The Federal Government Isn't Coming To The D.C. Office Market's Rescue This Time

In times of turmoil, the Washington, D.C., office market has often counted on the federal government as a countercyclical force, increasing its footprint to accommodate massive spending packages following the 9/11 attacks and the Great Recession.

But despite the passage of three major spending bills over the last year — the Bipartisan Infrastructure Law, the Inflation Reduction Act and the CHIPS Act — and the potential political shakeup from next week's midterm elections, experts don't foresee the federal government growing its office footprint. 

"If you look at history, there have been several examples where there have been significant increases in public spending," said Norman Dong, the head of the federal Public Buildings Service in the Obama administration. "I think this time is different."

The disconnect between spending and leasing could hardly come at a worse time for downtown D.C. The overall office market reached record-high vacancy again in the third quarter, and the vacancy rates in the Central Business District and East End climbed to 20.5% and 19.9%, respectively, according to Cushman & Wakefield.

While the federal government rapidly expanded its office footprint in D.C. in the wake of the last recession, it has spent the decade that followed shrinking it. Since 2011, the total amount of space leased by the federal government has declined by roughly 20M SF, according to a September report from the Government Accountability Office. 

Despite the Office of Personnel Management issuing a directive last year instructing federal agencies to re-examine their office strategy to incorporate teleworking, the erosion of the federal office footprint has yet to fully materialize. To date, the federal government has only reduced its 238M SF leased office portfolio by 525K SF in response to the pandemic, the GAO report found.

That is good news for landlords in the short term, but the modest decrease is related more to a logjam of decision-making than a desire to hold onto space. What’s more, it may harden lawmakers’ resolve to advocate for lease reductions, a rare bipartisan issue.

“It’s been two and a half years since the pandemic started, and we know federal employees are working from home at a very high rate. Yet, GSA’s portfolio has grown larger,” Dan Mathews, the head of the PBS during the Trump administration, said in an emailed response to questions. “That may be hard to explain to Congress."

Mathews is now head of federal sales at WeWork, one of five companies to win a coworking contract with the federal government in 2021. He noted the GSA is running an “open house” between Nov. 14 and Nov. 18 allowing any federal worker in the D.C., Denver or San Francisco markets to access coworking facilities free of charge to “kick the tires” on the flexible office concept.

That could lead to more agencies shifting their office strategy to flex spaces, taking a bite out of traditional leased office space at a time when commercial landlords have felt cheated by federal workers' limited return.

An estimated 30% of the total workforce in D.C., roughly 245,000 employees, work for the federal government, and most have their offices in the District, Transwestern Managing Director Lucy Kitchin, who leads the firm’s D.C.-based Government Services group, said at Bisnow’s D.C. Office Market Insights event Sept. 29. 

The health of the District’s office market is “intertwined” with the federal government, she said, adding that most of the federal jobs within D.C. are “clerical or administrative in nature” and therefore an easy target for remote work.

“Anyone who deals with federal real estate or pays attention to it is hearing the constant refrain of reduction, reduction, reduction,” Kitchin said. “There’s a sense there’s been a disproportionate amount of federally leased space empty in D.C. versus the rest of the market. This is why we care about if the feds are coming back to D.C.”

There are some signs of life for federal leasing. Dong, now a managing director at FD Stonewater, said the Department of Health and Human Services has indicated it may increase its footprint in the near future. The FBI also appears to be on course to select its new headquarters location in the coming months, with Prince George's County and Springfield, Virginia, as finalists.

The power dynamic in the federal government could shift after next week's midterm elections, with Republicans expected to win back control of at least one chamber of Congress. That could tip the scales toward a full-scale return-to-office push rather than the piecemeal approach agencies have taken thus far, given that Republicans in both the House and Senate have introduced bills that would mandate office returns and a reversion to pre-pandemic telework policies.

Alternatively, a Democrat-controlled Congress could result in federal growth as the government expands its mission and hires more full-time employees, Kitchin said.

“Remember, Congress holds the purse strings, so they have a lot of leverage,” Kitchin said. “The administration is at mercy of getting money from Congress, and they can hold that up by saying, ‘Listen, bring them back to the office and we may give you the budget you’re asking for.’"

Others are skeptical. Dong said despite the $1T in new spending Congress has authorized over the past year, the conversations he’s had with agency leaders leave him pessimistic that there will be a significant expansion in federal leasing, at least without further intervention.

“Even though you’re seeing significant spending this time around, you’re not going to see that expansion in the federal footprint,” Dong said.

What’s more, long-term decisions regarding any of the myriad issues changing the federal government’s calculus on leases appear years away. Kitchin said the GSA hasn’t even consistently begun tracking which employees are coming into the office today, under current hybrid plans. Once agencies get a headcount, they still need to survey workers, negotiate with unions and IT contractors, and rebid contracts to office architecture firms to design the hybrid office of the future, since many of their existing contracts expired during the pandemic. 

As a result, it may be four to six years before the GSA feels comfortable signing a lease that reflects "the ideal hybrid scenario," Kitchin said. 

“This is the exact kind of problem that requires physical collaboration, the kind of physical collaboration that has fallen off since March of 2020,” Kitchin said.

Kitchin advised landlords to push back on GSA when it asks for a two- to three-year extension, given that longer timeline, and she said they may be able to secure a better deal. Other agencies may be on the move in the coming years as they look to consolidate in newer, but smaller, footprints, creating competition in the market. But those holding their breath for a quick resolution to the federal government’s leasing woes may be turning blue.

"My most hot takeaway is government leasing is not dead. It is on life support, but it is not dead," Kitchin said. "I tell myself that every morning when I wake up."