Solving the Post-Pandemic Vacancy Rate Problem

12/18/2023

It’s no secret that the COVID-19 pandemic has reshaped our expectations for work and flexibility. The pandemic-induced paradigm shift, which catapulted remote work into the mainstream, has prompted a fundamental reconsideration of the traditional office environment. Where companies used to require more space, hybrid work models have lessened the need and therefore the desire to have office complexes, with many companies opting to utilize hot seats, shared desks, and coworking spaces. 

Questions about the future of the office have since spurred conversation in downtowns across the nation: What does it look like? How do we move within this shift? If not offices, how do we utilize the space that’s available? Most recently, the tone and tenor of these discussions have turned to pessimism and fear with phrases like “urban doom loop” and “death of the office” peppering articles and conversations among business and community leaders. The critical need to adapt to the changing office environment is ever present – and Arlington, Virginia is no stranger to it.  

Challenge: The challenge facing Arlington’s office market is significant. An analysis conducted earlier this year by Arlington Economic Development (AED) staff concluded that 40 percent of the rentable building area in the County – approximately 17 million square feet – is at risk of long-term structural vacancy or functional obsolescence. As of Q3 of 2023, the office vacancy rate is 21.5 percent, approximately 9 million square feet of vacant space. In Arlington, the impact of increased vacancies on office building values is resulting in buildings trading at a discount to historic norms. The lack of appetite for office from both the debt and equity markets are making it difficult for current owners to refinance existing debt which is leading to loan defaults and the likelihood that properties will enter special servicing and/or foreclosure, further eroding their values. These declining values present challenges to both building owners and the County’s tax base, which this fiscal year is projected to derive 16% of its revenue from commercial properties.  

Solution: The solution here is written within the problem itself. The economy will continue to thrive in places where people can meet face-to-face to connect, create, collaborate, and innovate. The future of work won’t be entirely virtual, but the demand for traditional office space square footage will likely shrink to make way for new meeting space, residential, entertainment, arts, hospitality, and other uses. The office buildings of the future will need to be greener, multi-purpose, technologically advanced and located close to where the talent lives. 

Execution: To catalyze the market by removing some of the regulatory barriers to repositioning the existing supply of office space, Arlington has created The Commercial Market Resiliency Initiative (CMRI). We started by expanding the number of allowable uses in our commercial spaces. Just this year, we saw the opening of a doggie daycare, an indoor dog park and bar and an indoor virtual golf experience – none of which would have been allowed before the CMRI initiative. Moving forward, CMRI will focus on additional regulatory reforms to expedite the repositioning, conversion and redevelopment of underperforming office buildings. We believe this is the most effective way to stabilize the office market, create value and enrich the overall urban experience in our downtown.  

Lessons Learned: The updates to the zoning ordinance use tables provide an expansion of allowable uses which has already activated a handful of vacant spaces with new neighborhood-serving uses, such as animal boarding and indoor recreation. The initial year of CMRI was proof of concept for fast-tracking regulatory reform. Even though we are still several months from bringing forward other major policy recommendations, this first phase of CMRI has laid the groundwork for success moving forward in two important ways. First, we served in a convening role that enabled transparent and candid conversations between County staff and stakeholders in the development community. This gave our team a deeper understanding of the real-time challenges and opportunities facing the market and created a stronger two-way conversation between parties. Second, we communicated regularly and frequently with our elected leaders and community members to ensure a shared understanding of the urgency and complexity of the situation. Combined, these efforts gave our County leaders the critical information needed to act on the first round of policy initiatives. With this foundation now in place, we have strong momentum to push further on regulatory reform that support CMRI related policy initiatives. We believe this change signals to the development community that Arlington County is open to market solutions and is ready to support a more efficient – although still public – process that can save both time and money. Ultimately, our hope is that developers and investors will view these changes favorably and pursue transformational projects in Arlington County.  

Ryan Touhill is the Director of Arlington Economic Development. Mr. Touhill has extensive experience overseeing economic development agency operations and a proven track record implementing local small business grant and economic recovery programs. He has played a key role in fostering regional cooperation and attracting and retaining business in our local and regional market.