Washington D.C. is experiencing a troubling surge in office vacancies, with a significant portion of the available space being labeled as ‘zombie’ offices by commercial real estate services firm CBRE.
These buildings, characterized by large blocks of empty space over 50,000 square feet, have owners either unable or unwilling to invest in tenant improvements and other necessary expenses to attract new leases, effectively making these properties unfillable.
CBRE’s recent second-quarter assessment reveals that out of 80 large blocks of office space currently on the market, over 30 are categorized as ‘zombie’ properties, collectively accounting for an alarming 5.6 million square feet of unusable space.
This impending crisis in the D.C. office market comes amidst ongoing discussions about how unaffordability in the workplace and post-pandemic dynamics have reshaped demand for commercial real estate in the city.
Leasing experts suggest that this designation of zombie buildings is having a significant impact on market perceptions, forcing tenants to proceed with caution and steer their interest toward financially stable properties instead.
Jon Glass, co-lead of the D.C. region for Savills, indicated that the current environment necessitates careful scrutiny of available office space, particularly given that many marketed properties cannot actually be leased.
“When you peel back the layers, you realize that not everything being marketed is truly available for a number of reasons,” he explained, highlighting that the predicament arises from maturing loans and inadequate cash flow that fail to cover debt obligations.
The surge in ‘zombie’ office buildings is partly linked to rising interest rates, declining office values, and enduring shifts in workplace dynamics post-COVID-19.
Landlords are finding themselves at a crossroads: lenders sometimes refuse to inject additional capital into underperforming properties, and some owners, having witnessed their equity disappear, are hesitant to incur further losses.
Furthermore, some landlords are simply unable to secure financing or generate sufficient income to manage debt repayments while advancing new improvements.
Tammy Shoham, director of D.C. market research for JLL, articulated the complex challenges faced by many building owners.
She stated, “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.”
As a result of these capital constraints, tenants and brokers are exercising increased diligence in evaluating potential leasing opportunities, ensuring they partner with owners capable of making necessary capital investments.
Bradley Wilner, an executive vice president for CBRE representing tenants in D.C., underlined the importance of financial stability on the part of landlords in the current market.
“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,” he noted.
This heightened caution has led tenants to gravitate towards properties with owners boasting stronger financial standings.
Data from CBRE indicates that since early 2024, buildings where owners have reset their cost basis or those with no property-level debt have accounted for 55% of all new leases signed in the D.C. market.
Wilner observed a growing trend in his advisory work where clients are choosing to sign leases with landlords who have undergone price resets or possess fresh capital for investments.
This bifurcation in the leasing landscape leaves lesser-quality buildings sidelined and exacerbates the overall vacancy situation.
Notably, while some level of debt isn’t inherently problematic, landlords must carefully navigate the implications of impending loans coming due.
Wilner points out that buildings nearing the expiration of older loans—especially those purchased over three years ago—are likely in precarious positions and struggling with leasing opportunities.
Despite the bleak characterization of these zombie buildings, the situation does present potential opportunities for the D.C. office market.
As these properties are sold at discounted prices or repossessed by lenders, new owners can infuse capital into the buildings, enhancing leasing prospects and initiating much-needed upgrades.
Wilner expressed optimism about recent trends, stating, “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.”
Recent transactions signal that owners are starting to capitalize on this potential—such as Taicoon Property Partners, who recently purchased an office building at 1899 L St. NW for $26.7 million and initiated a $10 million renovation project.
Newmark Vice Chairman Doug Mueller, retained to lead leasing efforts on the property, acknowledged the need for many buildings to undergo a basis reset or conversion to ensure long-term viability.
Additionally, BXP acquired a fully vacant office building at Metro Center for a significant discount, announcing plans to demolish the older structure and erect a new, pre-leased property that is expected to meet the evolving demands of commercial space users.
Wilner emphasized the positive direction these transactions could lead the market, underscoring a robust outlook for future developments and improvements.
As D.C. navigates these challenging waters, the interaction between financial viability and leasing opportunities will continue to shape the trajectory of the office market as stakeholders assess both risks and opportunities in an evolving landscape.
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