Washington Wins…Everyone Else (except maybe Chicago) Loses


What could prove to be the worst economic decline since 1929 may also have the unintended consequence of creating a booming real estate market for the Washington, D.C. metropolitan area over the next few years. Ironically this has been brought on not, as one might expect, by Democrats – traditionally the party of Washington – but by the often fervently anti-DC Republicans.

This process was set in motion by the Bush Administration’s $700 billion financial bailout. This has caused a potential geographic shift in power from Wall Street to Pennsylvania Avenue. By concentrating decision-making power and institutional ownership in the Nation’s Capital, the Administration has essentially drained power away from financial institutions historically headquartered in New York City. The local real estate market impacts of this shift in the locus of private-sector financial power will only be accelerated by the impact in that real estate market by the changing of the guard in Washington following the November 4th election.

To start with, the $700 billion federal bail-out of Wall Street being spearheaded by the Treasury Secretary is certain to involve a spate of new Treasury Department hirings, bringing in the employees needed to manage this herculean task. And, while that in and of itself does not a real estate boom make, there is a remarkable confluence of other factors to be considered as well.

For example, the November 4th election results are projected to generate 40,000 real estate transactions in the metro Washington marketplace over the next nine weeks, as those currently in power leave the Nation’s Capital and those elected to power move in. That is 40,000 transactions that otherwise would not be occurring in the prevailing economic climate. Any time you introduce a large number of buyers into the marketplace competing for product that might not be entirely fungible in terms of geography (in-town versus out of town; D.C. vs. suburban Maryland vs. Northern Virginia) or housing typologies (pied-a-tier versus exurban McMansion, for example), you drive prices up. Add to the equation that not everyone voted out of power actually ever leaves the D.C. area – this is after all the center of the universe for many law firms and lobbyists, as well as both major political parties – and there is the potential for increased demand for and a constrained supply of houses.

Add to this residential real estate boom a coincident commercial development boom. Consider that the federal government will become a major owner of some of the country’s most important financial institutions with, at the very least, monitoring and oversight responsibilities (if not also investment policy input). Under this scenario it is easy to imagine a whole new industry being born almost overnight in the District of Columbia, with private interests seeking debt and equity financing not by meeting with Wall Street investment bankers but by meeting with their investment bankers’ new regulator at 1500 Pennsylvania Avenue in Washington, D.C. (the headquarters for the U.S. Treasury Department).

This is not nearly as far-fetched a notion as it may first appear. Forty years ago most Washington, D.C. law firms and lobbyists were focused primarily on what today are viewed as pretty stodgy federal agencies: The Interstate Commerce Commission; the Federal Trade Commission; the Food and Drug Administration; the Interstate Highway Commission. Lobbying became more sophisticated, impacting to a much greater degree federal policies related to taxation, banking, and capital markets, as well as emerging policy areas like healthcare, energy, and the environment, causing the private-sector workforce feeding off of the federal presence in Washington, D.C. to grow exponentially.

The District of Columbia has the third-largest downtown in the U.S., ranking only behind New York and Chicago. More than 10 million square feet of commercial office space was added to the District between 1996 and 2005, with another 10 million having been brought on-line or underway since then. Additionally, geographic areas that in the 1960s were entirely rural farmland – such as Tysons Corner, VA, and Gaithersburg, Maryland – have grown so fast that they are today unrecognizable. For example, Tysons Corner has over 46 million square feet of office and retail space, and a daytime population of over 100,000. The Washington metropolitan area is the eight largest market in the country – and comprises the fifth largest market when combined with the Baltimore metro area – with a 2007 population of over 5.3 million people, yet almost nothing is manufactured here. It makes one wonder exactly how many people are required to properly rearrange the deck chairs on the Titanic.

Finally, add to the foregoing scenarios the very real prospect for a major expansion of our federal government under the incoming Obama Administration and an energized and slightly larger Democratic majority in the House and Senate. There is the distinct possibility (if not, in reality, the promise) of a New Deal Era federal program to re-build the nation’s infrastructure both to meet long overlooked needs but, more-importantly, to also create a vast number of new public sector-financed jobs . The stage is set for what could be the greatest Washington, D.C. real estate boom since the New Deal (the residential population exceeding 500,000 for the first time in the 1930s) or the Second World War (in 1950 Washington, D.C. reached its peak population of over 800,000 residents, although today that number is just under 600,000). The last boom transformed a sleepy southern town into a major northern metropolis; the next could turn greater Washington into first-rank conurbation on the scale of New York, Los Angeles, and Chicago.

Under less ominous circumstances this might all be considered the natural order of things. And from a purely personal perspective, I guess it wouldn’t be so bad to see my home appreciation return to the double-digit annual escalations to which Washingtonians have become accustomed.

But then there are questions of whether this is good for the country. Most metropolitan areas are suffering (some, like Miami, Las Vegas, and Phoenix are hemorrhaging) while only perhaps Chicago – the geographic power base of President-Elect Obama – seems well-positioned to gather in the spoils of the new political order. Meanwhile DHL’s recently announced layoffs in Wilmington, Ohio, may impact an estimated one-third of the employable residents in that community. By way of this stark contrast, there’s something truly unseemly in the notion that the very place fundamentally responsible for many of our current economic woes should benefit from being both the cause and the cure of the economic maladies plaguing the country.

Peter Smirniotopoulos, Vice President – Development of UniDev, LLC, is based in the company’s headquarters in Bethesda, Maryland, and works throughout the U.S. He is on the faculty of the Masters in Science in Real Estate program at Johns Hopkins University. The views expressed herein are solely his own.