[IMGCAP(1)]

For an industry dependent upon clear political direction, federally leased real estate faces a challenging future, as policymakers and government leaders map the future of agency budgets and space planning for the years ahead.

Lease awards by the General Services Administration (GSA) in fiscal year 2012 fell significantly year-over-year as handcuffed government decision-makers and agencies dealt with increased GSA scrutiny, gridlock in Congress and bipartisan support for reining in federal real estate expenditures.

Without clarity on agency budgets–or adequate funding to implement moves, consolidations and restacks–federal tenants were forced to delay space decisions or execute short-term renewals to ride out the uncertainty.

With the campaign season now over, and a wave of pending GSA lease expirations approaching, officials will be forced to address the government's precarious commercial real estate situation with a greater sense of urgency. Inaction over the past 12 months resulted in a significant increase in the number of federal leases in holdover. With 44.6 million square feet of GSA leases rolling through year-end 2013, it has become clear that federal officials must reach a compromise and stop deferring space decisions. Although uncertainty related to future spending priorities and agency budgets will likely continue to present headwinds to the market until a long-term federal budget is passed, sequestration and the rapidly approaching debt ceiling will force lawmakers to address and resolve lingering federal real estate decisions in 2013.

The dramatic swings experienced in the initial expansion, and subsequent pullback, of federal leasing activity during the first four years of President Obama's tenure will likely moderate over his second term, as deal flow returns to normalized levels. Recent trends in federal leasing activity appear to indicate that pent-up demand is accumulating and more action will occur in 2013. Although the volume of signed leases should experience a reversion to the mean, the rate of growth in the federal government's overall footprint is expected to remain flat or trend downward. Executive orders limiting the size of transactions; new mandates requiring offsets of new leases with consolidations or disposals; and stipulations on increased utilization rates suggest that the days of federal real estate expansion are over–at least temporarily.

Despite the tempered outlook for the near term, the federal government remains a large and stable segment of the nation's office market. Comprising approximately 4.6% of all leased space nationwide, the GSA exerts a sizable influence over the country's tenant footprint. The tendency of government agencies to remain in their space for over 30 years also functions as a stabilizing force for office markets across the country.

As lawmakers establish a clear and decisive strategy in the years ahead to address the nation's broader fiscal situation, federal agencies should once again receive the clarity they need to make long-term space decisions. Ultimately, regardless of the direction that federal spending patterns take, the federal government will resume leasing activity and remain a vital segment of the US office market, ensuring the strength and stability of a key segment of the country's tenant base.

Compromise and consensus will be essential to moving forward in addressing federal real estate challenges and establishing solutions for the future.

Federal real estate—by the numbers:

• 171,396,917 square feet: GSA-leased office space nationwide
• 97%: GSA renewal probability in FY 2010
• 94%: GSA renewal probability in FY 2011
• 4.6%: approximate share of U.S. office space occupied by GSA
• 44,610,609 square feet: GSA leases expiring through year-end 2013

See graph below:

[IMGCAP(2)]

Joseph Brennan is the managing director of the Washington, DC office of Jones Lang LaSalle Americas Inc. He can be reached at [email protected]. The views in this article are the author's own.