Washington DC Office Market Facing Age of Austerity?

Thanks again to the collapse of financial market in 2008, Federal Government poised to be primary driver behind Nation’s Capitol office market recovery in 2010.

The U.S. government is poised to be a primary driver of the nation’s capitol office market recovery in 2010. Beyond this year, though, the outlook isn’t so certain.

For starters, federal demand in 2010 is expected to be even stronger than last year, but then is expected to mitigate after mid-term elections and likely move into an austerity period starting in mid-2011.

In addition, the federal government is dealing with an “assets crisis” as it struggles to maintain its real estate amid its dwindling Federal Building Fund, an intra-governmental fund into which agencies pay rent to GSA for the space they occupy.

According to annual research by Jones Lang LaSalle’s Research and Government Investor Services experts, multiple large government space requirements – more than 4 million square feet. – have hit markets across the United States as federal staffing related to financial regulation and restructuring needs ramped up and agencies received additional funding to execute new or expanded mandates.

Not surprisingly, the majority of that growth will be concentrated in the Washington DC region – equating to upwards of 5 million square feet of net new absorption. This is a significant concentration of absorption given net private and public demand across the United States (not including Washington DC) combined does not equal 5 million square feet.

The Jones Lang LaSalle report further illustrates that the government’s response to commercial real estate itself should emerge in 2010 as a considerable new initiative.

In turn, regulatory agencies will assume expanded authorities, and their pressing mandates will make them among the fastest growing segments of the office market in 2010. Brennan added that much of this new demand will center on the DC metro market.

In the same week Jones Lang LaSalle’s analysis was released, the House Subcommittee on Economic Development, Public Buildings and Emergency Management of the Committee on Transportation and Infrastructure chaired by Eleanor Holmes Norton (Democrat DC) was holding hearings focusing on the financial viability of the Federal Building Fund (FBF) and whether the GSA is using its existing authorities to maintain its capital assets. Congress exercises control over the FBF through the annual appropriations process by setting limits on how much of the fund can be expended for various activities.

The funding set-up has tied the GSA’s hands for years, according to the subcommittee. In January 2003, the Government Accountability Office (GAO) designated federal real property an area of high risk, in part because of deteriorating facilities and an overreliance on “costly leasing.”

At those hearings this past week, the GSA publicly expressed concern about the ability of FBF to generate sufficient revenue to cover the repair costs of the current federally owned inventory.

Further, because the FBF has generated limited funding to finance construction of new Federal buildings, GSA has been forced to rely increasingly upon leases to meet the space growth needs of its federal tenants. Leased space now makes up more of the government’s inventory than owned space. In most circumstances, the use of long-term leases to satisfy the need for federal office space is not the best use of appropriated funds, because such leases are typically more expensive than federal construction.

The current guidelines for the budgetary treatment of leases require the full cost of a capital lease or lease-purchase to be scored up-front, whereas in the case of operating leases, only the first year’s annual rent and the value of any cancelation provision is scored up-front. This scoring rule has had the unintended effect of forcing GSA into the use of long-term operating leases, which generally contain no ownership option, to meet federal office space requirements.

Source: CoStar Group