The practice of real estate law requires a variety of substantive skills, including strong legal drafting abilities, attention to detail, and having a knowledge base of applicable real estate law. In addition, an effective real estate practitioner must also be able to work with each client, explain the complexities and unique aspects of each transaction to the client, determine the client’s objectives, and then close the transaction in a manner that satisfies the client’s goals. Real estate transactions may also involve other areas of law, such as land use, environmental, tax, and finance.
The District of Columbia (sometimes referred to herein as “DC” or “the District”) was one of the last jurisdictions in the USA to drop any pandemic-related protocols in 2022. These protocols ranged from reduced occupancy for bars, restaurants, office spaces and other closed-area gathering restrictions. Such protocols spanned throughout 2021 and into March of 2022. As a result, the real estate market was impacted from a lack of tourist activity and closed offices and workspaces.
The average occupancy of an office building was less than 40% for most of the year, which impacts the business activity in the neighboring areas. Like many other areas in the country, DC was also impacted by rising housing prices, with many areas in the DC market (and surrounding areas) experiencing high demand and low supply. While there was still construction activity in the market, it was down compared to 2019. Generally, while the office market and hospitality market took significant hits early on in the pandemic, both industries have started to recover.
While offices are on a more general upward trajectory than hospitality, it is expected that as tourist and convention activity starts to pick back up, each industry will continue towards a recovery of 2019 levels over the next 24-46 months. It is expected that as workers continue to return to in-person office attendance (even on a hybrid schedule) that activity in the DC market and the impact on real estate will continue to improve. The pandemic did present an opportunity for DC to continue its expansion with growing bike lanes and paths as well as providing street space for outdoor dining for various properties in certain high-density locations. Further, DC has renewed its commitment over the years towards supporting affordable housing and the trends towards creating opportunities for such developments continues to be a high priority for DC.
Some of the most meaningful tax-related provisions stemming from the 2017 and 2020 federal tax law changes are as follows.
The Tax Cuts and Jobs Act (TCJA) modified the rule permitting deferral of gain on like-kind exchanges, to only permit the deferral of gain to real property that is not held primarily for sale. DC conforms to the federal nontaxable exchanges rules provided in IRC §1031 through §1045.
Net Operating Loss and Carry Forwards and Carry Backs
The TCJA eliminated the two-year carry back and special carry back provisions for net operating losses arising after December 31 2017, except for certain losses incurred in the business of farming. The TCJA also limited the Net Operating Loss (NOL) deduction for losses incurred after December 31 2017 to 80% of taxable income and allows NOLs to be carried forward indefinitely. DC decoupled from federal treatment of a carry back of net operating losses in 1999, so the District does not follow the carry back provisions of the TCJA. But DC conforms to the NOL carry forward limitation provided in the TCJA.
The TCJA provides that a 100% first-year deduction for the adjusted basis is allowed for qualified property acquired and placed in service after September 27 2017, and before January 1 2023.
The TCJA limits the deduction on business interest for a taxable year to (i) the business interest income of such taxpayer for such taxable year; (ii) 30% of the adjusted taxable income of such taxpayer for such taxable year, and (iii) the floor plan financing interest of such taxpayer for such taxable year. IRC § 163(j)(1). The amount of business interest not allowed as a deduction for any taxable year is carried forward to the succeeding taxable year. § 163(j)(2). The District follows the business interest deduction limitation.
Qualified Opportunity Zones
The Tax Cuts and Jobs Act established a deferral of capital gains and for federal income tax purposes if a taxpayer invests in a Qualified Opportunity Fund. The TCJA also allows a basis adjustment in the Qualified Opportunity Zone, if the taxpayer maintains the investment for a five, seven, or ten or more years. Effective October 1 2020, the District decoupled from this federal treatment by only allowing the deferral and basis adjustments if the Qualified Opportunity Zone: (i) is certified by the Mayor as an eligible Qualified Opportunity Zone; (ii) has invested at least the value of the taxpayer's investment in the Qualified Opportunity Zone in a Qualified Opportunity Zone; (iii) has submitted its IRS Form 8996 to the Office of Tax and Revenue (OTR) for the tax year in which the taxpayer is seeking; and (4) submits an IRS Form 8997 to the OTR for the tax year in which the taxpayer is seeking the benefits.
Bonus Depreciation Rules
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) made a technical correction to the TCJA on the depreciation rules (labelling qualified improvement property as 15-year property or depreciation purposes, effective as of December 22 2017. This correction causes qualified improvement property to be eligible for 100% bonus depreciation if it was placed in service after September 27 2017 and before January 1 2023. But the District of Columbia does not allow a deduction for the special depreciation allowance under IRC § 168(k). It thus did not adopt the qualified improvement property bonus depreciation changes made by the CARES Act.
The District of Columbia enacted various mitigation protocols during the span of the COVID-19 pandemic, including, without limitation, rules on indoor and outdoor masking, mandates in vaccinations for DC employees and use of public spaces, mandated masking for educational institutions, at-home and virtual schooling, restrictions on large gatherings (at times even mandating gatherings over ten people), reduced occupancy allowances for restaurants, offices and other closed-in areas, and required closures of bars and gyms and other high-risk businesses for spread. Over the course of the pandemic, the various measures were modified to respond to community spread; however, the impact felt by DC businesses was expansive in nature.
Under the Federal Cares Act, DC residents were eligible for expanded unemployment benefits for certain periods of time. In addition to the federal PPP grants and funds, DC offered targeted funds for certain businesses, including the Bridge Fund Grant Program, which prioritized restaurants, entertainment and retail brick-and-mortar businesses and food trucks, most of which did not or were not eligible for federal relief and other fund grant funds targeted at other retail and hospitality businesses.
Additionally, the Mayor signed the COVID Vaccination Leave Emergency Act of 2021, DC Act 24-209, DC Code § 32-502.01, which amended the Original COVID-19 Leave provision and created a new COVID-19 Leave to take effect November 5 2021, which created extended leave for certain employees within DC for the effects of COVID-19 diagnosis or care for a relative or child diagnosed with COVID-19, among other protections. In addition, on April 21 the DC Council passed the COVID-19 Supplemental Corrections Emergency Amendment Act of 2020, which amends and clarifies previous around mortgage deferrals and rent collected by landlords receiving relief, prohibits commercial rent increases, allows nightclubs to deliver food with drinks, and clarifies other provisions in previous response legislation.
DC halted evictions and enacted other protections around rent and mortgage deferrals over the course of the pandemic. The impact of some of these various rules and regulations varied based on when and for how long it impacted the individual or business. While the aid allowed some businesses to sustain themselves with reduced occupancies, businesses were often strained with each surge and lower-than-accustomed gross revenues. As discussed in 1.2 Most Significant Trends, the impact will be long-lasting but most expect that DC will experience a full recovery.
