The workplace landscape has shifted, with remote and hybrid work becoming the norm for many industries. However, with the recent Presidential Executive Order’s recent mandate requiring a return to in-office work, commercial real estate markets are experiencing significant changes. To gain insights, we interviewed Tim Hearn, Senior Vice President here at TD&A, about the implications of this change and what it means for businesses in Washington, DC and Baltimore.
The Start of the In-Office Trend
The push for a full return to office began in 2024 when Amazon announced its requirement for employees to transition away from hybrid and remote work. “Amazon’s decision was the tipping point, and the federal government’s mandate has only reinforced that trend.”, Tim states. Despite the mandate, many employees still seek flexibility, mainly on Fridays, when personal commitments and recreational activities tend to take favor.
While remote work proved to be productive during the pandemic, Tim emphasizes the irreplaceable benefits of in-person collaboration, leadership development, and team building which most organizations were not able to achieve within a remote work environment. He also added that commuting patterns have been affected, particularly in DC, where traffic congestion has returned in full force. “Traffic into the Navy Yard every morning is bumper to bumper again. The super commuters—those driving an hour or more—are back.”
How the Mandate is Reshaping Commercial Real Estate
The return-to-office movement is driving an increase in office occupancy, but challenges remain. Many government agencies and organizations are reevaluating their office space needs, often being forced to downsize as a result of other Presidential Executive Orders. “Federal, state, and local governments are all looking to occupy less third-party office space due to budget constraints,” Tim explains. In Maryland, the state legislature is working to address a significant structural budget deficit, which for example will result in a $200 million reduction of funding to agencies like DDA and Health and Human Services.
In Washington, DC, the situation is even more pressing, with reports indicating approximately $6 billion in CMBS (commercial mortgage-backed securities) loans will now be on watch lists for defaults due to potential early lease terminations by federal agencies, an issue Tim referred to in the discussion. “When the General Services Administration (GSA) enters into a lease, after the initial fixed term, they have the option to terminate with 12 months’ notice. Historically this was not an option which the General Services Administration (GSA) would exercise. Under the new initiatives within DOGE, landlords in suburban Maryland, Northern Virginia, and Washington, DC are feeling the negative impact of these early terminations, with their CMBS lenders also being exposed,” Tim quotes.
Navigating the Uncertain Future
As businesses adjust to these rapid changes, Tim notes that many organizations are making tough decisions. Some nonprofits, such as JHPIEGO and the Johns Hopkins Center for Communication Programs, have already faced severe program closures due to USAID funding cuts. “They had 35,000 to 60,000 square feet of office space in Baltimore, but when DOGE cut the USAID funding, entities which executed USAID programs were also negatively impacted. Other large employers in Baltimore exposed to the USAID cuts include the following organizations who occupy close to 500,000 sf of office space in Baltimore:
- Catholic Relief Services
- Global Refuge
- Lutheran World Relief
- International Youth Foundation
- World Relief Group
The Life Sciences sector, once a thriving part of the Montgomery County office market, is now struggling with high vacancy rates. Over 3 million square feet of life sciences space was delivered during the pandemic, but a combination of a drop in IPOs, plus recently announced cuts by DOGE for program associated with the National Institute of Health (NIH) and the Food & Drug Administration (FDA) has stopped any additional expansion of life sciences space. “Before the pandemic, Montgomery County had 10 million square feet of life sciences space. During the pandemic, 3 million more were built, and another 3 million were planned. The recent announcement of Glaxo Smith Kline exiting 650,000+ square feet has created a vacancy rate greater than 25%. With demand shrinking, landlords are considering demolition of some older buildings, including considering uses such as land development for housing,” Tim explains.
What’s Next for Businesses and Commercial Real Estate Investors?
For companies impacted by these shifts, Tim advises careful financial planning and strategic decision-making. Many organizations that relied on federal funding are now facing threats to long-term funding sources, forcing them to rethink their long-term viability. High financing costs and budget cuts could lead to a commercial real estate decline, even if the rest of the economy stays stable.
“Usually, when there’s an economic recession, real estate follows. But sometimes, real estate takes a hit even when the broader economy is fine. Right now, financing rates are in the 7% range, with possibly a lower amount for great credit with low LTVs, but a lot of projects still won’t pencil out. That’s creating real economic pain for clients, and of course, any time people lose jobs, that’s a major impact on them and their families,” Tim explained.
About Trout Daniel & Associates
Trout Daniel & Associates is a full-service commercial real estate brokerage serving investors and businesses throughout the mid-Atlantic and beyond. The firm takes a highly-customizable approach to providing a full range of commercial real estate services, including brokerage, development, consulting and management to the retail, office, industrial, multi-family and investment market segments.