Raising Heights Raises Potential Dangers
As DC’s high density, commercially zoned areas within the District of Columbia approach being “finished”, a pubic dialogue has begun about easing height limits. For the past month, a number of groups have weighed in on both sides of the subject. Most recently, the National Capital Planning Commission (a federally appointed agency) has been at odds with the DC Office of Planning on whether or not to allow for higher buildings. The crux of the matter is that DC would like to have the ability to raise the density of development to increase its tax base while simultaneously adding to the supply of affordable housing. The NCPC, in its role as an oversight agency, opines that raising height limits will threaten DC’s iconic skyline.
A significant increase in building heights could be ruinous to the DC skyline and real estate market alike. Not only would the look and feel of our cityscape be forever altered, much larger buildings could cause a significant oversupply of space. For at least the next 10-15 years there will be no pressing need for higher density development within the District. When the time comes to raise height limits, it should be done gradually and in commercially zoned areas that can accommodate taller buildings. Property owners should pay for the value of “air rights” for extra building heights to the DC government. Revenues generated from the air rights sales should be earmarked towards paying for specific infrastructure improvements in the District.
Why is there a height limit in the first place?
For over 110 years, the size of new building development in the District of Columbia has been subject to the Height of Buildings Act. Contrary to the popular urban myth that “no building may be taller than the Capitol Dome”, the first 1899 law was enacted in reaction to the Cairo apartment building at 1615 Q Street, NW, near Dupont Circle. This 164 foot tall building was DC’s first “residential skyscraper” and caused an uproar for fear that the city’s monuments and skyline would become overshadowed by skyscrapers. In order to prevent building mass from darkening our streets, zoning laws limited the building heights based on the width of streets they faced. The tallest buildings (generally 130 feet) are permitted on the widest streets.
The Cairo Apartment Building – 120 Years Old & Still Standing Out
What are the effects of the height limit?
1. As intended, limiting density has created a pedestrian friendly environment with a decidedly European feel in the Nation’s Capitol. In many respects, Washington, DC has grown into a “Paris on the Potomac”.
2. The economic impact of height limits has prevented an over supply of office and residential space from any single development.
3. Vertical limits push new development horizontally, transforming new neighborhoods. Dramatically increasing height limits in any area of the District will stunt or stall the renewal of other neighborhoods.
The danger of oversupply
One reason the DC market has remained stable for so many years is that the real estate development industry has to work very hard on many projects to create a gross oversupply. That’s not to say we haven’t had plenty of occasions where supply has significantly exceeded demand in both the residential and commercial sectors. In the late 1980’s, Washington DC went through a frenzy of new development, peaking at over 6 Million square feet of new office space delivered in 1987. Following the S&L crisis and subsequent recession, DC experienced a development shutdown for almost five years. The good news was that the vacancies were spread across the market and the oversupply of office space was a key factor in the re-emergence of residential development downtown. During the 1990’s real estate slump, a number of vacant, economically obsolete office buildings were converted to residential use, proving the value of downtown residential development and igniting the on-going residential development boom.
The height limit has also been a major factor in the revitalization of the District’s neighborhoods including Logan Circle, Columbia Heights, Petworth, NoMa, Atlas District and beyond. Lower density is not only more livable, lower supply forces new development to spread to previously untouched areas. If the District truly desires to see underserved neighborhoods such as the Anacostia waterfront transformed, raising height limits should be strenuously avoided.
And if the height limit were raised?
Without height limits market swings would be much more severe. The upper size of new buildings built in DC currently ranges from 300,000 to 600,000 square feet. These 12 floor developments have a “footprint” of 25,000 to 50,000 square feet, or roughly between one-quarter and one-half of a city block. If the height limit was raised to 20 stories, as has been proposed by the DC Office of Planning, the same buildings would range in size from 500,000 to 1,000,000 square feet. In “healthy” markets, during times of an expanding economy, DC’s historic annual demand for new office space has ranged from roughly 1 to 2.5 million square feet of new space. When our market is “booming” we typically grow by 4-6 new large developments per year, or around 2 million square feet of new space. Under DC’s desired zoning changes, we could expect to see supply increase by 4-6 million square feet annually, or 2-4 years of supply deliver in a single year. Therefore, at the current rate of new construction, significantly taller buildings would flood the market with space.
