Defense-Related Spending Trend

It’s Memorial Day weekend and it happens to also be the first weekend of a new endeavor by our team to post a new article every single calendar day. So, while others frolic on the beach or man their grills, we write. Our topic this weekend is obvious: we will write about our nation’s military and, as always, we’ll put a real estate spin on it. Today, we highlight our nation’s defense budget.

The United States has developed the greatest military in the world. Doing so has required the commitment – and sacrifice – of thousands of incredibly brave men and women. It has also taken substantial funding. We thought we’d take a look at defense spending through the history of the United States, from the Second U.S. Congress to the present. There are some interesting observations to be made about how our military has evolved.

Few issues are as passionate and divisive as funding for our nation’s defense and the purpose of this blog is never to debate politics. We do, however, note the real estate ramifications of the political process and the Department of Defense is a significant real estate market presence. Entire communities in this country exist because of military bases and, in Northern Virginia, and especially Arlington, which is home to the Pentagon, the office market is largely anchored by military and civilian DoD occupants. A report issued by Arlington County Economic Development in December 2010 noted that more than seven million square feet of office space in the County were occupied by defense-related federal tenants. Further, the County estimates that DoD engages private-sector contractors on about a 1:1 ratio, indicating that another seven million square feet exists to serve defense-related contracts. Northern Virginia landlords take a keen interest in defense spending as a bellwether of the health of the office market.

But first a history lesson…

The nation’s defense budget traces its roots back to the Militia Act of 1792.  This Act (which was probably motivated as much by the threat of internal rebellion as it was invasion by foreign nations) provided that each State of the Union would maintain a militia and that every able-bodied male between 18 and 45 years of age would belong to the militia and train at least twice a year.  One of the more intriguing passages in the Act required that each citizen in the militia:

“…provide himself with a good musket or firelock, a sufficient bayonet and belt, two spare flints, and a knapsack, a pouch, with a box therein, to contain not less than twenty four cartridges, suited to the bore of his musket or firelock, each cartridge to contain a proper quantity of powder and ball; or with a good rifle, knapsack, shot-pouch, and powder-horn, twenty balls suited to the bore of his rifle, and a quarter of a pound of powder…”

These militias combined with the Legion of the United States (temporary successor to the Continental Army) to provide the nation’s military.  Such was the state of our earliest national defense force.  Nonetheless, it was effective in keeping the United States united, even through a Civil War.  In fact, for nearly 150 years, defense spending typically hovered near 1% of GDP (spending on graph shows “0” during this period due to rounding).  During that period our country engaged in three significant wars and a variety of lesser conflicts yet, after each engagement the defense budget quickly reset to about 1% of GDP.

A fundamental shift would come with World War II.  If you view the graph above, you immediately understand why Americans of this era are regarded as the “Greatest Generation”. World War II presented an immense test of resolve for a country which still had only a modest military presence. Defense spending dropped off steeply following the end of that war but the United States soon found itself in a prolonged Cold War punctuated by major conflicts in Korea and Vietnam. Though defense spending increased from Korea through Vietnam, it actually declined as a percentage of GDP. During the Reagan years defense spending grew more rapidly until the end of the Cold War era.

After the Persian Gulf War, defense spending began a period of decline which lasted all the way until that fateful day in September 2001.  Most of the remaining history is fresh enough that we all know it well. The War on Terror, a two-front campaign in Afghanistan and Iraq, has been the focus of a run-up in defense-related spending greater than any in our nation’s history, though GDP growth through the same period has also been substantial, blunting the impact on defense growth relative to GDP. Nonetheless, the total defense-related budget for FY 2013 is estimated at just over $900 billion, as compared to $366 billion in 2001 (see footnote at the end of this article).  This is real money – even for the federal government.

Defense dollars are spent around the globe but there is no doubt that this tremendous increase in spending benefitted state-side landlords, especially in the Washington-Baltimore area which houses the Pentagon, DoD’s headquarters, as well as the headquarters of all members of the U.S. Intelligence Community. Some investors, such as Vornado (NYSE: VNO) and COPT (NYSE: OFC) have centered much of their leasing strategy on DoD and related contractor tenants.

Defense spending today comprises nearly 50% of the federal discretionary budget and, therefore, changes in Defense tenancy can have a significant impact on the overall market for federal leased and owned space. By most accounts, Defense spending will decline overall in the upcoming years. The graph anticipates a substantial dip due to cutbacks proposed by the White House and the effects of mandatory budget cuts and sequestration.

Note: Those of you who are true wonks undoubtedly noticed that our total defense spending figures look awfully high. For example, the President’s FY13 budget request is just $525 million as compared to the $901 million displayed in our graph. The difference is due to the fact that we are displaying all defense-related spending including overseas contingency operations and other supplementals, civil defense and Veterans Affairs spending. Our data source for this trend line is usgovernmentdebt.us

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