Federal Leasing Has to Navigate Recent Government Gridlock
The government shutdown impacted local economies and real estate dynamics in many U.S. markets, but none moreso than the Washington, D.C., region. With anywhere from a quarter to over a third of metro D.C.’s privately owned office leasing tied to the federal government, the inability of the federal government to engage in long-term real estate planning has serious implications for the office sector.
Non-federal tenants in the region are impacted as well in that a significant portion of the region’s occupiers are reliant, at least in part, on government contracts and spending. In fiscal 2012 alone, more than $72.6 billion of federal contracting dollars were procured in Washington, D.C., and its suburbs. Possible repercussions in the contracting arena from the shutdown and continued budgetary uncertainty from the federal sector could include contract cancellations, delays in payments and scope reductions.
With ongoing questions about government funding and spending, these companies, like the government itself, cannot plan for the future and make decisions in areas that affect their businesses such as staffing, office and facility needs and support infrastructure.
The inevitable uncertainty due to the current stop-gap fiscal environment creates questions about where funding for fit out, technology and equipment will come from and leads to interesting new trends in the federal sphere. Indeed, the way that Congress and the White House are handling the nation’s budgetary and debt issues eerily parallels the short-term approach the feds are using to make many real estate decisions.
Feds’ Moves Thus Far
Leases executed to house the Nuclear Regulatory Commission and the Securities and Exchange Commission were oversized and took on more space than these agencies required. The fallout of these leases resulted in intense scrutiny from Congress and government watchdogs. These lease deals demonstrate the difficulty in anticipating the changing political and budgetary climate and result in the unnecessary expenditure of government resources. This runs counter to the government’s stated goal of reducing real estate costs.
On a limited basis, the federal government has accepted concessions from landlords to fund relocation costs, furniture, fixtures and equipment. This was evident in a couple of recently signed leases, including the high-profile planned move by the National Science Foundation from Arlington’s Ballston submarket to Alexandria in 2017. Without these funds, one-time, unbudgeted moving costs would render an agency unable to fund basic relocation and build-out costs, possibly for an extended period of time.
The federal government is hyper-focused on the utilization of its office space, seeking to push utilization rates as low as 118 square feet per worker in some cases. Workplace advances such as telecommuting, hoteling and work benching are helping the federal government achieve the aggressive utilization rates and subsequent cost savings, but questions regarding productivity and mission success remain. The long-term effects of radical downsizing are unknown, but with some federal employees able to telecommute up to eight work days out of 10, it will be interesting to see how agency missions are being fulfilled.
In the future, look for continued consolidations and a renewed push to move federal agencies out of privately owned space and into federally owned buildings. This will have a negative effect on certain submarkets, as smaller, less efficient buildings are abandoned for colocations in larger, newer buildings. The federal government is attempting to utilize older federal buildings at higher levels as well, but tighter budgets and limited funding for needed renovations and ongoing maintenance may keep the feds largely in privately owned buildings.
We can look to recent real estate activity by the National Science Foundation, National Cancer Institute, National Institute of Allergies and Infectious Diseases, Fish and Wildlife Service and Department of Justice, among others, as the new lease prototype. The GSA and tenant agencies conducted the appropriate planning to achieve a successful transaction for both the agency mission and for the public.
All feature some, if not all of the following aspects:
• a relocation from more costly core markets to emerging, value-oriented markets and proximity to mass transit
• the consolidation of multiple leases and locations into a single larger facility with denser footprints
• leveraging existing and future potential for amenities to be provided by private sector establishments and reducing the cost associated with government-provided amenity spaces
Opportunities for Growth
Will government growth return? Trends in national intelligence, healthcare and cyber security are already driving growth in some areas of the federal government. These areas offer the potential to offset declines in other areas of federal spending. Examples of major leases and development related to the intelligence community are rife in the metro area, and leases by agencies’ affiliated contractors are sure to follow. With the huge expansion of the healthcare industry due to the Affordable Care Act, traditional defense contractors Lockheed Martin, General Dynamics, Harris Corp. and Mantech have acquired healthcare-focused firms to facilitate expansion into the healthcare IT sphere. Finally, many companies that are expanding into cyber security, such as Northrop Grumman, Booz Allen Hamilton and SAIC, already have a large presence in the D.C. region and are poised for growth in the field.
— Darien LeBlanc, vice chairman, and Nathan Edwards, director of research, Cassidy Turley