the still-nascent startup environment in D.C., particularly tech businesses and bioscience operations. “The region has grown economically in recent years, but not as fast as the nation,” Dil observed. “Big names like Amazon with its new HQ2, the life sciences corridor, and new data centers mask bigger problems.”
With these issues destabilizing traditional elements that insulate non-Capitol-City economies from recession, D.C. may find itself more reliant than ever on tourist dollars to sustain it. This is, of course, bad news in the face of a looming recession, when tourists may opt to save their travel pennies and spend them at home. Dil recommends a careful analysis of the March Cherry Blossom Festival to get an idea of how much the local economy will be able to rely on tourism in the coming months. “That event, fully back for the first time since the pandemic began, will indicate whether tourism is returning to Washington,” he said.
Sidebar 2
How D.C.’s Condo Market is Coping
When the COVID-19 pandemic sent the nation into lockdown, the Washington, D.C. condominium market suffered early. After all, in early 2020, people living in multifamily residential developments were actively fleeing their homes, concerned about the health risks associated with high-rises and shared elevators. When work-from-home trends set in, even more left. After all, it is nearly impossible to remote-school kids and maintain a productive remote-work environment all in the same room. People cared less about shared condo amenities and more about green space and personal outdoor space; the decision to move was easy and obvious.
Although the D.C. condo market briefly rebounded when the nation began to return to work, federal teleworking policies have kept many buyers away from these once-highly-attractive residential options. In fact, in late 2022, the market slumped as buyers became concerned about a recession. However, local real estate professionals insist, the D.C. condo market is coming back. In fact, the median sales price for condo units was up 6% year-over-year in January 2023.
“The condo market is definitely rebounding in many areas because some buyers want to be back in the city near theaters and restaurants and others want to walk to work now that they are in the office more often,” reported local agent David Shotwell. However, he noted, the downtown “core is still struggling,” likely because so many offices there are still empty.
