One story that affects commercial real estate has drawn little attention in the business press – the federal government has shed millions of square feet of office space and warehouse space in recent years.
In a move to save money and maintenance costs, the Obama Administration embarked on its “Freeze the Footprint” policy. The Department of Defense (DoD) and other federal agencies were ordered to curtail leasing and aggressively cut back on office and cubicle space for federal workers and affiliated civilian agencies.
Meantime, the Feds have ended leases and announced plans to move federal workers into renovated or expanded buildings. Last year, the General Services Administration (GSA) announced that 19 federal buildings would absorb those workers who were stationed in other offices. These buildings, which will be renovated to take on the extra workers, include federal buildings in Los Angeles, San Diego, Fresno, Laguna Niguel and The Ronald Dellums Federal Building here in Oakland.
A Major Push to Scale Back Office Space, Warehouse Space
This policy has had a dramatic impact already. In 2014, according to one report, DoD and affiliated civilian agencies eliminated more than 7,000 buildings with office and warehouse space that totaled roughly 44 million square feet.
Federal agencies that control thousands of buildings and millions of square feet are also actively shrinking the size of individual offices by roughly 50 to 70 square feet per employee. These agencies include the massive Social Security Administration and the departments of Health and Human Service, Justice, Homeland Security, and Defense. Federal officials also reported that in fiscal 2013 and 2014, federal agencies reduced 21 million square feet of warehouse space. The Feds are also trying to eliminate data centers throughout the country.
The General Services Administration, which leases over 9,000 buildings across the US and the Office of Management and Budget are developing plans to consolidate even more buildings and dispose of real property over the next several years. In Washington DC, the Feds have already shed a sizable chunk of real estate. The GSA eliminated one million square feet in the DC area, and just under another one million more in northern Virginia. These initiatives have also presented opportunities as well. In DC, for example, the GSA has solicited input from private companies for plans to expand federal facilities in Washington to make room for workers.
The Potential to Freeze the Footprint in California
The GSA leases 746 buildings in California, according to its database. Several of these leases are up in 2016 and 2017. The federal agencies have also sought more favorable lease terms with building owners. During a Congressional hearing last year, a Social Security administrator told lawmakers that the agency had extended the lease terms for a building in Salinas, reducing the rent by $7.50 per square foot. He testified that the government would save $3 million over five years. It would seem plausible that when federal agencies renegotiate more leases in California, the Feds may seek better terms, dangling in front of landlords the possibility that they might pull out of the building altogether. It is hard to predict the moves of the federal government, however.
With this move to shrink its footprint, the federal government may also begin to unload its huge stock of empty or underused buildings. Some estimates have put that number at nearly 80,000 buildings. As one article noted, the federal government has tight guidelines on disposing of property, however. Private sector developers are the last in line to get a crack at purchasing federal property. That being said, it would seem that the Feds will take an accurate accounting of buildings that might potentially be disposed of in the states. There may be future opportunities to purchase land and buildings from the government.
The bottom line is that the federal government – a major owner of commercial real estate and customer in the leasing world – continues to pull back and has been aggressively consolidating space and plans to continue doing so. This caused ripple effects through office and warehouse markets across the country, including California. On the flip side, it could also create considerable opportunities for developers. This story is well worth watching as it continues to unfold.
If your company is negotiating a property deal with the federal government or another state or local government, you don’t have to go it alone. You can get a thorough analysis from a consultant whose community values align with your own. Contact DCG Real Estate today to learn more.