There is still more than half a decade left on the Internal Revenue Service's office lease for its Philadelphia hub, but state and local officials are already pushing the federal government to recommit to the space years ahead of time in an effort to avoid losing a major draw of workers into the city.
The bulk of Philadelphia's congressional delegation, led by U.S. Rep. Dwight Evans, is among a growing cohort of legislative leaders attempting to combat the unprecedented spike across the country in office vacancies — and the economic fallout to nearby commercial property renters including restaurants and retailers — in pleading with the federal government to continue leasing the space despite a significant portion of its workforce continuing to operate remotely.
The city is asking the General Services Administration, the agency leasing the Cira Square complex on the IRS' behalf, to begin negotiations to renew its agreement for upwards of 870,000 square feet at the Philadelphia property. The former post office houses more than 5,000 local employees, and the lease for the building at 2970 Market St. isn't set to expire until 2030.
Evans and other Philadelphia representatives have sent the GSA a letter in which it urged the branch, which manages the federal government's vast real estate portfolio, to evaluate the importance of maintaining its physical presence to the city's economy and local job market.
“We urge you to consider authorizing the beginning of discussions with IRS, as well as relevant stakeholders and property owners to explore whether the magnitude, timing, efficiencies, and long-term interests of the federal government might be best served by an out-of-cycle negotiation for a future lease at Cira Square," the congressional leaders wrote in the letter, which was made public this week. “Repurposing the building for alternative purposes subsequent to a departure by the IRS could only be done at a considerable expense and would introduce employment instability in a neighborhood crucial for greater regional economic revitalization.”
The plea joins a chorus of concerns among local and state officials across the country in their ability to fill a record amount of empty office space in their respective cities. Leaders in San Francisco, New York, Chicago, Denver, Washington, D.C. and elsewhere are attempting myriad strategies to try to boost downtown recoveries struggling to regain momentum lost to the pandemic-related shift to hybrid and remote work.
Those strategies have included incentives to boost construction activity as well as streamlined processes to make it easier to convert vacant office properties into alternative uses such as housing. Some cities are jawboning employers to implement stricter in-office policies or cut back on flexible work days, while others look to update zoning codes or eliminate the barriers to converting empty office towers into alternative uses.
San Francisco Mayor London Breed, for example, has asked the city's public sector to move some government employees to empty office buildings scattered throughout the financial district in a move she's hoping might persuade other prospective tenants to reconsider the market.
Along a similar vein, Denver officials are moving forward with plans to acquire a high-profile office building in hopes of filling it with government workers who might bring new energy to a central business district battered by high vacancy rates and little demand for empty office space.
Spatial Reckoning
However, those efforts and the broader recommitment to in-person work has yet to shift the needle for the national office market. Office tenants instead are increasingly scrutinizing their real estate needs and existing commitments, a focus that has resulted in smaller lease sizes and falling demand for space in some of the country's older buildings.
Tenants collectively handed back more than 65 million square feet of office space throughout 2023, according to CoStar data, bringing the total to over 180 million since the start of 2020 and far exceeding the reductions reported throughout both the Great Recession as well as the Dot-Com Bust.
Even the federal government is taking a close look at how much space it occupies versus how much it now needs. As of last April, the GSA leases about 180 million square feet of office space across the country, and the federal government owns roughly 500 million square feet.
The federal government's return-to-office policies have proven contentious among its workforce and political leaders. Only a quarter of its federal headquarters space in the Washington, D.C., and Baltimore area was being used on a regular basis, according to a recent report from the Government Accountability Office. The report also found the federal government spends $5 billion a year to lease office buildings, and that half of its leases were due to expire between 2023 and 2027.
A GSA spokesperson told CoStar News that the agency is working with the IRS to determine its future office needs in Philadelphia, but did not provide additional details.
As of now, Rep. Evans said the GSA hasn't made any decisions regarding whether it will stay or leave its downtown Philadelphia campus. Even so, he said in a statement he preferred to start negotiations for the IRS-occupied space to avoid having more difficult conversations down the line.
Those efforts may prove to be inconsequential, however, given that the lease includes no renewal options and rents below market value, Brandywine Realty Trust CEO Jerry Sweeney told investors on an earnings call shortly after the company in April 2022 repurchased the building it had earlier sold in 2016.
In its initial ownership period, the Philadelphia-based real estate investment trust leased the office building to the GSA in 2010, a deal that made the IRS its sole occupant. However, after reacquiring an interest in the campus for $383 million, Sweeney previously said the REIT is weighing a mix of options such as “a significant repositioning into a life science facility" or re-leasing the property to a traditional office tenant willing to pay market-level rents.
"Acquiring this property created a preeminent profit and repositioning opportunity,” Sweeney previously said.
Brandywine declined to comment or provide details about its future plans for the downtown Philadelphia property and whether any of those include the IRS as its anchor tenant.