2012: Government Real Estate Year In Review

If you think the world of government real estate is a staid and boring place, think again. There is a lot going on: big transactions, important policy and outright scandal. 2012 was no exception. We published 208 blog articles last year offering our observations on government real estate as events unfolded. A few of you have probably read them all but for those who haven’t, here are some highlights:

JANUARY: FBI ANNOUNCES IT WILL MOVE

J. Edgar Hoover Building

As the year started much of the Washington, DC market was abuzz over the prospect of a Very Big Deal: the FBI relocation from its downtown HQ. In the previous month the Senate Committee on Environment and Public Works approved a resolution providing the basic site selection criteria for FBI to vacate the J. Edgar Hoover Building and construct a new headquarters somewhere else in the Washington, DC region. The project is expected to cost $1.2 billion and bring 12,000 jobs. Local politicians in every area jurisdiction have been positioning to land this massive relocation, a process that is ongoing.

FEBRUARY: BUDGETS POINT TO AUSTERE TIMES

The President’s annual budget was released on February 13th. Though the top line budget request grew slightly due to planned increases in mandatory spending, the discretionary portion of the budget included a planned 4.4% cut. Further, the discretionary budget forecast over the following two years (through FY 2015) anticipated a discretionary budget reduction of an additional 10%.

A look at GSA’s budget proposal underscored the increasing emphasis on real estate cost reduction. GSA announced that it is systematically implementing portfolio plans for its largest agency customers. These plans are meant to establish “strategic portfolio requirements” expected to include a heavy emphasis on consolidation, telework and disposal of underutilized assets. The federal budget request made it clear that cost reduction and improved space utilization would be the central themes for the remainder of the year.

MARCH: REAL ESTATE COSTS IN THE CROSSHAIRS

In March we noted that the House approved a batch of Prospectuses, seven of which had been languishing on the Hill for 545 days. In the five years we have tracked this approval process, that was a clear record (though it was broken later in the year by the same 112th Congress when it approved some prospectuses that had spent 685 days on the Hill).  Why the delay?  The House declared itself no longer a rubber stamp and began taking an activist role in the approval of these prospectus requests, declaring “business as usual is over”.  The square footage approved in the eleven prospectuses was more than 300,000 SF (11%) less than requested by GSA. Ever since, GSA has had to show Congress reductions in space and cost with each prospectus request.  Demonstrating its own ability to reduce space, GSA unveiled a radical redesign of its headquarters offices that cut space utilization down to just 82 square feet per employee.

APRIL: SCANDAL ERUPTS

GSA executive Jeff Neely in Vegas

On April 2nd GSA Chief Administrator Martha Johnson resigned and two of her deputies—Public Buildings Service Commissioner Bob Peck and Johnson’s top adviser, Stephen Leeds—were fired.  This was in response to an Inspector General report of “excessive, wasteful and, in some cases, impermissible” spending at a GSA Western Regions training conference at a resort hotel outside Las Vegas, which cost $822,751. Leadership of GSA was assumed by Dan Tangherlini, who submitted to a month of House and Senate hearings on the Vegas scandal. GSA (an independent agency of the Democrat-led Executive branch) and the (Republican controlled) House had clashed before but Vegas soured the relationship substantially.

MAY: WE LEARN WHAT “SEQUESTRATION” ACTUALLY MEANS

There was a time when only the hard-core wonks had heard of “Sequestration” but on May 10th the American public was introduced to it when House Republicans voted to override the steep defense cuts that would be mandated by sequestration and replace them with spending reductions to food stamps and other mandatory social programs.  The Sequester Replacement Reconciliation Act passed by a 218–99 vote; only 16 Republicans opposed it and no Democrats supported it.  This “butter for guns” swap was met with strong resistance from Senate Deocrats and the President. Recognizing that this impasse would not be resolved before Election Day, it was for many of us the first signal of the legislative “perfect storm” that would occur with a lame duck Congress tasked with approving a continuing resolution to cover FY2013 appropriations, the need to increase the debt ceiling, and legislation to stave off sequestration.  As we write this today, we are in the midst of that storm.

Recognizing that all aspects of the budget were, and would remain, in flux OMB delivered an edict freezing the federal inventory requiring that approval for acquisition of net new space shall only be granted where the total square footage is offset through consolidation, co-location or disposition of space from that same agency.  This ruling remains in effect.

JUNE: THE FATE OF FTC IS DECIDED

Since 2005, House Transportation and Infrastructure Committee Chairman John Mica (R-Fla.) had been attempting to transfer the historic Apex Building from the Federal Trade Commission (FTC)—which has been headquartered there since the building opened in 1938—to the National Gallery of Art (NGA).  The Mica plan was to move FTC from the Apex Building to backfill unused space leased by the SEC at Constitution Center. GSA put the kaibosh on that effort with its delivery of a report determining that FTC should indeed move into Constitution Center, but from leased space in two other buildings.

Constitution Center (photo: CoStar)

Wrangling over the fate of FTC probably delayed the sale of Constitution Center, which was initially marketed in April 2011 to great fanfare but did not close until nearly the end of 2012.  The $734,000,000 sale to a J/V led by MetLife was the biggest deal of the year in the Washington, DC area.