Commercial real estate is typically held by via one or more legal entity(ies) that are distinct from its individual owners. While sophisticated real estate owners may have varying structures, including corporations, partnerships, and REITs, the most commonly used entity for acquiring and owning commercial real estate remains the Delaware limited liability company. Ground leases also be used to bifurcate ownership between a fee owner with a reversionary interest in the real property and a long-term ground lessee who can benefit from the current use of the property.
The proposed sale of any housing accommodation that is rented to a tenant, including a multifamily property, will implicate the Tenant Opportunity to Purchase Act of 1980, codified at DC Code 42-3404 (“TOPA”). Under TOPA, regardless of the size of the housing accommodation and whether a sales contract with a third party is in place, an owner who wishes to sell its housing accommodation must deliver an “Offer of Sale” to each tenant of the housing accommodation. The Offer of Sale must include, among other things, the asking price and material terms of the sale, a statement that tenant has the right to purchase the accommodation, and a summary of tenant’s rights and sources of technical assistance for the tenant. A copy of the Offer of Sale must also be provided to the Rental Conversion and Sale Division (“CASD”) of the District of Columbia’s Department of Housing and Community Development (“DHCD”) and posted at the property.
For housing accommodations with five or more rental units, only formed and registered tenant organizations may respond to the Offer of Sale; there are no individual tenant rights (tenants only have the right to join or decline to join a tenant organization). To have standing under TOPA, the tenant organization must (i) be properly formed per the requirements of §42-3404.11 (ie, have legal capacity to hold real property, elect officers, adopt bylaws, represent 51% or more of the heads of household etc; and (ii) deliver an application for registration with CASD within a specific timeframe, depending on whether the tenant organization is already in existing or is newly formed:
If a tenant association timely delivers its application for registration with CASD, the seller and tenant organization have a duty to negotiate in good faith for at least 120 days. A tenant organization may also challenge the Offer of Sale as not being a “bona fide offer” within 45 days of the receipt of the Offer of Sale, and request a determination of the appraised value of the housing accommodation.
Under TOPA, a tenant or tenant organization shall also have the right of first refusal during the 15 days after the tenant or tenant organization received from the owner a copy of the valid sales contract to purchase by a third party. The right of first refusal period commences after the end of the negotiation period, and during those 15 days, the tenant organization has the right to match the ratified third-party sale contract.
Due to the (complex and numerous) issues presented by TOPA, sellers and proposed buyers of multifamily properties should conduct a careful analysis regarding tenant rights and the specific procedures that must be followed to comply with TOPA.
All contracts drawn for the purpose of conveying real property in the District of Columbia shall contain the following information:
Underground Storage Tanks
Sellers of real property in the District of Columbia are required to inform prospective purchasers in writing, prior to entering into a contract for sale, of the existence or removal of any underground storage tanks of which the seller has knowledge. If the sale is of commercial property, seller is also required to inform prospective purchasers of any prior use of the property of which seller has actual knowledge which suggests the existence of tanks on the property. For example, if seller knows there was formerly a gas station at the site, it is required to disclose this fact. Sellers of individual condominium or cooperative units are not subject to the disclosure requirements.
Title to real estate is lawfully and properly effectuated by a seller, or “grantor”, delivering a deed naming the buyer as “grantee”, which deed is signed by the grantor. Grantor’s signature must be acknowledged and notarized.
Deeds are recorded with the District of Columbia Recorder of Deeds and must comply with the following requirements.
Buyers conduct their due diligence in a variety of ways. Most purchase and sale agreements provide for a period of time following execution of the contract, during which all such diligence activity is conducted and, during such time, the deposit remains refundable to the purchaser in the event of a termination by the purchaser for any reason or no reason. At this time many refer to the deposit as “soft” because it can be refunded upon a termination of the contract.
In a residential context, this is often as simple as a home inspection and a title review process handled primarily by the title company with the closing conducted by a closing agent (often the title company). The due diligence process is more complicated, and the length of time and level of scrutiny would depend on the facts with respect to commercial properties. Often, due diligence will involve the review and inspection of the following by the purchaser’s attorneys: title reports, surveys, leases and tenant estoppel certificates, service contracts, warranties, property condition reports, zoning, environmental reports (Phase I and Phase II), and certificates of occupancy.
Some purchasers will arrange for some of the above diligence activities on their own and/or with third-party consultants; specifically, review of rent rolls and rent calculations, operating statements, and service contracts on the property, and conducting zoning and environmental due diligence.
Buyers will want a seller’s representations and warranties to cover as many aspects of the real estate, ownership entities, and other types of discoveries that a purchaser would seek to discover in due diligence. Purchasers will want to ensure that they are obtaining correct, complete, and accurate information from the seller. For these reasons, representations and warranties are significantly more involved and are typically heavily negotiated.
Sellers will seek to limit representations to the types of discoveries that purchaser would otherwise be unable to uncover with diligent efforts. In addition, representation and warranties will include and address issues of authority, due organization, and assurances that there are no violations of the rules under the Office of Foreign Assets Control and other related laws.
A purchaser’s representations are typically limited to authority and financial ability to consummate the closing, including representation and warranties that include and address issues of authority, due organization and assurances that there are no violations of the rules under the Office of Foreign Assets Control and other related laws.
In addition, it is common for a purchaser to insist that the purchase and sale agreement provide that seller’s representations and warranties survive closing for a given period of time. Survival periods vary, and are a typical negotiation point in most deals. If such representations do not expressly survive closing, a merger clause will merge any and all representations made into the deed. A purchaser will want to ensure that there is a backstop for harm caused due to a breach of the representations and warranties post-closing. A point of negotiation is often whether there is any survival period, and if so any backstop and in what form such backstop will take. Sellers will occasionally agree to either a post-closing holdback escrow or a guaranty from a credit-worthy guarantor. In some instances, a seller will agree to maintain their entity for a period of time with a negotiated net worth. In addition, the issue of how such claims are made with respect to a post-closing breach will be negotiated at length (including any floors or caps with respect to such surviving liability).
In commercial transactions, a purchase and sale agreement would typically include, at a minimum, the following representations and warranties:
The District of Columbia does not currently have any rules or regulations that apply specifically to foreign investors acquiring real estate. Instead, foreign investors should be aware of trends in CFIUS review that apply to any foreign investment in the USA that could raise national security issues. In particular, real estate investments (even non-control transactions) by foreign investors of properties within defined proximity of certain sensitive locations (including maritime and airports), may be in scope for national security review by CFIUS. Real estate national security proximity issues may be particularly difficult to mitigate, so the parties should undertake thorough analysis early in the diligence process to identify potential CFIUS issues.
