Real Estate Forum - April 2013

REAL ESTATE Washington, DC

Sequestration: Assessing the DC Impact

By Jennifer LeClaire and Erika Morphy

Sequestration has replaced “fiscal cliff” as the latest buzz- word—or perhaps the latest buzz kill—in Washington, DC. But the sequester will make a far greater impact on commercial real estate in Washington, DC than in other metros in the nation. Or will it?

No other US region depends more heavily on federal government spending than Washington. Federal government spending is to DC like auto manufacturing was to Detroit—and the auto industry’s demise has made near-devastating impacts on the Motor City. The budget cuts that follow the sequester will no doubt spur job losses—or at least stymie job growth—in the DC area.

Consider the facts: According to the George Mason University’s Center for Regional Analysis, the sequester that went into effect on March 1 has the objective of reducing federal spending during 2013 by $85.4 billion from the baseline established by federal spending levels during 2012. DC is expected to lose more than 92,000 jobs. Maryland is set to lose nearly 85,000.

THE BIGGEST LOSERS

How does this trickle down to the commercial real estate industry? In a dramatic way, according to a report from the Associated General Contractors of America. “Sequestration and Its Possible Impacts on Construction” reveals that the cuts could mean a $4-bil- lion-plus reduction this year in federal construction spending.

“Sequestration could have a significant impact on a wide range
of necessary and worthwhile construction funding accounts,” the
AGCA reports. “From an investment perspective, the American
people would be the biggest losers in the sequestration process.
Federal facility and infrastructure needs are obvious, and the value
construction investment brings to all citizens is well-documented.”
The projects span the spectrum of government agencies, accord-
ing to AGCA, from military housing ($1.5 billion) to a $135-million
reduction in drinking water and wastewater facilities and infra-
structure investment. Affordable housing will take a hit as well, due
to cuts scheduled for the Department of Housing & Urban
Development. HUD will lose $194 million, or 5.9%, of its
Community Development Fund; $57 million ( 5.7%) from its
Home Investment Partnerships Program and $107 million ( 5.8%)
from its Public Housing Capital Fund. The Community
Development Fund in particular will hurt affordable housing; it
provides assistance for low-income community revitalization initia-
tives by funding the Community Development Block Grant pro-
gram, which provides annual grants on a formula basis to cities,
urban counties and states.

BUT COULD DC REAL ESTATE BE IMMUNE?

The good news, relatively speaking, is that the DC area may have suffered the worst of it already. For starters, the federal government has been rightsizing for years.

Jones Lang LaSalle’s Joe Brennan says the Obama Administration has released memos directing federal agencies to cut real estate costs by at least 20% and freeze space portfolio expansion. Likewise, he continues, congressional appropriators have reviewed large space requirements that require congressional approval, forcing agencies to work with higher space utilization rates in their procurements.

Also, the region has been buffeted significantly by the uncertainty coming out of Washington, DC. To finally get some idea of what will happen—even if it is across-the-board cuts—will, in a way, be a relief. “A lot of the real damage to the commercial real estate market has been done already with the scare tactics,” Brennan says.

The same can’t be said about the local economy, which will clearly feel the pain of federal employees furloughed a day or more every pay period, or however the cuts come down. “That is something federal government workers are bracing for and it will have a ripple affect throughout the economy,” Brennan says.