OMB Freezes Inventory Growth

OMB Acting Director Jeffrey Zients

On Friday, Office of Management and Budget (OMB) Acting Director, Jeffrey Zients, issued a memorandum effectively freezing the federal inventory of leased space.  The memorandum entitled “Promoting Efficient Spending to Support Agency Operations” addressed a wide range of cost reduction initiatives including reductions in travel costs, conference expenditures and more efficient management of the fleet of government-owned vehicles.

From our view, of course, the most interesting aspect was the memorandum’s directives relating to real property.  Specifically, the memo urges aggressive disposition of excess property and, more notably, declares that “as of the date of this memorandum, agencies shall not increase the size of their civilian real estate inventory.”  Henceforth, approval for acquisition of net new space will only be granted where the total square footage is offset through consolidation, co-location or disposition of space from that same agency.  The memo goes on to observe that exceptions will be made in instances where the government’s space need is to protect national security, reduce costs, allow for the “effective accomplishment of agency missions” or comply with legal requirements.

In many respects, OMB’s pronouncement has been expected and it simply builds on earlier Executive Branch directives including President Obama’s June 10, 2010 memorandum that ordered federal agencies to produce $3 billion in civilian real property costs savings by the end of this fiscal year.  This memorandum and other policy and legislation issued over the past two years have already begun to reduce square footage used per employee, increase teleworking and backfill vacant space in federal buildings.

So, what does it mean for the federal leasing market on the broad scale?

First, it is a good time to be an incumbent landlord.  Property owners with contemporary, functional and efficient buildings will find that government tenants are less likely to relocate.  One significant caveat, however, is that agencies are tending to consolidate into fully-leased buildings.  So, in those instances where an agency leases all of one building and a small portion of another building nearby, the “nearby” building is at significant risk of losing its tenant upon lease expiration.

Second, owners with vacant space will find that leasing to federal tenants is much more difficult.  This is largely because agencies aren’t growing but also due to budget uncertainty that often leads agencies to seek shorter renewal terms.  When GSA performs its analysis of competing lease offers, it adds space replication and relocation costs to the other landlords’ proposals.  Especially where the lease term is relatively short, the amortization of this cost makes it very difficult to underbid the incumbent lessor.