Furthermore, as always, foreign investors will be subject to economic sanctions scrutiny by the targets of investment and co-investors, with many seeking very detailed information on ultimate beneficial owners involved in a particular investment.
Foreign investors also need to be concerned with tax issues. The ownership structure may have an impact on taxes from operating income and from a sale of the property or an interest in the property. For US income tax purposes, the FIRPTA rules (IRC Sections 897 and 1445) generally require a buyer to deduct and withhold 15% of the amount realized by the foreign seller from the disposition of US real property interests, and treat gain realized by a foreign person from the sale of US real property interests as effectively connected income, subject to US income tax.
Foreign investors also need to understand whether they will be subject to other regulatory laws, including securities regulations, environmental laws, foreign corrupt practices statutes and laws requiring the reporting of the acquisition of ownership of US real estate.
If foreign investors will have a controlling interest in the owner, the transaction may be reviewed by the federal government. The Foreign Investment in Real Property Tax Act can subject foreign investors to federal income tax liability and the withholding of proceeds from a sale or transfer.
Purchasers of real estate could be liable for environmental contamination even if the purchaser did not cause the environmental contamination. Commercial real estate purchase and sale agreements typically include:
A prospective buyer will generally obtain a Zoning Report from a third-party consultant. Such consultant will review and analyse the zoning and related matters and variances for the property by, among other means, obtaining a zoning letter from DCRA that reflects the official zoning classification for the property. The consultant will then issue a Zoning Report that sets forth the applicable zoning for the property, including permitted uses and applicable restrictions, and confirm whether the existing structures and uses thereof are in conformance with the existing zoning for the property.
In DC, takings are authorized pursuant to the DC Code’s Eminent Domain provisions. The mayor of DC may initiate Condemnation Proceedings to acquire real property needed for public use when that property cannot be acquired by purchase from the owners at a price satisfactory to the officers of the District authorized to negotiate for the property. Pursuant to the DC Code, taking are permitted for sites of schoolhouses, fire or police stations, rights-of-way for roads, highways, streets and alleys or parts thereof, rights-of-way for water mains or sewers, or any other authorized municipal use.
Once it is decided that a taking is necessary, a complaint may be filed in the Superior Court of the District of Columbia in the name of the District of Columbia for the condemnation of the property or rights-of-way and the ascertainment of its value. The mayor will then sign and file a declaration of taking “declaring that the property is thereby taken for use of the District of Columbia”. Upon this filing, title to the property in fee absolute shall vest in the District of Columbia, and the property shall be deemed to be condemned and taken for the use of the District.
The District of Columbia imposes both a transfer tax and a recordation tax when a deed, certain leases, or a security interest in real property is submitted for recordation. The taxes are based on the actual consideration paid for the property. Where there is no consideration paid or the District determines there is only nominal consideration, the tax is computed based on the fair market value of the property. Consideration is considered nominal when the actual consideration paid for the property is less than 30% of the fair market value of the property. The Recorder of Deeds will not accept the deed for recordation if both taxes have not been paid.
The rate at which such taxes are calculated is based on whether the property is classified as “commercial” or “residential”.
For transfers of commercial real property, the District imposes a 2.5% recordation tax and a 2.5% transfer tax on such transfer.
For transfers of residential property, the rates for each of these taxes is as follows:
The District imposes a 2.9% tax on the transfer of economic interests in entities (eg, more than 50% of the controlling interest of the property owner is transferred) that hold District real property interests, unless the real property is Class 2 real property with a value of USD2 million or more. If the real property is Class 2 real property with a value of at least USD2 million, there is a 5% tax on the transfer of economic interests in entities that hold District real property interests.
Although the transfer tax is imposed on the transferor of the property and the recordation tax is imposed on the transferee, both parties are jointly and severally liable for the tax liability. In addition, while these taxes are typically split equally between a seller and buyer, by agreement, the parties may apportion the tax liability between themselves in whatever manner they determine. The recordation of all deeds requires the filing of Form FP-7C, which elicits information about the identity of the purchaser and seller, the nature of the transaction, and the sale terms.
See 2.6 Important Areas of Law for Foreign Investors.
Most purchasers of commercial real estate acquisitions are financed through commercial real estate loans from institutional lenders and debt funds, each of which are customarily secured by a mortgage. In addition, commercial mortgage loans are usually further supported by guarantees of payment from the borrower’s individual principals or parties of significant net worth. For new construction, borrowers can apply for a construction loan mortgage, which is secured in the same manner.
In addition to mortgage loans, purchasers of commercial real estate may obtain mezzanine financing to finance amounts beyond what is approved by the institutional mortgage lender. Mezzanine loans are secured by a pledge of the borrower's equity interest in the entity which owns the property. Developers also raise funds to purchase real estate by selling equity in exchange for cash contributions.
Typically, the security interest created in connection with a mortgage loan is a first-in-priority mortgage or deed of trust lien on the real property. While not necessary in DC, the mortgage lender may also choose to file a separate Uniform Commercial Code (UCC) Financing Statement to create a security interest in any fixtures located at the property or to perfect a security interest in all of the assets of the borrower. In DC, a deed of trust can also serve as a “fixture filing” to create and perfect such security interest.
Commercial real estate can also be financed, in part, by mezzanine loans. The mezzanine lender may perfect its security interest in the borrower by filing a UCC Financing Statement in the state of formation of the borrower entity. In order to perfect its security interest in this manner, the mezzanine lender would require the borrower to deliver original certificates of equity interest.
An important consideration for foreign lenders is the USA Patriot Act, which, among other things, intends to identify, verify, and record information regarding parties to a loan transaction. The law is aimed at preventing parties from engaging in or conspiring to engage in any transaction that evades or avoids, or attempts to violate, any of the prohibitions set forth in any anti-terrorism law, including the Patriot Act or those that involve "blocked persons". Blocked persons include a person listed as such or made subject to an executive order of the President or a person or entity with which any bank or other financial institution is prohibited from dealing or otherwise engaging in any transaction by any anti-terrorism law.
Recordation tax is imposed when a security interest instrument is submitted for recording. A security interest instrument includes a mortgage, a deed of trust, a financing statement, a refinancing statement, or another document, instrument, or writing that creates an encumbrance on real property.
The recordation tax for a security interest instrument relating to commercial property where the amount secured is equal to or exceeds USD2,000,000 is equal to 2.5% of the amount secured by the instrument. The recordation tax for a security interest instrument relating to commercial property where the amount secured is less than USD2,000,000 is equal to 1.45% of the amount secured by the instrument. When the existing debt on a security interest instrument is refinanced, the tax rate is applied to the principal amount of the new debt more than the principal balance due on the existing debt if the existing debt was previously subject to recordation tax and the tax was timely and properly paid.
