The Incredible Shrinking Government

Wednesday’s Wall Street Journal ran a story about the downsizing of government agencies and its effect on office occupancy. In public-sector boomtown Washington, DC, for example, the Securities and Exchange Commission recently shrank its requirement for new space to about 300,000 square feet from a planned 900,000 square feet after funding to hire more employees fell through. “We’re starting to see the impact of a very, very difficult fiscal situation in the government trickling down to decisions being made for leasing,” Don Miller, CEO of Piedmont Office Realty Trust, told the newspaper.

Two-hundred-and-twenty-five miles to the north, the Metropolitan Transportation Authority, which runs New York City’s subways and buses as well as the Metro-North and Long Island Rail Road commuter lines, may sell or lease some of the 2.6 million square feet of office space it owns or occupies. The transit agency has issued an RFP for real estate firms to advise it.

One reason is that a good deal of the space is now vacant after cuts in administrative staff. Another is that the MTA’s office space is scattered across 30 buildings citywide and in White Plains, NY. Efficient, it’s not.

Another public entity also has acknowledged space-efficiency issues and also is looking to do something about it. The Bloomberg administration began last year to trim 1.2 million square feet of New York City government’s 19-million-square-foot occupancy by 2014; it’s already about one-third of the way toward achieving its goal. A 2009 study found that the city was paying $13 million per year in rent for empty desks, and that was before further layoffs.

Situations like these might represent opportunities along with headaches for the commercial sector. Were the MTA to sell its headquarters building, for instance, air rights near Grand Central Terminal would accrue to the buyer. In Lower Manhattan, changes in the occupancy plans of state and federal agencies at 1 World Trade Center could mean more space to be leased at higher rates. For the owners of city-leased space, though, the Bloomberg administration’s consolidation program may just mean vacancies to fill.

Keep in mind that we’re talking about the two most stellar office markets in the country, the ones that stand apart even from other top-tier gateway cities. If New York and DC are feeling the public-sector pinch, then imagine the potential impact of shrinking government on any other market. JPMorgan Chase recently issued a note to clients advising them to keep an eye on REITs with significant government exposure, “as renewals may not be the lay-ups they once were.”

Regardless of how you feel about the role and size of government, the question remains: Amid a slow recovery, how do you backfill space given up by the public sector?