So, why should DC want to raise heights now?
Given that the District has at least a 10 year supply of development sites, that every square foot of new development already adds to DC’s tax base, and that a healthy real estate market strongly contributes to the ongoing transformation of DC into a truly world class city, why would someone argue for torpedoing the status quo? Like Captain Renault in Casablanca, you will be “shocked, shocked to find” that it’s money, lots of money. In this case it’s modern political alchemy. The DC government and landowners could literally turn thin air into piles of gold.
Land/development sites are valued by the size of the building that can be built upon them. Current downtown land values range from $150 to $200 per FAR (Floor to Area Ratio) square foot. A lot zoned for 10 FAR allows for 10 square feet of building for every square foot of ground. So increasing the maximum height from 12 to 20 floors could potentially add $1,200 to $1,600 of value for every square foot of a re-zoned site. In other words, a 50,000 square foot development sites would instantly be worth an additional $80,000,000. The added land values would also increase real estate tax basis, and when a property is developed, potentially generate another $10-12 per square foot annually in taxes. Continuing with the 50,000 square foot site example, that’s $4-5 Million of additional annual tax revenue.
However, this is a false argument. Without demand to support such a huge increase in supply, real estate tax revenues could actually decrease as oversupply depresses property values across the market. Given that real estate taxes are the single greatest source of revenue for the District, this would be like killing the goose that laid the golden egg. When falling property values have caused lower tax revenues in years past, the District government responded with more aggressive property appraisals and raising tax rates, which simply place more burden upon DC’s existing residents and businesses.
Is a compromise possible?
Creating value is not necessarily a bad thing. Rather, it’s one of the core precepts of our economic system. The danger lurks in giving away huge value to a few property owners while simultaneously destroying the market balance and DC skyline. That said, there could be an opportunity to create significant value for the city along with increased real estate tax revenues through moderate addition of FAR in select areas. Adding simply two floors of to the height limit in portions of the business district would provide all of the same revenue benefits without shocking the market or ruining our Capitol’s skyline. If the DC Office of Planning identified a density “receiving zone” in 100 blocks, potential developable area in the District would increase by 16 million square feet. Excluding government buildings, office space alone in the District currently totals approximately 150 million square feet. There’s another 20-30 million square feet of undeveloped or underutilized commercial zoned development sites. Not that DC currently has an acute need for more development sites, but the creation of the 2 FAR receiving zone with remaining potential development will create enough space for decades of continued growth within the District. Spreading two floors of additional density around DC’s commercial district will provide for a slow, seamless expansion of the market. Numerous examples already exist where two floors have been added to existing buildings through TDR’s (transfer of development rights) without a noticeable change in our streetscape.
2121 K, 2020 K and 1111 19th Street, NW acquired TDR’s to be redeveloped with two additional floors.
How should property owners be charged?
Last but not least are the questions of what to charge property owners who apply for to increased height limits and how to use the money. The value created by any height increase is a tremendous revenue opportunity for the DC government. What to charge should be fairly straightforward: establish a pricing formula based on a reasonable percentage of the market value of FAR for the site in question. Agreeing upon the use of the funds (or having the DC Council agree) will be a bit more problematic. As a DC native and resident, I would prefer that this windfall be applied towards some specific project in the public interest. Earmarking revenues received from FAR sales would hopefully limit waste likely to occur from simply dumping more into the general budget. Given that increased density puts more strain on the city’s old and decaying infrastructure, projects to offset that burden would make sense. Improved transportation, replacing the 100 year old water and sewer lines, adding renewable power projects, low-income housing and striving towards a clean, sustainable environment, etc. are all worth considering as we continue to transform Washington, DC into one of the great cities of the world.