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News release

WASHINGTON, D.C.

Downsizing Dominates Federal Market As Leased Inventory Decreases

Jones Lang LaSalle annual Federal Perspective report shows 82% of federal lease activity last year was renewals and extensions


WASHINGTON, Dec. 4, 2013 -- As federal agencies adapt to the government's budgetary environment, federal real estate will enter a transitional period, with leasing decisions emphasizing operational efficiency and long-term cost savings, according to the annual Federal Perspective report released today by Jones Lang LaSalle.

The report, which analyzes government activity in the commercial real estate market, says the impact of these progressive tactics is still an unknown. The White House and Congress agree that the government needs to reduce its federal footprint and become a better steward of its real estate, but the institutional changes the government will implement have not yet been finalized.

"The impact all these changes will have on the market remains to be seen," said Joe Brennan, Managing Director, Jones Lang LaSalle. "Leases up for renewal may no longer favor the incumbent landlord, so it is imperative that ownership groups stay on top of what is happening with the federal government's leasing efforts."

In the interim, the General Services Administration (GSA) has started to focus on trimming overhead and reducing real estate expenditures. The square footage allotted to each government employee has fallen from 280 square feet per person to about 125 square feet per person, a statistic most evident at the GSA's headquarters building, where 4,400 people now work from the same amount of space that used to house 2,500.

The effects of additional workspace efficiency trends—including open floor plans, shared workspaces and telecommuting—are evident from leasing decisions in the Washington, DC submarket of Ballston, where two agencies have announced plans to vacate a combined 1.0 million square feet and relocate to lower-cost areas, downsizing by 15.9 percent in the process.

Federal market numbers:
•    82 percent – overall leasing activity representing extensions and renewals
•    1.86 percent – 2013 drop in metro DC GSA-leased office inventory
•    12.5 percent – decline in metro DC net effective rents from peak levels
•    11 percent – rise in U.S. net effective rents since 2010
•    $1.7 billion – amount spent annually by GSA for properties deemed underutilized

“The uncertainty in the market has impacted the decision making of all tenants and driven them away from long-term commitments,” added Brennan.  “The leases of tenants, both private and public sector, are on average about 22.5 percent shorter today than they were 10 years ago, as they want to maintain some flexibility.”

CAPITAL MARKETS
The uncertainty plaguing lease renewals has not filtered down to the capital markets. The federal government comprises approximately 4.6 percent of all leased space nationwide. Since government agencies tend to remain in their space for over 30 years, federal leasing acts as a stabilizing force for the nation's office market.

This stabilization is still evident in the capital markets. The Washington, DC region houses approximately 41 percent of all GSA-leased space in the country and has captured more than 40 percent of the $3.3 billion in average annual sales volume for GSA-leased office buildings since 2006. In 2013, GSA-leased buildings have sold at a rate that nearly doubles the average price per square foot for building sales nationwide.

REGIONAL FOCUS
Overall, public sector demand for space in the greater Washington, DC region is restrained. Federal leasing activity has still accounted for some of DC's largest leases of late, but government gridlock has left agencies without clear directives for long-term space solutions, leading to short-term extensions and consolidations.

In Northern Virginia, the continued shift of jobs to Fort Belvoir and parts of Springfield has produced churn throughout Fairfax County, but new lease awards were sparse.

The Base Realignment and Closure Act (BRAC) continues to exert a massive influence over the office market both inside the Beltway and in Northern Virginia, leading to the disposition of a combined total of 2.5 million square feet of space since 2005.

In Maryland's Montgomery County, the supply-demand dynamic has reached a relative standstill. The construction pipeline is below 1 million square feet, and only a handful of federal leases have barely broken the 100,000 square foot mark. Mirroring the rest of the region, most of the deals in this submarket have been short-term extensions.

Similar lackluster activity is evident in Prince George's County, where short-term renewals are also prevalent. The county does have sites to offer the FBI., which is considering several locations for relocation.

WHAT’S AHEAD?
The report says that, looking forward, bipartisan support for expense reduction and mandates to improve operational efficiency will drive federal real estate decisions in 2014. This includes replacing short-term extensions with longer-term leases for reduced space. Alternative workplace strategies—including teleworking, desk sharing and open space plans—will be prioritized, as will space givebacks and moves into federally owned space.

Federal real estate dispositions will likely grow, and the government will show an increased willingness to explore creative solutions, including public-private partnerships, to address budget shortfalls for agencies and relocations.

Adapting to the new landscape will ultimately lead to long-term decisions, which will allow the market to develop financially prudent strategies to adjust to the shifting federal demand.
For more news, videos and research resources, please visit and bookmark Jones Lang LaSalle’s Metro DC Media Center web page.  

About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in 2012. Its investment management business, LaSalle Investment Management, has $46.7 billion of real estate assets under management. For further information, visit www.jll.com.