Association Sends Biden a Letter to Increase Pressure on Federal Office Leasing

It used to be that letters from the federal government would cause concern over a potential draft notice or tax audit. Add in a new one for commercial real estate: worry that they won’t need that office building any more.

A letter this week to President Biden from The Real Estate Roundtable — backing firms including Brookfield Properties, Blackstone, Empire State Realty Trust, Starwood Capital, as well as multiple major banks and CRE professional organizations — emphasized just how concerned many in the industry have become.

“We therefore respectfully urge you to direct federal agencies to enhance their consideration of the impact of agency employee remote working on communities, surrounding small employers, transit systems, local tax bases and other important considerations, along with the direct effect on governmental service delivery and labor productivity. In addition, we ask for your support of legislation to facilitate the increased conversion of underutilized office and other commercial real estate to much-needed housing,” the letter read.

Otherwise known as “keep leasing the office spaces or let us do something with it to avoid big metro economic collapses.”

The worry is palpable and understandable. A General Accounting Office report from September said that, in a survey, most agencies were planning significant cutbacks in the amount of space they use.

“GSA leases space for agencies from other federal agencies, public entities, and private-sector lessors in commercially owned buildings,” the report stated. “As of March 2022, GSA managed 7,760 leases, totaling nearly 180 million square feet. Rent costs for these leases are about $5.7 billion annually.” It also added, “There are more than 19,500 federally owned buildings, including approximately 511 million square feet that are considered office space.”

Another industry letter at the end of November echoed similar concerns, although specifically for the Washington, D.C. area.

“Our interest in this matter is not about being overtaxed,” said that letter, which went to D.C.’s CFO and was cc’d to the city’s mayor and city council. “We are primarily concerned about the future fiscal health of the city. For every decline of $100 million in commercial property tax assessments, annual property tax revenue falls by $2 million.”

These are all are big ad threatening numbers, offering a reminder of the impact office decline can mean.

“As of March 2022, more than half of GSA’s leases (4,325 out of 7,754), which account for more than 88-million square feet of space, have expiration dates scheduled for calendar years 2022 to 2026,” as the GAO report had noted. “While agencies will extend some of these leases or move to other spaces, according to GSA officials, in a post-COVID-19 environment agencies are likely to significantly reduce their demand for federal real estate due to changes to telework and remote policies.”

Such concerns show how a collapse of office markets can light a fuse to general urban economic disaster. Less and less money for taxes that pay for the expensive services and infrastructure cities have and need. Less foot traffic to restaurants, stores, and entertainment. And, of course, falling property valuations, because the CRE and finance industries aren’t worried enough as it is.