or local, government action – or lack thereof – can sometimes impact the office market. As a tenant in the jungle, it pays to watch the big monkey with all the bananas.
Brother, Can you Spare a Dime? Um, $60 million?
In this article by Rachel Tobin in Sunday’s Atlanta Journal-Constitution, the Georgia State government committed $60 million in a public/private partnership to help convert a “forlorn” area in Atlanta. If successful, the development in the railroad “Gulch” in Atlanta, Georgia would transform a long festering sore on Atlanta’s central business district landscape into a revitalized and bustling area. The plan is to build mixed use retail, residential and office. And it would add a nice source of new property taxes to local governments and spur job growth according to boosters of the project.
It would also result in new office product, which will hit the scene many years from now. This can have unintended consequences in future years; when it finally delivers, it will be the first new product in nearly three decades in the central business district. However, with government dollars stimulating and focusing developers, hope springs eternal that public investments can spur vertical improvements with private developers.
Who’s yo’ Uncle?
In another example of government influence on real estate markets, an article in Wednesday’s Wall Street Journal by Anton Troianovski explains that the government is tightening its belt like everyone else. As Anton suggests, the
government can many times “prop” up demand in down cycles. However, in many cases government entities, especially state and local departments, occupy class B space that lots of corporate users wouldn’t even consider. While the WSJ article shows pictures of class A buildings, I would bet that much of the General Services Administration portfolio is either class B or properties owned by the government. The state occupancies that may have the biggest impact according to the Journal are almost certainly class B or even C.
While the movement of any large tenant affects markets, we believe that the new conservative face of government won’t have a huge impact on the class A office markets traditionally occupied by corporate America, with the possible exception of Washington D.C. and Northern Virginia. In those areas, expect a real estate bonanza and lots of wonderful sublease opportunities.
If the government moves do change things, they will likely be to the benefit of corporate tenants through what is called “class compression.” In other words, class C product will lower rates to attract class B uses, which will do the same to attract class A users. The ball stops bouncing in class A when those landlords feel pressure to lower rates to retain tenants.
And hey, maybe you can get your own corporate stimulus package with a nice, attractive sublease from Uncle Sam or his little brothers in state and city government. Perhaps you can get a favorable designation or incentives that will help lower your cost of occupancy. Just make sure you get the paperwork filled out right and be nice, because Uncle Sam is the biggest gorilla in the real estate jungle and you can bet he has more bananas than you do.
(WSJ) Government Cuts Clip Office Market
Smaller government means less demand for office space, and that is acting as a drag on the recovery of the commercial-real-estate market.
In Washington and elsewhere, government leasing has helped prop up demand in tough times. But now cash-strapped governments are moving to cut back on office space, even as commercial real estate struggles to recover.
In Washington, which has benefited from a surge in space rented by government agencies, the Securities and Exchange Commission renegotiated a 900,000-square-foot lease for new office space down to about 300,000 square feet because the agency didn’t get the congressional funding it had counted on to hire new employees.
“We’re starting to see the impact of a very, very difficult fiscal situation in the government trickling down to decisions being made for leasing,” said Don Miller, chief executive of national landlord Piedmont Office Realty Trust, which will lose the Office of the Comptroller of the Currency as a tenant in at least one building in the wake of the agency’s decision to move into some of the space no longer being leased by the SEC.
The biggest impact is likely to come on state and local levels. The states of Illinois, Missouri and Kansas recently hired brokerage firm Jones Lang LaSalle Inc. to reduce real-estate costs, and other states, from California to Florida to South Carolina, are examining ways to pare back their use of space, brokers said.
Investors have taken notice. J.P. Morgan Chase & Co. analysts said in a note to clients recently that real-estate investment trusts, or REITs, with a lot of government exposure “should be watched more closely in a budget-tightening environment as renewals may not be the lay-ups they once were.” And REITs with lots of government leases have lagged behind peers in recent months.
After the financial crisis first hit, buildings with government tenants were a safer bet. Washington emerged as the healthiest office market in the country, with rents falling much less than other cities.
Buying stocks of landlords with government tenants “was a less risky way of gaining office exposure, especially in an environment where capital was still very constrained for the private sector,” said Al Otero, a REIT portfolio manager at European Investors Inc. “The roles have somewhat reversed.”
Brokers and investors expect government demand to slow down. Research firm Reis Inc. predicts occupied office space in Washington will increase by one million square feet this year and about 800,000 square feet next year, compared with a jump of 2.8 million square feet in 2010.
The New York City government has vacated 380,000 square feet since last year when Mayor Michael Bloomberg launched a push to move out of 1.2 million square feet of city-leased space by 2014, for a projected annual savings of $36 million. The program involves consolidation as well as moving toward more open work spaces.
Florida’s portfolio of leased office space, at 8.3 million square feet in 2008, has shrunk about 5% since then, said Ann Duncan, president of Vertical Integration, a Tampa, Fla., firm that advises governments, including the state of Florida, on real-estate use. She predicts another decline of roughly 500,000 square feet this year.
Rents have been rising in some prime markets since the depths of the downturn. In Washington’s Georgetown market, effective rents were up 2.2% in 2010, according to Reis. In Midtown Manhattan, rents rose 0.2% during the year.
But in many markets rents actually fell last year, with net effective rents down 1.5% nationally, according to Reis. If government agencies contract without the private sector expanding more, downward pressure will continue, some predict.
For landlords who saw government leases as stable components of their portfolio, more aggressive moves to cut spending inject a new degree of uncertainty. For example, Florida’s Department of Corrections terminated a lease by invoking a clause that allows the state government to move out of a building if state-owned space becomes available in the same county.
“Traditionally, we would tell landlords that only a handful of times had it ever happened, but it’s clearly being used more now,” Ms. Duncan said. “Downsizing and taking less space is going to be a very prevalent activity this year.”
Corporate Office Properties Trust, which owns buildings in the Washington area that cater to federal-government contractors, assured investors on a recent conference call that most of its tenants weren’t at risk of seeing major cuts. But the temporary spending resolutions passed by Congress to keep the government operating “limit new contract starts and push back programs and spending opportunities, which defer leasing decisions by tenants,” company President Roger Waesche said. “We are experiencing this firsthand.”
Some analysts, such as Green Street’s Michael Knott, said investors have overly discounted the consequences of federal spending cuts. “There’s no doubt this alters the trajectory, but I don’t think it drives it into the ground,” Mr. Knott said.