U.S. government shed 2 percent of its real estate space last year

In an annual report on the state of the federal real estate market, Jones Lang LaSalle (JLL) spots some trends having an impact on the greater Washington, D.C., metropolitan commercial real estate market.

A big one: Most federal leases executed in the last year were renewals, and federal agencies shed nearly 2 percent of their space. 

As federal agencies continue to adapt to the government's budgetary environment, federal real estate will enter a transitional period, JLL — a professional services and investment management firm— predicts in its Federal Perspective report.  It expects leasing decisions to focus on operational efficiency and long-term cost savings.

“The impact all these changes will have on the market remains to be seen,” Joe Brennan, managing director, JLL, said in a statement.  “Leases up for renewal may no longer favor the incumbent landlord, so it is imperative that ownership groups stay on top of what is happening with the federal government's leasing efforts.”

What is clear is that the General Services Administration (GSA) has started to trim overhead and reduce real estate expenditures. The square footage allotted to each government employee has fallen from 280 square feet per person to about 125 square feet per person, a statistic evident at the GSA's headquarters building, where 4,400 people now work from the same amount of space that used to house 2,500.

The effects of additional workspace efficiency trends — including open floor plans, shared workspaces and telecommuting — are evident from leasing decisions in the submarket of Ballston, where two agencies have announced plans to vacate a combined 1 million square feet and relocate to lower-cost areas, downsizing by 15.9 percent in the process.

Other federal market numbers:

•  1.86 percent – 2013 drop in metro D.C. GSA-leased office inventory,

•  12.5 percent – decline in metro D.C. net effective rents from peak levels,

•  11 percent – rise in U.S. net effective rents since 2010,

•  $1.7 billion – amount spent annually by GSA for properties deemed underutilized.

“The uncertainty in the market has impacted the decision making of all tenants and driven them away from long-term commitments,” said Brennan.  “The leases of tenants, both private and public sector, are on average about 22.5 percent shorter today than they were 10 years ago, as they want to maintain some flexibility.”

However, JLL points out that uncertainty plaguing lease renewals has not filtered down to the capital markets. The federal government comprises about 4.6 percent of all leased space nationwide. Since government agencies tend to remain in their space for more than 30 years, federal leasing acts as a stabilizing force for the nation's office market.

Overall, though, public sector demand for space in the greater Washington, D.C.,  area is restrained. In Northern Virginia, the continued shift of jobs to Fort Belvoir and parts of Springfield has produced churn throughout Fairfax County, but new lease awards were sparse.

The Base Realignment and Closure Act (BRAC) continues to exert a massive influence over the office market both inside the Beltway and in Northern Virginia, leading to the disposition of a combined total of 2.5 million square feet of space since 2005.

Going forward, the report says that bipartisan support for expense reduction and mandates to improve operational efficiency will drive federal real estate decisions in 2014. This includes replacing short-term extensions with longer-term leases for reduced space.

Federal real estate dispositions will likely grow, and the government will show an increased willingness to explore creative solutions, including public-private partnerships, to address budget shortfalls for agencies and relocations.