New solicitations for real estate from the General Services Administration come with a big asterisk: “Funding subject to availability of funds at the time of award.”
Increasing pressure from the White House and Republican-controlled House to cut real estate expenses is putting many GSA projects in limbo, threatening to delay or outright cancel many major local projects. The potential cuts could have a ripple effect throughout the local commercial real estate industry, from landlords and architects to office furniture suppliers.
The recent budget compromise cut the GSA’s fiscal 2011 budget by $1 billion from the previous year, providing just $82 million for construction projects nationwide. The GSA says it will soon say where those cuts will come from.
In a region that has been home to more than $1 billion in real estate stimulus projects since 2009 and saw 3.57 million square feet of net new federal leases signed in 2010 — investments that helped deflect a more painful commercial real estate bust in the region — a slowdown in federal real estate spending was inevitable. But that doesn’t make the belt-tightening any more pleasant. And some consider the uncertainty even worse than the potential cutbacks, with both leasing and financing up in the air.
“On a macro basis, it’s a good thing,” said Joe Brennan, head of government investor services for Jones Lang LaSalle Inc., a real estate company. “On a micro basis, though, the ability to get deals done and the way they’re getting done is excruciating for everyone. Bank of America doesn’t care that a deal’s up in the air, you have to pay your mortgage.”
The cutbacks shut out designated funding for the Food and Drug Administration’s White Oak office consolidation, eliciting protests from Maryland lawmakers. And the GSA put a 1.13 million-square-foot requirement for the Department of Homeland Security office consolidation on hold for 90 days, raising the question of whether it might be tabled.
GSA’s DHS announcement came two months after President Barack Obama delayed the Federal Emergency Management Agency’s planned St. Elizabeths headquarters for at least a year. The most recent post on FedBizOpps for a 182,000-square-foot DHS operations center at St. Elizabeths started with an all-caps notice at the top that funding was subject to availability.
DHS said only that budget cuts would affect the schedule of its long-planned headquarters consolidation and that the department “cannot accept cuts to frontline law enforcement or direct security operations.”
That’s little comfort for the seven or so building projects in the running to host DHS’s office consolidation. Brokers estimate those property owners have spent anywhere between $5,000 and $200,000 apiece on their respective plans. A team’s spending varies depending on several factors, such as whether or not architects and contractors are working speculatively, if staff salaries are factored in and how much new planning the owners had to do to enter the competition.
Peter Marcin, executive director of Cushman & Wakefield Inc.’s federal practice group, said requirements that call for new construction would likely be the first to be put on hold.
“On budget lines, it’s a shell game,” Marcin said. “If you look at it like a corporation, the reason corporations lease is because of the upfront cost of ownership. If you look at the country as a corporation, it’s not a time to construct — it’s not a time of surplus, it’s a time to be creative.”
That creativity could include fewer total agency consolidations or an expanded scope for a procurement to include new locations that are still Metro-accessible but come with lower rents.
“I think you’re going to see a conversation, for example, that says, ‘Do you really need to be only in the Rosslyn-Ballston corridor, or could you be somewhere else?’” Brennan said.
The Republican leadership of the House subcommittee charged with approving large real estate deals has requested data on federal leasing from the GSA as it and the Obama administration work to implement the proposed Civilian Property Realignment Act, an effort to save $15 billion on real estate over the next three years. (See related story, Page 25.)
Rep. Jeff Denham, R-Calif., plans increased oversight this summer as the subcommittee reviews large federal lease requirements, known as prospectuses, from the GSA.
“Rep. Denham feels we need to spend less money to house federal employees,” his office said in a statement “That means we need to put more people in less space and we need less expensive space. He is questioning every aspect of the requests to find ways to cut costs. Bottom line, we have to increase utilization rates and Rep. Denham wants agencies to realize that this is not business as usual anymore and they don’t need as much space as they ask for.”
Real estate experts say decisions on the ongoing National Science Foundation’s and Federal Trade Commission’s lease requirements will be telling — they will shed light on whether the GSA and Congress will actually put pressure on agencies to compromise, perhaps at the expense of full-fledged consolidations or prime locations. Those prospectuses are expected to come up for approval this summer.
“We spent last year chasing deal after deal after deal and now we, as a group, have a chance to step back and look at where things are headed,” Marcin said. “I think there’s a momentary speed bump while everyone steps back and says, ‘Hold on a second.’”