Industry Seeks Guidance on Federal Space Cuts

WASHINGTON, DC—It's no secret that the federal government is clamping down on the space its agencies use. A recent memo from Jeffrey Zients, acting director of the Office of Management and Budget, to the heads of the executive branch agencies, reiterates that view. According to the May 11 memorandum, an expansion to new federal building space that increases an agency's total square footage of civilian property must be offset through consolidation, co-location or disposal of space from that agency's inventory.

The message from the Obama Administration, Congress and others in Washington is clear about the government's use of real estate, says Joseph Brennan, managing director at Jones Lang LaSalle's office here. "They're saying they need to practice austerity and be skilled and aggressive in the disposal. And they're completely right."

The problem is that without more guidance, it is difficult for the agencies to know how to proceed, he says. "Should they eliminate programs? Fire employees? Reconfigure space?" Brennan asks. "If it's the latter, where will the capital come from to invest in that configuration?" For the government to reap the benefits of a streamlined real estate footprint, he suggests, "It has to suggest ways and provide the means of implementing this goal."

From a practical perspective, this lack of guidance is keeping local deals from closing. Brennan points to an active lease on the market, the Centers for Disease Control and Prevention. Located in Rockville, MD and occupying 180,000 square feet, the agency has struggled with reducing that square footage to 110,000 square feet

The policy proposal comes at a time when local office vacancy rates are rising. While employment figures nearly doubled in the DC metro area in 2011, Paula Munger, director of research at Cushman & Wakefield, says vacancies will continue to increase over the course of the next year by at least 1%, to reach approximately 13%. "The good news is that by the end of 2013, that robust job market will have kicked in, finally leading to more office leasing activity," she says. "The market will be back to normal next year," she adds, referring to DC's traditional pattern of positive absorption. Already, "we're seeing some growth in the legal-services industry, particularly among smaller firms."

Others, like Doug Donatelli, CEO of First Potomac, are similarly optimistic. "Overall, the market is slower than it has been in previous years," he says. "And certainly there is a fair amount of concern about the direction of the DC economy—especially because of the potential cutbacks in federal government spending in the defense industry. That said, we don't have an enormous number of government-related leases we're worried about."