A mortgage or deed of trust that secures payment of all or a portion of the purchase price paid for real property is not subject to taxation if it is recorded simultaneously with the deed of conveyance for which the purchase money instrument was obtained. To qualify for the purchase money exemption, a purchase money mortgage or deed of trust must be executed within 30 days of execution of the deed conveying the real property and recorded within 30 days after recordation of the deed conveying the real property.
There are no specific legal rules or requirements that must be satisfied by a borrower before granting a security interest in real estate assets. However, the borrower must satisfy all requirements set forth in its organizational documents (articles of organization, by-laws, partnership agreement, LLC agreement, etc).
With respect to commercial property, District law recognizes both judicial and non-judicial foreclosures. While lenders rely on both methods, judicial foreclosures are more common. To commence a judicial foreclosure, the lender must file a complaint with the DC Superior Court, which complaint shall request an order and decree for sale of the subject property. In addition, the borrower will need to be served with a copy of the foreclosure complaint. Under DC law, the court has wide discretion with respect to establishing the terms, timing and procedures for the sale of the subject property.
While mediation is not required in judicial foreclosures of commercial property, the court will generally order mediation if requested by the parties. When issued, a decree for sale will set forth the manner and terms of the sale and generally requires that the lender publish notice of the sale in a daily newspaper in general circulation in DC. While District law does not provide a commercial borrower with the right to reinstate the debt, a borrower does have the right to redeem the property at any time before sale.
It is possible for existing debt to be subordinated to newly created debt by agreement. A recorded subordination agreement between the first lender and new lender (generally together with the borrower) can be used to accomplish such a subordination.
It is customary for loan documents to provide indemnification and hold harmless provisions protecting the lender from any environmental liability. If a lender becomes the property owner by foreclosure or deed in lieu, then the lender/owner generally takes the property as it is, including subject to fines or remediation requirements as may exist at the time.
If the borrower becomes insolvent and is the debtor in a bankruptcy proceeding, any enforcement actions previously commenced will be subject to the automatic stay of the Bankruptcy Code. Courts may grant the lender relief from the automatic stay that will allow enforcement of the security interest pursuant to its terms and applicable law. Nonetheless, provided that the mortgage or deed of trust was properly recorded and there are no defects in the mortgage or deed of trust itself, the priority of the lender’s mortgage or deed of trust will generally remain intact.
There are no existing, pending, or proposed rules, regulations, or requirements that lenders or borrowers pay any recording or similar taxes in connection with mezzanine loans related to real estate.
The development standards outlined in Title 12 of the District of Columbia Municipal Regulations regulate the use of land, the height and size of buildings, the size of lots, provision of yards, parking requirements, and more; however, depending on the project, other code provisions and regulations may apply. Additional development restrictions are administered by other agencies, such as Historic Preservation, the National Capital Planning Commission, the US Commission of Fine Arts or other preliminary reviewing organizations.
DC Public Law 8-36, the Environmental Policy Act of 1989, requires that all District of Columbia agencies consider the environmental impact of all proposed major actions before issuing any approvals for them. Building permit applicants are required to submit an Environmental Intake Form with their application to determine if an Environmental Impact Screening is required. If an Environmental Impact Screening is required, an interagency review team will look over the applicants' Environmental Impact Screening Form and make a determination. This process takes approximately 30 days.
Obtaining a building permit in the District involves numerous steps and generally starts with submitting an application to DCRA; however, various other agencies will also be involved in the process. The applications will be reviewed by all of the relevant disciplines. Each discipline will review the plans and approve them — or put a hold on the application so corrections in response to the plan reviewer’s comments can be made. Final building permit approval will not be given to any project until all disciplines and external agencies have approved and stamped the plans. Typically, plans are routed through:
For certain projects such as restaurants, excavation, work in historic districts, or work in public space, the following agencies may also participate in the review process:
After all disciplines and external agencies approve the application, the applicant will receive a notification to pay any outstanding permit fees, upon which the permit will be issued.
There are two categories of DCRA inspections related to permits:
The laws and process relating to the design, appearance, and method of construction are very specific to DC and the applicable parcel of land. Accordingly, landowners would be well-served to consult with local zoning counsel in connection with any development project.
See 4.1Legislative and Governmental Controls Applicable to Design, Appearance, and Method of Construction.
See 4.1 Legislative and Governmental Controls Applicable to Design, Appearance, and Method of Construction.
With respect to an adverse decision by the zoning authority, appeals may be initiated by the filing of an appeal with the BZA on the form and in the manner that the BZA may prescribe. At the time of filing the appeal, the appellant must pay a filing fee and submit required documents in PDF format. The appeal will not be accepted for processing unless accompanied by a certificate of service.
The Board of Zoning Adjustment (BZA) is an independent, quasi-judicial body that is empowered to grant relief from the strict application of the Zoning Regulations (variances), approve certain uses of land (special exceptions), and hear appeals of actions taken by zoning administrators at DCRA. The BZA is authorized to hear cases where it is alleged that the decision of any administrative officer or body related to the enforcement or administration of the zoning regulations is incorrect. The BZA also hears appeals of the zoning administrative decisions. Under the Civil Infractions Act of 1985, the BZA is authorized to hear administrative appeals from the decision of an administrative law judge involving the zoning regulations.
There is no general requirement to “enter into an agreement” with local or governmental authorities to obtain development approvals. In the ordinary course, a developer would have to proceed through an application and review process to obtain the applicable approvals. It is not, however, uncommon for such approvals to be "conditioned", with the developer’s agreement, upon the developer addressing issues raised by DC. This is especially true with Planned Unit Developments (PUDs), which require a particular development process in DC where an applicant can receive zoning flexibility and relief in exchange for a set of community benefits negotiated with the city and the neighborhood.
The Zoning Administrator at DCRA is charged with enforcing the Zoning Regulations and the conditions, plans, or drawings as approved by the Zoning Commission or BZA. The Zoning Administrator has the authority to, among other things:
Additionally, the Attorney General, or any other neighboring property owner or occupant affected by such violation, may institute an action for injunction or other appropriate action provided by law.
District law allows various entities to own and hold real property. These entities include, but are not limited to, limited liability companies; limited partnerships; general partnerships; corporations; and trusts.
Due to the ease of formation, tax benefits, liability protections, and flexibility in modes of governance, limited liability companies are most used for real estate transactions.
Limited Liability Company
Limited liability companies (LLCs) offer flexibility that is generally unavailable to corporations and general partnerships. Several notable advantages, including the lack of limitations on allocations of profits, losses, and other tax attributes among the members and a separation of management from ownership.
