The federal government — historically seen as a stabilizing force in the D.C. region — is morphing into a liability as the Trump administration slashes the workforce, office footprint and funding across agencies.

Arlington County, directly across the river from D.C., has long been home to government tenants and contractors and has relied on them for its economic prosperity. Like the entire region, Arlington is now staring down a threat to that reality.

“Let’s face it, our regional economic development model is under major disruption right now,” Arlington Economic Development Director Ryan Touhill said Tuesday morning at Bisnow’s Exploring Arlington County’s Next Chapter event.

Out of Arlington’s 39.2M SF of office space, 5.2M SF is leased to the General Services Administration, the federal government’s real estate arm, according to Avison Young. More than 25,000 federal employees work in Arlington.

Though the county is in for a disruption, it is also well positioned to adapt and come out on the other side, several local officials and real estate executives said at the event, held at the Hyatt Regency Crystal City.

“Short term, this is a very painful time for Arlington as it is for all of our region, but we are well equipped,” Arlington Chamber of Commerce President and CEO Kate Bates said.

The pain comes as Arlington already has a 26.7% office vacancy rate, according to CBRE’s first-quarter report.

“The structural problems that we had with office vacancy preexisted. Now they are exacerbated, because the federal government is exacerbating them,” Arlington County Board Chair Takis Karantonis said.

Among public and private sector leaders at the event, there was no question that the slashing of the federal workforce, office space and budget led by Elon Musk’s Department of Government Efficiency will have an impact on the county’s future.

But they said the county has been down this road before.

“I don’t want to seem Pollyanna about this, because 20% of our office space is GSA leased space, so that is a fairly large percentage of our base,” National Landing BID President and CEO Tracy Sayegh Gabriel said. “But I think in terms of making lemonade out of lemons, we have a great precedent just looking at the National Landing area alone.”

In the early 2000s, the county lost 20,000 federal jobs when the Department of Defense undertook its Base Realignment and Closure process, which relocated military offices from the county onto bases. Many of those jobs had been in Crystal City, where a swath of former federal offices became vacant.

In the years since BRAC, the county’s job base has diversified toward the technology sector. A peak milestone in that effort came when JBG Smith won the bid to build Amazon’s second headquarters within the Crystal City-Pentagon City area, which has been rebranded as National Landing.

That pivot is now seen as a net positive for the area that once faced an existential threat.

“Without that, we wouldn’t have had the space for Amazon, the transportation system wouldn’t have been able to absorb it. We wouldn’t have had the workforce here,” Bates said.

So far, only the first phase of HQ2 — the 2.1M SF Metropolitan Park site — has been completed. Amazon announced in 2023 that construction on the 3.2M SF PenPlace phase would be delayed, and shovels still haven’t hit the ground.

But even the first phase has brought economic activity and neighborhood amenities with it, including a 5K SF outdoor food pavilion with local vendors, a public park and an affordable housing fund from the tech giant.

“We took that crisis moment and made it not just about diversification but actually changing the physical environment so that we could be more competitive going forward,” Sayegh Gabriel said.

Another positive for the county is that many of its federal and private tenants are in the defense space, which is expected to take less of a funding hit than other federal sectors, JBG Smith Senior Vice President Andrea Murray said.

The county has a high concentration of defense tenants, federal and private, that want to be near the Pentagon.

“Not all agencies are being treated the same way,” Murray said. “Arlington and National Landing have a concentration of the type of worker on the federal side that’s a little less sensitive to some of these cuts.”

Murray acknowledged that the Trump administration has signaled it intends to cut 8% of military spending, but she noted the defense technology side is exempt from that and is “prioritized for growth.”

JBG Smith’s year-end regulatory filing said that the Department of Defense and defense contractors accounted for 81.9% of the leases it signed last year in National Landing — before Trump took office.

“Defense and national security remain a priority for the current administration, and we believe that there will be an increasing focus on technology’s role in those areas,” the filing said.

Regardless of how much space the GSA does end up cutting in the county, multiple panelists said it may be a net positive to see some of those buildings repurposed.

“When you look at the buildings that the GSA occupies, they’re terrible buildings,” Silverline Equities founder Anthony Chang said. He launched the firm last year hoping to take advantage of postpandemic office distress.

“They’re buildings that should be mothballed,” he said. “And it doesn’t matter that they go away in D.C. or in Virginia. They don’t matter.”

Karantonis said that in some cases, he’s “even grateful” for the chance to “liberate” office assets and convert them into something productive.

While it’s too early to tell what the ultimate impact of the federal cuts will be on office demand — Arlington recorded 10K SF of positive absorption in the first quarter, per CBRE — panelists said they haven’t seen a negative impact on the leasing scene.

“You have more leasing activity today, post-DOGE, than you did before the pandemic,” Chang said. “But the real kicker is there’s fewer buildings for that leasing activity to go into.”

See the original article on the Bisnow.com