US government will drive office market recovery in 2010

The US federal government will rent upwards of 5m sq. ft. of space in the Washington DC area alone this year, more than the total public and private demand across the rest of the country. However, starting in mid-2011 a period of ‘austerity’ will begin.

The US government will be the primary driver of the nation’s office market in 2010, with Washington DC set to benefit the most from increased demand for space, according to Jones Lang LaSalle.

Over the next 12 months, the federal government’s role in driving activity will intensify as its shifts from planning numerous programmes and initiatives to actually implementing them. The federal government is expected to lease an additional five million square feet of office space in the Washington DC area alone in 2010, locking up long-term deals with renewal options. The total public and private demand across the rest of the US is not expected to reach five million square feet.

National office vacancy rates in the US remain at historic highs, with the year-end 2009 occupancy rate climbing to 18.3 percent, surpassing the previous high recorded in 2003 according to the report, entitled the 2010 Federal Government Perspective.

In terms of leasing demand, the report said various arms of the government had already increased their footprint in the Washington DC metro area, including agencies such as the Department of Treasury, the Federal Reserve, the Commodities Futures Trading Commission and the Securities Exchange Commission. As of the end of 2009, the government was still actively looking for the 1.1-million-square-feet of space for the Department of Homeland Security, the SEC was searching for nearly 400,000-square-feet and the Department of Veteran Affairs was looking for 276,000-square-feet of office space. The Federal Reserve, the US Treasury and the Comptroller of the Currency will also see increased space requirements.

The private sector should follow suit with law firms, accountants, contractors and consultants accommodating the federal government’s increased business. This increase in activity will likely occur in Washington DC faster than anywhere else in the nation.

“With many ownership groups under water on investments, the government may intercede in commercial real estate to provide liquidity and keep certain entities afloat,” said Joe Brennan, managing director of Jones Lang LaSalle’s government investor services team. “In that event, the introduction of new programs to aid struggling commercial real estate owners could create near-term space requirements in financial centres like New York, San Francisco and in the Washington DC metro area.”

Other parts of the US will also benefit from increased government activity. Energy policy is likely to increase demand for leased space in energy hubs such as Colorado, California and Texas.  Suburban Maryland also stands to benefit thanks to newly introduced health care legislation.

Although federal demand in 2010 is expected to be stronger than in 2009, it is anticipated that after the mid-term elections this November, demand will subside and a period of austerity will begin from mid-2011.