Partnership (Limited and General)
In the District, a partnership is formed by agreement between two or more partners, which can be a combination of individuals and entities. A general partnership is distinct from the individual partners, which allows general partners the ability to own property and engage in transactions independent of the partners.
Limited liability partnerships (LLP) protect a partner’s personal assets from unlimited liability for certain partnership obligations. District laws governing LLPs provide partners with “full shield” protection (ie, partners are not liable for any debt, liability, or obligation of the partnership). This is the chief advantage of a limited partnership over a general partnership. Another positive of a limited partnership is that it is a separate entity from its partners and can have perpetual duration. Under federal tax law, a partnership is not taxed as a separate entity; rather, the tax consequences of the business activities of the partnership are allocated among the partners, generally in proportion to the partners’ percentage interests in the partnership as established by the partnership agreement. The partners report their allocated portion of these items directly on their individual tax returns. Income is reportable by the partners even if it is not distributed to them. The partnership is, however, subject to District unincorporated business franchise tax.
General partnerships are easily formed, require few formalities and allow for flexible management. The most negative characteristic of the general partnership structure is imposing personal liability on the individual partners. Under District law, a partner is personally jointly and severally liable for any debts, contractual and other obligations, and any tort or other liabilities of the partnership that are incurred after the partner’s admission to the partnership.
Corporations may be formed to own and operate “for profit” or business corporation under the District of Columbia Business Corporation Act of 2010. A significant benefit of this entity type is that shareholders generally have no personal liability for the corporation.
District law defines “corporation” to include any trust, association, joint-stock company, S corporations as defined in IRC § 1361(a), and any other organization classified as a corporation for federal income tax purposes. Thus, real estate investment trusts and regulated investment companies are treated as corporations for purposes of District taxation (ie, subject to the corporation franchise tax).
Any corporation, limited partnership, limited liability company, or limited liability partnership doing business in a jurisdiction other than its jurisdiction of incorporation will need to qualify to do business in that jurisdiction. In these cases, the entity will also be required to obtain a registered agent in its jurisdiction of incorporation as well as in any jurisdiction in which such entity is qualified to do business.
Limited Liability Company
In 1994, the District enacted the Limited Liability Company Act, classifying limited liability companies (LLCs) as partnerships for District tax purposes, except when classified otherwise for federal income tax purposes. Thus, District limited liability companies are generally subject to the unincorporated business franchise tax.
In the District, the sale by a partner of his or her interest in the partnership is generally considered to be the sale of a capital asset resulting in capital gain or loss to the selling partner.
The tax consequences of the corporate structure are often less advantageous than other business forms because the corporation is a separate taxpayer, paying income taxes on its profits, except with an S corporation. However, the District does not recognize S corporation status. S corporations are subject to District incorporated business franchise tax.
Limited Liability Companies
These entities have minimal corporate formalities.
Corporate governance is dictated by the provisions of the certificate of incorporation, bylaws, and statutory law. Under District law, if the business of the corporation is managed by the shareholders or other persons (rather than the directors), the shareholders or other persons are subject to all liabilities of the directors.
General partnerships are easily formed, require few formalities and allow for flexible management. Typically, all the general partners share control and participate in managing the general partnership.
The District of Columbia Uniform Limited Partnership Act of 2010 governs the formation and operation of a limited partnership in the District. Limited partnerships are managed by at least one general partner. A limited partnership’s governance is dictated under the partnership agreement with the partnership law setting forth statutory defaults. To insulate the limited partners from unlimited liability, the general partner must be solely responsible for the management and operation of the partnership business.
For further details of the governance requirements for each entity, see 5.2 Main Features of the Constitution of Each Type of Entity.
The most common form of arrangement for the use of real estate for a limited period of time is a lease. While not as common, DC does recognize license and occupancy agreements, which do not create an interest in property in the licensee/occupant. A lease, however, creates a possessory interest in real property and affords the tenant greater rights, including exclusivity and assignability (as permitted by the landlord) and is not generally terminable prior to the expiration of the lease term, absent a default by the tenant or other narrowly construed circumstances.
Commercial leases can be gross leases or net leases. If a lease is a gross lease, the landlord typically provides certain building services and charges a fractional share of the costs back to the tenants. In this scenario, the tenant will typically pay rent to the landlord that is comprised of two parts:
Sometimes, these payments of "additional rent" are structured as payments of increases over a specified base year; other times, especially with retail leases, it is a flat percentage of the building’s square footage.
Typically, gross leases are seen in office buildings and other properties where there are multiple tenants in a single building. Conversely, with a net lease, the tenant pays a base rent payment to the landlord and also separately contracts for and/or pays other costs and expenses of the property directly to the service provider or other proper payee. In a triple-net lease, for instance, the tenant would pay a fixed rent to the landlord monthly and separately pay all costs and expenses of the real property such as taxes, insurance, maintenance and utilities.
Ground leases are another type of commercial lease in the District of Columbia. Typically, the landlord leases only the land to the tenant for a long term (99 years for example) and maintains a reversionary interest where, upon expiration of the lease, the land and all improvements, including those constructed by the tenant during the term of the ground lease, will revert to and be owned by the landlord. During the term of the ground lease, the tenant is responsible for constructing improvements and maintaining the property.
Aside from the various transfer and recordation tax implications related to leases with a term in excess of 30 years discussed herein, the District of Columbia does not regulate commercial rents.
Space leases typically range from five years to 20 years and many will afford the tenant at least one option to renew. The terms vary based on each deal; however, rent will generally increase over the term of the lease at regular intervals (discussed in more detail in 6.5 Rent Variation). Ground leases will have much longer terms. Rent is typically paid monthly, although it is not unusual for ground lease payments to be quarterly or annually.
For space leases, the tenant generally has all repair and maintenance obligations within the leased premises and the landlord is responsible for maintaining the structural components of the building, the roof, common areas and the building systems. Typically, space leases provide that if the tenant fails to make its required repairs in a timely manner then, following notice and opportunity to cure, the landlord has the right to make such repairs and then charge back the incurred costs to the tenant. In a ground lease, it is common for the tenant to be solely responsible for all repairs and all maintenance.
Typically, base rent will increase at certain trigger points that are negotiated as part of the economics of the lease (such increase could be every year, three years, five years, or another interval). The amount of the increase varies but is usually a pre-determined percentage. Escalation charges are usually computed annually, with estimated payments until actual expenses are known and reconciled. In a retail context, the tenant will often be required to pay the landlord a "percentage rent" with a computation commonly done on an annual basis and with payments to be made on an estimated basis until actual sales figures are available.
See 6.5 Rent Variation.
