Federal agency headquarters buildings in greater Washington, D.C., remain deeply underused, with in-person usage rates as low as 9% — even for the General Services Administration overseeing federal space procurement.
Those are among the findings from a new report from the General Accounting Office, a nonpartisan U.S. watchdog. And credit ratings firm Moody's Investors Service concludes that federal agency reductions already threaten some bond repayments and further weak leasing in the market.
About 11.7 million square feet of federally leased space in the D.C. area is set to expire by the end of next year, according to federal lease data, potentially encouraging consolidation of the leases by combining agencies into one site. In its report, the GAO reviewed three selected weeks, one each during January, February, and March 2023 and found that 17 of 24 federal agencies used on average an estimated 25% or less of the capacity of their headquarters buildings.
On the low end of the range were agencies including the departments of Agriculture, Housing & Urban Development, the Small Business Administration, and the Social Security Administration, using about 9% of their space.
Even on the higher end of the range of use, agencies used less than half the capacity of their headquarters on average. Those agencies included such departments as Commerce, Homeland Security, Justice, State, and Treasury.
The GAO calculated utilization based on the size of a building in terms of usable square feet compared to how many people entered the building per day.
“Underutilized office space has financial and environmental costs,” the GAO reported. “Federal agencies spend about $2 billion a year to operate and maintain federal office buildings regardless of the buildings’ utilization. In addition, agencies spend about $5 billion annually to lease office buildings. Any reduction in office space could reduce these costs. Office buildings also have environmental costs that could be lowered with better utilization.”
Lease Payment Risk
The underutilization also presents real financial risks to investors as well, according to Moody’s Investors Service in its analysis of the GAO report.
The findings signal the potential accelerated downsizing of the federal government's leased footprint, at least for large federal office buildings in greater D.C., a significant risk for federal lease revenue bonds, Moody’s said. Such bonds are backed by lease payments from federal agencies. Those bonds require lease renewals to successfully refinance that outstanding debt.
“While pressure to downsize its leased footprint predates the COVID-19 pandemic, greatly increased telework and remote work will accelerate the government's downsizing plan,” Moody’s said, pointing to the case of the U.S. Patent and Trademark Office headquarters.
Moody's expects the Patent & Trademark reductions will lead to a default on bond payments.
A year ago, the Patent & Trademark lease was reduced in Alexandria, Virginia, by more than 760,000 square feet, joining a slew of government-owned entities that have already been shrinking their offices in the D.C. area. The agency signed a new lease, taking its five-building campus down to three buildings.
LCOR of Berwyn, Pennsylvania, owns the Patent & Trademark campus. Representatives of LCOR did not respond to a request for comment on the Moody’s report.
In August, Moody’s downgraded $60.2 million in bonds backed by Patent & Trademark lease payments, signaling a high risk of default on senior debt as early as December 2024.
Weak Leasing Outlook
The underutilized D.C. government offices could reduce the likelihood of lease renewals going forward, according to Moody’s.
“While most of the headquarters buildings in the study are federally owned spaces, such underutilized space still poses an indirect risk,” Moody’s said. “More space at federally owned buildings, along with the GSA's strategy to preserve and prioritize such assets, will likely lead to consolidation of leased space into federally owned space, causing lower lease renewal likelihoods at those leased facilities.”
The GAO report underscores that the GSA continues to have excess supply of both owned and leased real estate, Cushman & Wakefield said in an email to CoStar News. That oversupply, combined with aggressive working from home policies, may lead to more downsizing of federal agencies in their 45 million square feet of leased inventory in metropolitan Washington for the foreseeable future, according to the brokerage.
“While it’s true that the Feds continue to have vacant spaces within their owned buildings, one of their main challenges with backfilling these spaces and/or increasing their utilization is the massive costs to renovate, modernize, amenitize and provide the necessary technological infrastructure,” Darian LeBlanc, executive vice chairman of government investor services at Cushman & Wakefield, said. “In many cases, it’s faster and less costly to simply lease space in modern office buildings than it is to undertake a renovation in a federal building.”
The GAO report supports LeBlanc’s take. Most agencies’ hradquarters’ configurations do not support a modern workplace, the GAO said. The headquarters buildings were designed under a model that included numerous areas no longer needed in the modern workplace, such as some administrative and storage spaces. In some cases, agencies configured their spaces with larger offices than are currently needed. Multiple agencies indicated that the historic nature of their headquarters buildings limits their ability to maximize utilization.
In commenting to the GAO on the conclusions of the report, the GSA said, “Ways of working in offices have changed following the pandemic and will continue to change particularly as organizations continue to leverage new technology and appropriate hybrid working arrangements. As a result, calculating appropriate utilization rates will be an ongoing challenge.”
The GSA said the unused space catalyzes opportunities to consolidate, co-locate, and optimize the federal real estate portfolio.