“Reduce the Footprint” Faces Public and Political Headwinds for the Social Security Administration

With over 1,000 leased facilities, often in single-tenant buildings, the Social Security Administration (SSA) is a staple of many federal investor portfolios. Like other federal agencies, however, SSA has been dutifully implementing the “Reduce the Footprint” policy pursued by the current and previous administrations. SSA reduced its total square footage by about 5% between 2012 and 2016 and shuttered at least 125 locations in the past ten years. Unlike reductions in office space by other agencies, which can go largely unnoticed by the general public, closures of public-facing SSA facilities can materially impact the lives of beneficiaries.  Many of those affected are elderly, and they may be forced to travel farther for important benefits or to transition to electronic services they cannot easily understand or access.

Unsurprisingly, this group of reliable voters, along with their elected representatives in Congress, appear to be pushing back. Recent closures of leased SSA facilities in Baltimore, Milwaukee, Chicago and Arlington, Virginia have sparked protests by stakeholders upset at the loss of critical service locations, with local politicians and members of Congress demanding answers from SSA. This backlash stands in stark contrast to the general bipartisan enthusiasm for the broader “Reduce the Footprint” effort, and it presents two major implications for federal property investors with current or prospective interests in SSA facilities.

First, this political pushback may apply pressure to GSA’s standard process for determining “market” rent for SSA leases. As we have discussed previously, GSA uses its proprietary “Bullseye” tool to determine whether a lessor’s offered rent is consistent with local market rates. Importantly, this tool considers local office rents when applied to SSA leases. However, an SSA facility, which invites heavy foot traffic and often requires a special layout to accommodate public visits, is not a standard office use. As a result, offered rents for SSA facilities can justifiably be higher than typical asking rents for pure office space. In explaining the recent SSA closures, SSA officials have claimed that GSA could not find “suitable replacement space” in the area. However, because there is ample vacancy in the vicinity of many of the closed locations, one must assume that by “suitable” GSA means “attractively priced as compared to local office rents.” Conceivably, GSA might have found suitable space in the existing locations if contracting officers felt authorized to pay a premium for the special non-office uses required by SSA facilities. Perhaps the recent complaints from aggrieved beneficiaries and their representatives will cause policy makers to provide GSA with the price flexibility required to avoid further SSA closures.

Second, the outcry over SSA closures could impact one of the most important (and most elusive) metrics in federal investment: renewal probability. Countless hours have been poured into determining the mathematical likelihood that a federal tenant will renew its lease upon expiration. Of course, the real answer in any given instance depends on myriad factors (e.g., the quality of the space, the agency’s budget, changing space needs, applicable federal policies, etc.), but the recent “Reduce the Footprint” mandates have generally decreased the likelihood that a given federal tenancy will remain in place as is (rather than downsizing in place, downsizing elsewhere or discontinuing altogether). However, if political uproar can be expected following the closure or relocation of an SSA facility, then policy makers may think twice about closing up shop, and SSA could become a “stickier” tenant in the eyes of federal investors.

“Reduce the footprint” is a rare Obama-era policy that remains in favor with the current administration. Reducing federal real estate costs clearly has broad bipartisan support.  However, Dan Matthews, head of GSA’s real estate arm under President Trump, has recently suggested that long-term leasing can be more effective at reducing costs than shrinking square footage.  And federal real property investors have certainly taken note of this important shift in tone.  Now, GSA’s recent experience with SSA closures points to another potential wrinkle in the government’s space reduction efforts: for the sake of efficient and effective public services (and the avoidance of negative political reactions and news coverage) some leased locations are perhaps less likely than others to be reduced going forward.