Value added tax, or other taxes or governmental levy, are not payable on District of Columbia rent. However, transfer and recordation taxes are due upon the recording of a lease for a term (including renewals) that is at least 30 years. In such cases, the transfer tax is based on the average annual rent over the term of the lease, including renewals, capitalized at a rate of 10%, plus any additional actual consideration payable. But the amount to which the rate is applied cannot exceed the fair market value of the real property covered by the interest transferred.
A tenant will typically be required to post a security deposit with the landlord at or prior to lease commencement. The tenant may also incur costs associated with obtaining permits for its intended use and any construction or fit-out costs associated with constructing or remodeling the premises. Typically, with a gross lease, the landlord will provide the tenant with the premises in a stated condition and provide a monetary sum (in the form of reimbursements to tenant based on invoices and other supporting documentation) to be used as a "tenant improvement allowance" to cover some or all of the tenant’s fit-out. The tenant is responsible for any costs exceeding the allowance. Alternatively, the landlord may provide a "build-to-suit", "turnkey" space to the tenant that is substantially complete.
The landlord is generally responsible for all maintenance and repair of common areas such as hallways, lobbies, elevators, parking lots or garages, and landscaping. Leases will specify the services that will be provided by the landlord and will often include seasonal services such as snow removal. Typically, however, such costs are ultimately passed on to and paid by tenants as common area maintenance or similar charges, with each tenant paying its pro rata share based on the formula set forth in the lease.
In a ground lease, the tenant is commonly responsible for all maintenance and repair costs.
The method of payment for telecommunications and utilities will vary based on the type and capabilities of the property. For electricity, the cost to the tenant is usually determined by a direct meter or a submeter. Charges for heating, ventilation and air conditioning (HVAC) will also depend on each property. Most commonly, tenants are all served by a single HVAC system (with the expenses to be built into the base rent and escalations) and are typically subject to additional charges for after-hours HVAC service. In some buildings, the HVAC system has been designed so that each tenant has its own, with such expenses being charged to the respective tenant. Additionally, tenants may have their own supplemental air conditioning and cooling systems for data and telecom rooms, the costs of which would be paid for by each tenant.
Each of landlord and tenant maintains its own insurance.
For insurance maintained by a tenant, the lease will typically impose an obligation on the tenant to maintain specific forms of coverage and to include the landlord as an additional insured. Such insurance will usually include general commercial liability and personal injury in certain amounts and limits that will vary depending on the premises and the use. The tenant will pay for this insurance directly.
Insurance maintained by a landlord will typically cover the common areas, structures, and roof as well as include general commercial liability and personal injury. Generally, the landlord’s costs for such insurance are ultimately passed on to and paid by tenants as common area maintenance or similar charges, with each tenant paying its pro rata share based on the formula set forth in the lease.
Landlords may impose restrictions on the tenant’s use of the premises, which is typically set forth in the lease. The permitted uses are usually a narrowly tailored list of activities. Most leases will also include prohibited activities, which often relate to an adverse effect on the reputation or character of the building or otherwise would negatively impact the landlord or other tenants. In addition, for retail centers, tenants are often granted exclusive use rights and, accordingly, the landlord will restrict other tenants from uses which could violate such rights.
Tenants must typically request the landlord’s prior written consent to perform any material alterations or changes to the leased premises. It is not uncommon, however, for a lease to provide that a tenant may make minor alterations without the landlord’s consent provided that such alterations are cosmetic in nature, do not exceed a dollar threshold, do not require a building permit, and/or do not affect the structure, the roof, the building systems, or ingress to or egress from the building.
All tenants in the District are entitled to the right of quiet enjoyment. Residential tenants are given much greater rights, such as protection from discriminatory housing practices based on a tenant’s or prospective tenant’s membership in a protected class, rights to organize a tenant association, the “warranty of habitability” that is implied in a lease but explicit in DC regulation requiring a landlord to maintain the tenant’s unit and common areas of the building in compliance with housing code, broader protection from evictions, and a right of first refusal to purchase a rental unit being put up for sale (see 2.2 Important Jurisdictional Requirements).
Under District law, landlords generally do not have a duty to mitigate damages in the event of a tenant default or abandonment. However, if a lease contains provisions expressly granting a landlord the right to reenter and relet the premises and holding a tenant liable for loss of rent upon tenant’s default, then a landlord would have a duty to make reasonable efforts to mitigate damages upon reentering the premises after abandonment.
The tenant’s insolvency in a lease context is governed by applicable bankruptcy, insolvency and creditor’s rights statutes. When the tenant files for bankruptcy under federal bankruptcy law, an "automatic stay" is imposed. which initially restricts the enforcement of remedies or the termination of the lease by the landlord, absent relief from the bankruptcy courts. Thereafter, there are specific requirements under bankruptcy law with respect to whether a lease, which is a contractual agreement, is to be assumed or rejected, and which establish the methods for calculation and recovery of rents unpaid as of the date of the bankruptcy filing. The lease is an executory contract and bankruptcy law may impose rules and obligations on how this must be treated.
Landlords will generally require a security deposit at the beginning of the lease in the form of either cash security, a letter of credit or a guaranty from a well-capitalized parent entity. The amount of the security deposit is negotiated but often based on monthly rent or a multiple thereof.
Whenever a lease for any definite term shall expire, and the tenant shall fail or refuse to surrender possession of the leased premises, the landlord may bring an action of ejectment to recover possession in the Superior Court of the District of Columbia. The landlord may not engage in self-help evictions such as changing the locks, turning off utilities, or blocking physical access to the premises.
Landlords and tenants typically have a right to terminate in the event of a condemnation by a governmental authority and/or a casualty event that either exceeds a dollar amount or requires a stated period for remediation. In addition, landlords reserve the right to terminate a tenant’s lease if that tenant defaults on its lease obligations and fails to cure following notice from the landlord.
Generally, if there is a tenant default that continues beyond the applicable notice and cure periods, a landlord has the right to terminate the lease and, if the tenant does not voluntarily vacate the premises, bring an action of ejectment to recover possession in the Superior Court of the District of Columbia.
In the case of eminent domain, upon the filing of a declaration of taking, the court may fix the time within which and the terms upon which the parties in possession (including lessees) shall be required to surrender possession as it deems just and equitable. In the event of a condemnation, DC uses the “aggregate of interest rule”. The aggregate of interest rule values each individual property interest holder’s interest, and then adds the value of each interest to determine the value of the whole property. The terms of a lease may also provide for the allocation of any condemnation award between landlord and tenant.
