As the seat of the Federal Government, it is no surprise that the Washington, DC metropolitan region (DC Metro) is disproportionately affected by the huge contribution the government makes to the office market as well as the region’s broader economy. The General Services Administration (GSA) currently leases 56.5 million square feet (msf) in the DC metro, about 16% of the market’s inventory. Nearly 30% of the GSA’s leased footprint across the country is in the DC Metro Region. It should also not be a surprise that when federal spending and employment declines, uncertainty in the region takes hold and its byproducts – the higher vacancy and decreased net absorption in the office sector that we have seen over the past three years – can be pronounced. However, there have been some recent signs that the worst part of the fiscal drag, caused by the austere budgetary environment and federal dysfunction, may soon be behind us. As the end of 2014 approached, federal employment made a turn to the positive, chalking up five straight months of federal government job gains. We expect this trend to continue as there are 1,100 federal government job openings in the DC region. Furthermore, the CR- omnibus spending package that was approved in late 2014 and funds government operations for fiscal year 2015 includes spending increases for many DC metro region demand drivers including the Pentagon, National Institutes of Health and others. We expect the increased budget authority for these agencies to bolster federal spending in the DC Metro by 4.4% - the first increase since 2011.
That’s not to say that all is great. At least one-third of all federal leases signed in the past two years have been short-term deals. Moreover, the federal government is still struggling to achieve aggressive mandates requiring new leases to have the efficiency and proximity to amenities and transit offered by new construction while still being below prospectus rent caps - $50 for the District of Columbia, $39 for Northern Virginia and $35 for Maryland. With over half of the GSA’s DC Metro leased portfolio expiring in the next five years, owners that can deliver a building that meets these mandates should be successful. While the new leases will be anywhere from 20-50% smaller as they transact, increased activity and less dysfunction should boost confidence in the region.
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By: Nathan Edwards
Director of Research, DTZ - Washington, D.C.
Email Nathan: Nathan.Edwards@dtz.com
Follow DTZ on Twitter: @DTZ