Q&A: How the Federal Government Will Impact Office Leasing in the D.C. Area in 2021
CBRE has teamed with Georgetown University’s Steers Center for Global Real Estate on a new report dissecting how the federal government influences office demand in the Washington, D.C. region.
The report, titled “Politics & Place,” highlights a 3.3 percent increase in discretionary spending in the federal budget for fiscal year 2021, which started Oct. 1. That includes a 5.8 percent increase in defense spending, which should drive growth in contracting activity. That, in turn, should drive demand for office space in the D.C. area next year.
Still, the amount of space that the General Services Administration (GSA), the federal government’s main workplace manager, occupies is expected to decrease due to a continued focus on efficiency and space contraction.
Wei Xie, associate director of mid-Atlantic research at CBRE, spoke with Commercial Observer about how the federal government will impact office demand going forward, what the election could mean, and how COVID has affected what we’re seeing.
Commercial Observer: How would you characterize how the federal government influences office demand in the Washington, D.C., region today?
Wei Xie: The influence is two-fold. The government itself is a major lessee category in the region and accounts for 28 percent of total office leasing activity. The GSA’s pursuit of operational efficiency in recent years has been a notable source of contraction in space demand.
On the private-sector front, government spending affects several industries that are prevalent in our region, namely government contractors, lobbyists and law firms. How much spending funnels through the federal government and where it goes has a heavy impact on the demand metrics of many of our region’s economic pillars, which subsequently influences employment growth and office demand.
How could the upcoming election affect what we see in 2021?
There could be a wide range of effects depending on which party wins control of the White House and the two houses of Congress. In general, we can say that our analysis shows when both chambers of Congress are controlled by the same party, this facilitates budget flow and more ambitious policy agendas, which leads to increased government spending and regional office demand. On the other hand, political gridlock negatively affects business sentiment and budgetary growth and thus office space demand.
How has COVID impacted this influence?
COVID-19 has accentuated this influence. It is said that crises grow the role of the government. The pandemic has prompted the federal government to significantly increase its activity as households and businesses look to Washington for solutions. The $2 trillion CARES Act and many other relief programs and accompanying regulations have sustained and even grown segments of the region’s federal contracting, lobbying and law firm activity.
What factors drive the demand for office space in the DC region?
Generally speaking, two factors drive office demand in the region: employment growth and workplace density; i.e. how many office-using jobs there are and how much office space each worker is allocated. Additionally, business confidence helps determine occupiers’ growth projections and plans around carried vacancies for future headcount increases.
What can we expect in space contraction by the GSA in the year ahead and what impact will this have on the overall office market?
The GSA’s leased footprint in the capital region peaked in 2014 at 57.5 million square feet. It has since shrunk by 10 million square feet, or 17 percent. This is from a combination of higher space utilization, consolidations and moving to federally-owned buildings, as well as telework policies. The sustained focus on efficiency will likely lead to additional space contraction by the GSA. However, higher limits on discretionary spending could temper the extent of the GSA space givebacks.
How does lobbying play into all this?
Lobbying activity impacts law firms, public relations firms, as well as the government affairs offices of a wide range of private-industry firms from tech to pharma, from financial services to energy, all of which have a notable presence and office footprint in the District. Federal budget and appropriations is the most lobbied issue, and major spending bills are a catalyst for lobbying activity.
The CARES Act from the 2020 pandemic and the American Recovery and Reinvestment Act from the 2008-2009 Global Financial Crisis have been the two heaviest lobbied bills in recent years. Should there be a second relief bill to bring additional economic support, we expect to see continued growth in activity from this sector.
What can you project about the year ahead?
The D.C. regional economy has historically proven to be more resilient to downturns than other major metro regions due to its essential and countercyclical nature. The federal government and private-sector industries that directly or indirectly work with the federal government are expected to help stabilize the D.C. metro region. Our workforce remains strong and competitive.
Our cities have less density compared to others, which has proven to be a key challenge in the current environment. Our cost of living is more balanced than some of the other high-cost markets. All these factors will bode well for our region’s recovery. That said, real estate is a lagging indicator and will follow the economic recovery.
What other factors are important to look at when dissecting the federal government’s influence?
The widespread adoption of work-from-home policies during the pandemic is something we need to keep monitoring and understanding. It introduces a new element in our calculus and can be a disruptive force in office demand, with cascading impact on other product segments—multifamily, retail and, to a less extent, logistics and distribution.