A lease also may be terminated by the effect of a foreclosure of a senior mortgage. Seniority may be established by the recording priority of the mortgage, or by the execution of a subordination agreement by the tenant in favor of the mortgagee. Many leases provide for the execution by the mortgagee of a subordination, non-disturbance and attornment agreement, which allows a tenant to remain in the event of the foreclosure of the mortgage as to the landlord’s interest in the premises.
Common pricing models for construction projects include fixed price (referred to as lump sum or stipulated price), and cost plus a fee – which may or may not be subject to a guaranteed maximum price.
See also 7.4 Management of Schedule-Related Risk.
The architect generally leads the design team, employing additional core disciplines, although these disciplines and other consultants may also be separately engaged by an owner to work in co-ordination with an architect of record. For construction, owners will typically engage a general contractor and may engage a project manager or other owner’s representative to assist the owner with project oversight and management.
Construction risk is often managed by, among other things, indemnification, warranties, limitations of liability, delay damage limitations and other waivers of damages, provisions relating to insurance, bonding and subcontractor default insurance, subcontract pass-through provisions, contingency (in the case of a guaranteed maximum price contracts) and other economic provisions and controls (such as shared-savings or other incentives), as well as liquidated damages.
Owners should also be mindful to properly review and tailor insurance programs to minimize potential uninsured exposures and require, by contract, that the contractor’s commercial general liability and excess/umbrella coverage be endorsed to include the owner as an additional insured, assuming that the intended primary coverage is provided by the contractor and not an owner’s project policy.
See also Section 7.4 Management of Schedule-Related Risk.
Often developers will seek to enter into guaranteed maximum price contracts that will include provisions that require contractors and subcontractors to adhere to established milestones, with corresponding schedules prepared by the contractor or construction manager. In addition, it provides for specific pricing and certain mechanisms for cost control. In particular, the contractor’s work should be subject to a "time is of the essence" clause, clarify whether there are any governmental entities (and regulations) involves, and construction schedules should identify key interim and completion milestones, as well as critical path activities and scopes.
Given the recent supply chain challenges, it is less common for contracts to include liquidated damages for contractor delay and, often times, depending on the nature of the project and timing considerations they may also include early completion bonuses. In addition, many construction contracts now include built in escalation clauses to account for rapidly increasing construction and raw materials cost increases.
Any such time or scope bonuses tend to be based on economic terms and, while not uncommon, they are not an industry-standard or norm and lately less common. Delay events (including raw material shortages) should be subject to prompt and timely notice with an obligation to substantiate impact to the critical path of the work. Often such delays will be further complicated by other matters, such as loan obligations. The agreements should clearly define force majeure events and any impact they may have on delivery requirements.
The most common form of additional security to guarantee a contractor’s performance is a performance bond. Performance bonds are required for most public projects. In private projects, there may also be completion guarantees, letters of credit and other personal guaranties provided from parent or related companies, depending on the nature of the transaction, the scope and duration of the project and the parties involved.
DC’s mechanic’s lien law provides that a contractor can file a Notice of Lien stating the amount due or to become due within 90 days after the earlier of the completion or termination of the project. Under DC’s mechanic’s lien law, the term “contractor” means a contractor who has direct contractual privity with the owner for the performance of or supply of construction work, materials, repairs or improvements. Only contractors who contract directly with the owner, and subcontractors who contract directly with an owners’ contractor are entitled to seek a mechanic’s lien claim under DC’s mechanic’s lien law. A DC mechanic’s lien has priority over construction loan advances that are made after the claimant filed its Notice of Mechanic’s Lien. The owner can remove the lien by either paying the amount of the lien claimed, or by “bonding off” the lien with what is known as an “undertaking”. The owner can also file with the court a “written undertaking” where the owner along with a surety make a promise to pay any judgment rendered by the court. The owner must give five days’ notice to the lien claimant of the written undertaking to bond off the mechanic’s lien.
A certificate of occupancy must be obtained before a building may be occupied following new construction. There are certain exceptions and rules that will otherwise govern renovations and improvements, not all of which will require a certificate of occupancy. The District of Columbia also requires that any new owners (subsequent to a change in ownership) obtain an updated certificate of occupancy.
Domestic or foreign corporations, including financial institutions that carry on or engage in any trade or business in the District or receive income derived from sources within the District are subject to the franchise tax. Gains and losses from sale of real property in the District are allocable to the District.
Unincorporated businesses are also subject to the franchise tax. Unincorporated businesses include businesses conducted in the District by partnerships, limited liability companies taxed as partnerships, and sole proprietorships.
For federal income tax purposes, the income of such entities flows through to its owner or owners, but the District imposes an entity-level franchise tax. However, investment partnerships and their non-resident partners generally are exempt from tax.
The exemptions from payment of the District’s transfer and recordation taxes are extremely limited. A commonly used exemption for mitigating recordation tax liability is to record a “purchase money mortgage” simultaneously with the conveyance deed as described below.
A mortgage or deed of trust that secures payment of all or a portion of the purchase price paid for real property is not subject to taxation if it is recorded simultaneously with the deed of conveyance for which the purchase money instrument was obtained. To qualify for the purchase money exemption, a purchase money mortgage or deed of trust must be executed within 30 days of execution of the deed conveying the real property and recorded within 30 days after recordation of the deed conveying the real property. It is practical to execute and record the purchase money instrument simultaneously with the deed of conveyance.
Municipal taxes are not paid on the occupation of business premises or on the payment of rent.
Under DC law, non-residents are not subject to tax on income earned in the District of Columbia where they conduct or engage in business through an “unincorporated business”. Under the District’s Charter, the District is prohibited from imposing a tax on the net income of non-residents and partnerships cannot withhold taxes on the distributive share of income to a non-resident individual partner.
See also 2.6 Important Areas of Law for Foreign Investors.
The District conforms to the IRC as currently amended. Thus, to the extent that it has not decoupled from provisions of the IRC, the same US federal income tax benefits afforded to owners of real estate are available to investors for District tax purposes. Benefits include the following:
The District of Columbia conforms to IRC §1231, which allows a net loss to be treated as an ordinary loss when there is a net loss for the tax year from sales, exchanges, and involuntary or compulsory conversions of certain asset.
See 1.3 Impact of Recent US Tax Law Changes.
In 2021 and through the first quarter of 2022, the District of Columbia economy, like much of the USA, was a mixed bag as it continued to work with the lasting impacts of the COVID-19 pandemic. While there will be a lasting impact of COVID-19 on the real estate market in the District of Columbia, there are positive trends that impacted various sectors in 2021 and likely will continue throughout the rest of 2022 and beyond.
As access to various mitigating measures to the health crisis became more accessible in 2021, the economic disruption of COVID-19 started to subside. While COVID-19 had a substantial impact on the real estate industry overall, the effects on the District of Columbia real estate market varied widely among sectors. Continued shifts in the way people work and seek housing, especially for federal government employees, which make up a portion of the regional workforce, will have a long-lasting influence on real estate in the District of Columbia.
