Shrinking federal leases leave Washington landlords in a bind

Washington real estate executives, accustomed to seeing federal lease requests receive timely approval from Congress, watched aghast for months as House Republicans pored over a set of 15 local lease proposals in search of places to cut requirements and save money.

By the time 10 of the requests were approved on March 8, some had been waiting more than a year and most had been trimmed considerably. A request for 231,000 square feet for the National Park service was cut to 158,000 square feet. A Department of Veterans Affairs lease was cut from 192,000 to 181,000 square feet. A Federal Communications Commission lease was cut from 79,000 to 64,745.

While members of Congress were wielding their red pens, paralysis trickled through the industry and the outlook for Washington landlords and leasing agencies soured considerably. A new reality seemed to take hold, one in which it was difficult to predict when a federal lease might get approved and what it might look like once a politically polarized Congress was through with it.

“It’s absolutely a major issue because you’ve got a backlog of leases that are pending,” said Tom Birnbach, managing principal at Cresa, a services firm that represents Washington office tenants. Birnbach said it was difficult to predict when space might open up because of a string of decisions stalled by a wait for federal lease decisions. “I have no idea what’s going to happen with it and I think most people don’t,” he said.

House Republicans, led by Rep. Jeff Denham (R-Calif.), said the changes would save taxpayer dollars from being used on unneeded space. The deals should save the government $15.6 million annually and $239.5 million over the full terms of the deals compared with what the GSA initially requested. “Business as usual is over, and this committee will be shrinking the size of federal real estate holdings unless there is a clear and well-documented justification for growth,” Denham said in a statement after the lease prospectuses passed.

Art Turowski, a former GSA official now with Jones Lang LaSalle, said the delays caused one wave of concern and the cuts another. “More surprising than them approving the local prospectuses was what they approved,” Turowski said. “You could look at each one of the leases and see significant space reductions.”

The difficulty of lease approvals could mean rough going for property owners with available or soon-to-be available space. Jones Lang LaSalle has been marketing Victory Center, a 600,000-square foot building in Alexandria, to federal tenants for years with no takers. Vornado/Charles E. Smith reported an 89 percent occupancy rate for its Washington area properties in the fourth quarter of 2011, down from 94 percent a year previously. The government’s base realignment and closure process has hit the company’s Crystal City holdings hard and the departure of the Defense Information Systems Agency left its 403,000-square-foot Skyline 7 building in Bailey’s Crossroads completely empty.

The new federal leasing landscape has analysts considering which parts of the region are most reliant on the GSA for office use. Hans Nordby, managing director at the CoStar Group, found that the District has 23.4 million square feet of GSA-leased space, more than Arlington County (10.4 million), Montgomery County (6.4), Alexandria City (4.4) or Fairfax County (4.3). But some of the area’s strongest neighborhoods have the largest exposure, with Capitol Hill, Ballston and Rosslyn all relying on the GSA to lease more than 15 percent of their inventory. In Crystal City, Southwest D.C. and the “Capitol Riverfront” neighborhoods, the percentage is over 30.

“Like my farmer father used to say, ‘You can work a good horse to death,’” Nordby said.

Cresa’s Birnbach said his clients, many of which are government contractors, are in a holding position while they watch the government. Those with leases expiring are requesting three-, two- or even one-year extensions rather than typical five- or 10-year deals.

“A few years ago landlords might not have been agreeable to it, but the way things are looking out there to them now, they are okay with it,” he said.

Jonathan O'Connell has covered land use and development in the Washington area for more than five years.
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