JULY: 1WTC LEASE IS SIGNED, WITHOUT HOUSE APPROVAL

On July 17th the GSA announced that it signed a 270,000 square foot lease to house its regional office at 1 World Trade Center (1WTC), doing so without prospectus authorization from the House of Representatives. Never before had GSA dared move forward with a prospectus lease without full congressional approval. Yet, with the House holding up approval of the 1WTC prospectus, and with cover from Sen. Chuck Schumer (D-N.Y.) GSA was emboldened to go ahead.

In light of this, we noted with great irony that the property dispositions bills emerging  from Congress seek to consolidate all federal leasing authority under GSA, stripping independent agencies of the ability to lease space under their own contracting authority. We are left to wonder if Congress will reconsider this in 2013.

AUGUST: THE ELECTION PROCESS BEGINS

Rep. John Mica

August is always a quiet month in Washington. This year it was made more so by the fact that most of Congress was out stumping in their home states in advance of the primary elections. Rep. John Mica (R-Fla.) easily won his primary guaranteeing his return to the 113th Congress. Yet, term limits prevent him from serving another term as Chairman of the House Transportation and Infrastructure Committee, which presides over public buildings issues…and GSA. The new Chair of that committee was later announced to be Rep. Bill Shuster (R-Pa.).  Shuster’s record on public buildings issues is thin, though he has largely voted with his Republican colleagues. It will be interesting to see how the House and GSA interact under his leadership in the 113th Congress.

SEPTEMBER: A NEW PBS COMMISSIONER IS APPOINTED

At the start of September Dorothy Robyn was installed as the new Public Buildings Commissioner, a position left without a permanent leader since the firing of Bob Peck earlier in the year. Robyn had been DoD’s deputy undersecretary for Installations and the Environment where she was responsible for managing 539,000 military installations. Dan Tangherlini said in his announcement that Robyn’s experiences managing BRAC activities and promoting environmentally friendly DoD buildings “make her uniquely qualified to manage the extensive inventory of the Public Buildings Service as well as the task of disposing of excess and underutilized properties,” and added that her work at the Pentagon often required coordinating with GSA on major real estate decisions, giving her “valuable experience working with GSA.”  Her experience addressing underutilized properties should help GSA respond to the requirements of property dispositions legislation now wending its way through Congress.

OCTOBER: THE SLOWDOWN IS APPARENT

We spent much of the year highlighting evidence that the government leasing market was stagnating including the fact that lease terms are becoming shorter, due largely to an uncertain budgetary environment. Also, new construction (and the long-term leases that accompany it) has become nearly extinct. We noted that many agencies have abandoned long-term real estate planning in favor of kicking the can down the road with short term lease extensions. Our view of the market was supported empirically by Dr. Dennis Eisen who unveiled his Government Real Estate Index at the National Federal Developers Association conference on October 23rd. The index illustrates a precipitous drop in government lease awards, especially in the office sector where leasing volume dropped more than 90% from the previous year.

NOVEMBER: DEJA VU ALL OVER AGAIN

The November election produced pretty much the exact same balance of power.  Obama is returning as President, the Democrats maintained control of the Senate and the Republicans retained control of the House. We are left to wonder if the 113th Congress can accomplish any more than the 112th. This is a particularly troubling issue because Moodys and Fitch have both threatened to downgrade the United States’ credit rating as Standard & Poor’s did last year.

Shortly after the election Moodys issued a notice stating that the results had not changed the “highly polarized and unpredictable” political landscape that still threatens the nation’s credit rating. The ratings agency described how the prospect of a continuing standoff on the fiscal cliff may impact a wide range of debt ratings, and said that it still assigns a “negative” outlook to U.S. credit ratings, meaning that a rating review likely would result in a downgrade. Essentially, the ratings agencies aren’t bothered by our nation’s balance sheet so much as they are concerned with the inability of our political leadership to resolve fiscal crises. Today’s fiscal cliff compromise will not be enough to change that view and this issue will loom large in 2013.

DECEMBER: GSA GETS CREATIVE

Faced with huge real estate challenges and equally daunting budget challenges GSA has begun to explore more innovative means of accomplishing its goals, some that begin to look like true public-private partnerships. In Los Angeles, GSA is soliciting proposals to dispose of an historic, 72-year-old courthouse building at 312 Spring Street and use the funds from the building’s sale to finance construction of a second federal building near the new courthouse. At the same time, GSA has awarded a contract for the construction of a new $318 million, 550,000 SF L.A. courthouse, one of the few major ground-up federal office construction projects underway in the U.S.

Back in the Washington area, GSA is soliciting creative ideas from the private-sector to determine if there is some way to finance the completion of DHS’ St Elizabeths campus and to explore methods to construct the new FBI headquarters and the redevelopment of the Federal Triangle South area. GSA also released renderings of the planned conversion of the Old Post Office into a world-class hotel, after selecting the Trump Organization to lead the project earlier this year.

WHAT TO EXPECT IN 2013?

Given the long train of fiscal crises lined up, we expect 2013 to be a dynamic and defining year in government real estate. It’s too soon (and too ambitious) to predict how the year will unfold but clearly the tenor will be established early by the way Congress and the President tackle sequestration and the debt ceiling. Beyond that, we can be sure that our federal government will continue to clamp down on real estate spending and there will be intense pressure to reduce the inventory through greater space utilization and disposal of unneeded property.

We know we’ll have plenty of fodder for the Capitol Markets blog in 2013 and invite you to read and comment throughout the year.

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