The Fed's Footprint Is Critical to Understanding Office's Potential Danger
Even the giant of federal office leasing wants to pare back on $5.8 billion in annual spending.
The federal government is a huge user of leased office space, with 179.3 million square feet in rentable square footage, according to the most recently available from the General Services Administration. That could be a sleeper issue for office property owners.
“Government buildings historically have been known to have stable property cash flow, as these government tenants don’t move office locations frequently and often just renew their existing leases,” noted Trepp. That is no longer a given. “However, with remote and hybrid work becoming a common option for private businesses and federal agencies alike, office occupancy in D.C. dropped 1.2 million square feet in 2022 and saw an overall 79.5% occupancy.”
The shift isn’t contained in the greater D.C. area. A General Accounting Office report in September 2022 indicated that most agencies are planning significant cutbacks in the amount of space they use. And none of this counts state and local government use of leased office space. The warning flag should be how much of the space is in actual use.
“To illustrate the low occupancy rates for properties that have federal, state, and municipal governments as tenants, the Trepp team mapped government CMBS exposure and occupancy rates across geography,” the firm wrote of the 20 metropolitan statistical areas showing the largest loan balances for properties with any exposure to government leasing. “The data displays the weighted average occupancy for each MSA, and what percentage of those properties had occupancy rates of less than 60%, as well as occupancy rates between 60% and 80%.”
The MSAs ranged in overall weighted average occupancy from 62% in Boston-Cambridge-Newton, MA-NH to 92% in San Diego-Carlsbad, CA. The federal government exposure specifically ran from 1.76% in San Francisco-Oakland-Hayward, CA to 49.65% in Washington-Arlington-Alexandria, DC-VA-MD-WV.
The D.C. centered space is understandable. But the next three highest are in Riverside-San Bernardino-Ontario, CA (29.94%); Minneapolis-St. Paul-Bloomington, MN-WI (22.12%); and Denver-Aurora-Lakewood, CO (20.61%).
“There are a total of 1,365 government-occupied properties across 837 loans, giving a total outstanding loan balance of $25.9 billion,” Trepp wrote. “The majority of these loans with exposure to one or more government tenants are backed by office or mixed-use properties (87.5%). If the federal government finds new ways to enhance hybrid or remote work and their need for office space decreases, the occupancy on these properties could continue to decline, where the MSAs that show already-low occupancies could face greater challenges.”
There are elected officials pushing to have federal agencies bring employees back into the office. But at a current total annual rent of $5.8 billion, there is also a lot of pressure to look good by trimming costs.