Four bonds tied to federal office leases totaling about $733 million have been put under review in a warning to investors, a move that follows a report last year pointing to low in-person use at agency buildings.
Any possible downgrade in ratings could send prices of the bonds lower while underscoring sluggish office demand across the country. The debt is for buildings housing offices of NASA, the Social Security Administration and the Department of Homeland Security.
Excess space is a longstanding challenge for the federal government and not just a result of increased work-from-home options since the start of the pandemic, officials have said. While more than half of agency officials surveyed acknowledged their headquarters buildings had excess space prior to the pandemic, the acceleration of working remotely during the health crisis led to fewer office workers who were customers at nearby stores and restaurants — and a blow to local economies and commercial landlords.
The decision by Moody’s Investors Service to review the bonds comes just five months after the U.S. General Accounting Office concluded most federal agencies in Washington, D.C., are only using 25% of their office space.
Moody’s is the only bond-rating firm to rate the four bonds. The largest offering is a $275 million deal backing NASA’s headquarters at 300 E. St. SW in Washington, also known as Two Independence Square.
NASA’s lease of 98.5% of the 605,897-square-foot building is set to expire in August 2028. The agency has occupied the building since its completion in 1990.
According to the GAO, a nonpartisan U.S. watchdog, NASA used just 10% to 19% of the building’s allocated office space at the time of its report.
Older buildings such as NASA's do not support a modern workplace, according to the GAO. Configurations include numerous areas no longer needed for administrative use or storage. The agency officials said portions of their buildings could not be easily transformed.
In October, Cushman & Wakefield told CoStar News that the General Services Administration, the overseer of federal space procurement, has excess supply of both owned and leased real estate. That may lead to federal agencies reducing their 45 million square feet of leased inventory in greater Washington for the foreseeable future, according to the brokerage.
Leases Elsewhere
Other bonds under review are a $266 million offering backing the Social Security Administration’s Baltimore offices at 6100 Wabash Ave. The agency leases the 540,566-square-foot building through January 2034. It's been a tenant since the building's completion in 2014.
Bonds totaling $185 million backing the Social Security Administration’s office at 1200 Rev. Abraham Woods Jr. Blvd. in Birmingham, Alabama, are also under review. The administration, which was an original tenant when the 587,528-square-foot building was finished in 2008, has a lease that runs until January 2028.
The fourth bond deal under review is a $6.5 million offering backed by the Department of Homeland Security’s lease of a 14,610-square-foot building at 443 Redcliff Drive in Redding, California.
“The review for possible downgrade is prompted by credit negative trends in federal leasing policy and weakness in the office real estate market nationally, which weigh on the likelihood the federal government will renew the leases pledged to the bonds,” Moody’s said.
“Timely renewal of the leases at similar shell rent levels is necessary for full bond repayment given the large amount of principal that will be outstanding at lease expiration,” Moody’s said. “Absent lease renewal, recovery for bondholders would be minimal. In addition, the recent higher interest rate environment increases future refinancing risks for the balloon payments due at maturity.”
In its review, Moody's intends to assess the degree to which recent negative developments in federal leasing and local office market trends weaken the likelihood of renewal and the potential for any reuse value for the four properties.
The review is expected to be concluded within 30 days.