Despite the continued global economic disruption of COVID-19, growing economic pressure as inflation continued to rise and the threat of, and realization of, increasing interest rates, certain sectors of the District of Columbia real estate industry proved to be the benefactor of shifting consumer trends, while other sectors continued to struggle and find resiliency. This has meant an uneven recovery for the District of Columbia. As we progress into 2022, many of the trends we started to see in 2021 will be watched closely.
The housing market continued its increased pace in 2021 and into 2022. While there are indicators of some slowdown in the first quarter of 2022 due to increasing interest rates and continued supply chain challenges, the DC Metro housing market remains strong. The DC Metro area market was fueled by those wanting larger spaces to live and work as offices and businesses continued to remain in remote working environments. Long & Foster provided that the median sale price for homes in Washington, DC was around USD659,950, which is an increase of about 4% from February 2021. DC Metro area counties saw similar increases, with a few counties, such as Arlington and Alexandria, showing smaller gains. While multi-family construction starts trending up in 2022, many factors impacting other markets in the USA will also continue to impact the DC market. Challenges such as labor shortages, supply chain issues and increased pressure on pricing on raw materials will remain critical factors into 2022. Additionally, as employers call employees back into the office, whether for a shortened workweek or other hybrid schedule, the demand and upward pricing pressure on the suburb markets in the DC Metro area is expected to continue, even if it may not be as substantial as in 2021.
As median and average housing prices increased in 2020 and 2021, constructing and maintaining affordable housing in the DC Metro Area is a continued focus for Washington, DC. Most recently, the mayor announced the construction of 2,000 new units of affordable housing west of Rock Creek Park. In addition, DC has continued to target certain metrics for availability of affordable housing, including the push to build 36,000 housing units by 2025, with at least one-third of those being affordable to families making up to 80% of the region’s median family income. Deputy Mayor for Business and Economic Development John Falcicchio has publicly stated that 20,251 new homes have been built so far in the city, 3,578 of which are affordable. The current 2022 budget up for consideration provides for the largest one-time investment of USD500 million to DC’s Housing Production Trust Fund (HPTF). This fund assists with the creation of affordable housing and provides support in the construction and long-term maintenance of such affordable housing. As certain regions continue to see large-scale developments, which will certainly include multi-family units, the mayor’s office will likely work to create incentives for developers to also develop and focus on creating more affordable housing.
Among all of the various real estate sectors in DC, hospitality has experienced a large and significant drop in occupancy volume, transaction volume, and investment activity. In 2020, the hospitality sector was brought to a near stop in DC, but 2021 did see the very beginnings of a recovery. The Delta wave and subsequently the Omicrom wave caused many starts and stops for these businesses, which led to generally poor performance for 2021. The multiple COVID-19 waves, combined with competing forces of labor shortages, supply chain challenges and other raw material price increases, have led to a slow recovery in this sector. Many public museums and other popular tourist sites and buildings were not open for much of the popular summer season of 2021, leading to another slow and depressed tourist season.
Over the last half of 2021 there was some increase in average occupancy rates and revenue per available room (RevPAR), and even some stabilization within the market from the lows of 2020. But that stabilization was just that – a leveling-off. With most major conventions and other group-related business remaining stalled, DC did not fare as well compared to other large metropolitan areas in the USA.
It is estimated that DC lost more than USD2 billion in business travel revenue in 2021 alone. While the usually busy summer months were hampered by restrictions, many hotel properties retooled in early 2021 and were able to benefit from more localized tourism and pent-up demands with scaled-down smaller group events such as weddings. A further challenge for the DC market is the immediate impact of the national labor shortage. Like hotels in other markets, DC hotels had to streamline their operations to account for labor shortages, which included closures of food and beverage operations, cessation or limited housekeeping, and limited availability of rooms or other amenities. However, prior to the emergence of Omicron, we saw multiple hotels in the DC market trade at record levels, including some of the most iconic properties.
The Office Sector
The DC office market has generally been a well-performing market and less susceptible to other headwinds in the USA because of being the capital and the breadth of the government workforce. As the pandemic took effect, many assumed that office culture and working environments would be reassessed permanently due to COVID-19. While there has been increasing pressure to reduce the overall footprint in some instances, the average size and cost of an office occupier increased year over year. While leasing slowed significantly in 2020 in the DC Metro region, it is now on the rise again in the later half of 2021 and 2022. A CBRE report found that 63% of the larger leases that were sized over 10,000 square feet provide for a greater than eight-year term and that over two-thirds of those that did choose to relocate chose to upgrade their location and space. DC is not immune from the general experimenting by companies of how workers use and interact within an office environment and whether co-working, hoteling, hot-desks, open office designs, remote working and single-size offices are of practical use and successfully implemented. Those results are yet to be baked into the market.
As government workers are called back to the office, it is expected to see a rise in the leasing trends to more closely track pre-pandemic levels. However, with respect to certain sectors, like technology, advertising, media, and information-based companies, it is expected there will be more of a hybrid or pure remote environment and less physical in office space demand.
For some sectors in the DC market, such as hospitality, it is expected to be a slow recovery. For others, it is expected that the recovery will be fast-paced, although may be dragged down due to other headwinds beside the pandemic. With rising labor rates and growing labor shortages, increased inflationary pressure, continued waves of COVID-19, and rising interest rates, 2022 and beyond will be a mixed bag. The DC mayor’s office has placed a great deal of importance of supporting sagging sectors within the DC real estate markets and pushing for increased available affordable housing. While office vacancy will likely push higher given there are eight buildings under construction and slated for completion by year-end, construction starts are down by over 70% from 2018-2019 historical levels. This dwindling development pipeline could help stabilize vacancy in the long term and push up leasing market demand further. It is also expected that the DC market will see a further increase in office-to-residential conversions, which would help reduce office supply surplus in the long run.
While hotel valuations may remain in flux in DC, other markets are continuing to see a rise, such as single and multi-family housing as well as mixed-use developments. Despite world events and increasing pressure on the supply chain, there are increasing construction starts in the DC area with continuing positive indicators overall. While the recovery may not be as fast-paced as in other markets in the USA, there is optimism that the DC market will recover at a faster pace than originally predicted in 2020.
Deepening world and political events will likely have an impact on the DC market in varying ways for years to come. Many economists predict that supply chain shortages, increasing construction costs, and rising interest rates will impact the rate at which recovery to pre-pandemic levels can be expected. As the pandemic eases and workplaces adjust to varying in-person schedules, the DC office market will continue to have mixed results.