Could Reduced Federal Office Demand Be Good for D.C.?

It's not the people doing something real

It’s not the people doing something real

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Congressional spending cuts are leading to reduced federal demand for office space, which is meaning pain for some D.C. landlords. But to swim against the current a bit, I think that this may actually be good for the city’s economy on a reasonably short time frame. The reason is that with the former Convention Center site already under construction, the main downtown part of D.C. is almost 100 percent built out and there aren’t even that many office parcels left in more peripheral areas like NOMA and Mount Vernon Triangle. Under the circumstances, increased federal demand for office space expresses itself almost entirely in the form of sustained high rents rather than new construction. The high rents, however, are an input cost to all the private firms in the city (think Slate) that reduce the ability of the private sector to generate high-paid jobs and useful services.

Now of course really gargantuan cutbacks in federal personnel would eliminate the city’s core industry. But around the margin, high rents are probably a bigger economic issue for the District than office vacancies.

Longtime readers will recall that due to the miraculous technology of the elevator it should, in principle, be possible for a city to add office space even without expanding the geographical footprint of its central business district. You would accomplish this by building structures that are 20, 30, 40, or even 50 (or more) stories high. In that case, more federal demand for office space would mean more construction and ultimately more downtown office workers and therefore more businesses (stores, restaurants, dry cleaners) catering to their needs in a beneficial cycle of job creation and tax revenue. But the Height of Buildings Act creates an unusual situation in which excessive federal demand for offices literally crowds out other kinds of economic activity.