Real Estate Forum - January 2013

NEWS FRONT
Will DC Miss Out on the Healing?

WASHINGTON, DC—The mood at Prudential
Financial’s fifth annual Global Economic
and Retirement Outlook briefing was one
of moderate optimism for commercial real
estate this year. “The macro environment is
a little more stable than this time last year,”
said Edward F. Keon, managing director
and portfolio manager of Quantitative
Management Associates. “A European col-
lapse is a little less likely, and in the US,
there’s a little less uncertainty.”
In short, he said, “the healing process is
underway.”
Keon acknowledged that Washington—
official Washington, that is—could throw a
wrench into the recovery pace. But for the
most part he and other participants seemed
confident that it wouldn’t happen, or would
have a short-term impact if it did.

During the Great Recession, DC’s CRE markets were relatively insulated from the economy, protected by the government’s largeness. Today, it feels as though the real estate community is insulated from the (now recovering) economy, and at the mercy of the government’s largeness, or lack thereof.

Simply put, the longer Congress and the White House take to reach some kind of accord, the harder it will be on the market. Based on the current posturing among politicos, the soonest we’ll get some certainty about the government’s direction is spring, when—presumably—the debt ceiling will be resolved, the sequestration cuts negotiated and another short-term resolution is passed to continue funding the government.

There is plenty of evidence, quantitative and anecdotal, that Washington’s CRE markets are struggling even before these potential landmines are negotiated.

In the Association of Foreign Investors in Real Estate’s annual survey of global cities in which foreign real estate investors say they will invest, Washington, DC was not in one of the top two positions as it usually is. Why? Well, see above.

The DC area posted its worst year on record in 2012 in terms of absorption. Jones Lang LaSalle reports 3. 3 million square feet of negative absorption last year.

In a recent report, Cassidy Turley’s Garrick Brown said if the sequestration cuts were to go through, government expenditures for contractors would be reduced by

9% in 2013, turning the contracting world
on its head, possibly resulting in 18. 7 mil-
lion square feet of unused space. The
Greater Washington, DC area, where fed-
eral spending accounts for 42% of the
area’s gross metro product, makes it the
market most exposed to the proposed
sequestration cuts.—Erika Morphy

GSA Awards Down, But Better Days Ahead

For an industry dependent upon clear political direction, federally leased real estate faces a challenging road ahead 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 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. 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. But 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.

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.

(A longer version of this column originally appeared on GlobeSt.com.)

By Joseph Brennan

Joseph Brennan is the managing director of the Washington, DC office of Jones Lang LaSalle Americas Inc. He may be contacted at joseph.brennan@am.jll.com. The views in this article are the author’s own.