The Government Budget And Its Effect On Commercial Real Estate

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A Q&A with Chris Roth

In June 2010, President Obama sent a memo that proposed $8 billion in real estate cuts for the federal government by the end of 2012, to be overseen by the General Services Administration (GSA) and the Office of Management and Budget (OMB). At the time, there was wide speculation on how this might affect the commercial real estate industry. So a year on and a year closer to the proposed deadline, REBusinessOnline (REBO) checked in with Chris Roth, managing director at Jones Lang LaSalle and the national manager for the firm’s contracts for GSA tenant representation services for federal agencies that work through the GSA for their real estate needs.

REBO: What is the current state of President Obama’s proposal to cut the federal government’s real estate spend?

Roth: With so much going on with the debt ceiling, and everyone is wondering what part of the Civilian Property Realignment Act [CPRA, a bill proposed by Rep. Jeff Denham (R-CA)] is going to play, not much has happened yet. Something is definitely going to happen, but we’re not certain of the extent of it.

REBO: What is your perspective on the market for federal space, and where do you see activity when cuts do occur?

Roth: In terms of what the impact may be down the road, I’d anticipate a lot of smaller leases — GSA’s average lease size is 7,500 square feet. Nationally, I see a lot of very small deals all the time, and that’s a vast majority of it. The press tends to focus on the big assets in D.C., and that makes the most sense because they have almost 100 million square feet in D.C., but they also occupy 280 million square feet across the rest of the country.

With that said, I think it’s likely there will be a realignment and probably consolidation of agencies with a lot of field offices. Take for example Denver Federal Center, where you see 20 or so leases around an owned asset, and if an owned asset is only 70 percent occupied, when those come up for lease, the GSA is going to focus on getting those outside leases into the owned asset.

In terms of large leases, there still could be moves like that into federal space, but I think those leases will just be scrutinized a lot more in general.

REBO: How will this activity affect owners where the federal government is leasing?

Roth: I would expect is there are going to be a lot more renewals, but coming along with contracting of space. Where you might have had 140,000 square feet, you’ll see that brought down to 110,000.

REBO: How does the GSA analyze its budget, and how will that affect real estate considerations?

Roth: The GSA does a lot of cost/benefit on moving against staying in place, and in some cases, it’s going to take a lot to move, and that’s why I think we’ll see more renewed leases and federal agencies staying in place. I believe the GSA’s budget is proposed as significantly less than what they have this year. The other driver will be what happens out of CPRA, especially if the CPRA has a mandate for space reductions in terms of percentage or square footage per person or employee, something that really legislates cost savings. That could be very powerful across agencies.

REBO: What agencies are currently expanding and seeking development opportunities? Which are contracting their services?

Roth: There is very little if any expansion, but as far as contraction, we are seeing some agencies that are coming out with reducing square footage requirements for leasing, which I can’t name. It makes a lot of sense when you look closer, and what you are seeing there is these agencies looking at utilization rates for work space, and they don’t want to be signing news leases that will be low utilization. If they are getting ready to lease, they want to be sure that if it’s looked back on in 2020 they were aggressive in the utilization of space.

REBO: Where are there opportunities to acquire federal properties? What are the challenges in purchasing from the government? What advantages can these deals provide potential investors?

Roth: I would say it’s highly likely GSA will enhance their disposition program, and they’ve already begun to identify some areas and buildings where changes will occur in their own portfolio. If you’re looking in D.C., the occupancy will be too high, whereas in Kansas City or Philadelphia or Baltimore or Chicago, I think they’ll find some efficiencies in those markets, and if they consolidate, they are going to be able to dispose of those assets. There is a lot of land value that is tied into GSA’s assets and other locations. I do think there will be opportunities for the private sector to acquire, and they will be the result of realignments that occur over the next two years.

REBO: What impact will this have on the commercial real estate market in general?

Roth: If GSA has less to money to spend itself and less money to lease assets and less money to operate and manage assets, it’s getting hit in all directions. Change will occur. If you’re on the leasing side you position to advise them as best you can, and if you’re on the owner side, you say they may renew, but for less space, and how do you hang on? If you’re an investor, you’re concerned about renewals and contraction.

Especially in D.C., it will have an impact, but if you look across the country there’s a lot that can be realigned. Secondary and tertiary markets could be affected as well.

REBO: What’s the timeline on what we can expect something to happen?

Roth: Just a year ago, President Obama was saying we are going to focus on this, and here’s a goal and to cut real estate costs so it was in the forefront. I think the difference now is that people are seeing this in the context of overall budget cuts.

Everyone is focused on debt ceiling right now, and as soon as that is resolved — let’s hope it’s resolved — I think you’ll see this focus on real estate become front and center. Whatever form legislation takes, there will be mandates to increase consistency and monetize underutilized properties.

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