Insights: How will Federal Spending Impact the DC Region?Given the current U.S. deficit, there has

been a great deal of speculation about

how changes in federal spending will

impact the DC region. During the 2007-

2009 recession, the DC region led the

country in economic and real estate per-

formance, due in part to the extent to

which federal expenditures are concen-

trated in this region. It is increasingly likely

that federal spending in the DC region will

moderate over the next two years from its

record-highs of 2010. This white paper

offers a brief analysis and summary of the

implications of proposed changes in fed-

eral spending on the DC region economy

and the commercial real estate market.

FY 2011 Budget

Following weeks of debate over a possible

federal government shutdown, the U.S.

Congress passed a continuing resolution

(CR)1 for the remainder of fiscal year (FY)

2011, which runs through September 30,

2011. The budget resolution compromise

trimmed $38.5 billion from the current

operating budget. Those budget cuts in-

clude:

• $19.2 billion from Education, Labor,

health care programs

• $3.5 billion from the children’s health

care initiative

• $2.2 billion from the health care in-

surance CO-OPS program

• $500 million from funding for federal

Pell grants

• Cuts in other programs, including job

training, highway and high-speed rail

projects, and rural development ini-

tiatives

But these “cuts” may not be as bad as

originally thought. First, the government

considers a cut as a reduction in future

spending plans. Additionally, a cut can

be defined as a reduction in the rate

of spending increases. Many believe

that the announced cuts merely reflect

changes in accounting practices.

Despite these budget cuts, the DC region

may actually fare rather well with the lat-

est round of FY 2011 budget revisions.

Funding for agencies and initiatives that

are key to the DC region actually in-

creased in 2011 compared to 2010:

• Health and Human Services - an

increase of $14.9 billion in 2011

(+2.7% year over year)

• Department of Defense - an increase

of $5 billion (+1% year over year)

• Securities and Exchange Commis-

sion - an increase of $74 million

(+7% year over year)

• No cuts to federal allocations for DC

Metro public transit

With the concentration of health services

and research in Suburban Maryland and

Northern Virginia’s focus on defense, both

of these regions appear likely to benefit

from these increases in the short-term.

The Long-Term: FY 2012 and Beyond

There is much uncertainty related to the

federal budget and the implications for

the Washington, DC region. As of this

writing, the FY 2012 budget is being de-

bated in Congress. Both the President’s

and the Republican Congressional lead-

ership’s proposal call for a two percent

decrease, year over year, for FY 2012,

although budgets for every year from

2013 onward reflect increases proposed

by both parties. What the final ratified

budget will be is still uncertain, but at

least the long-term trend seems to be the

same—up.

Department of Defense: According to the

FY 2012 budget submission by Presi-

dent Obama, the Department of Defense

base budget would increase to $553 bil-

lion. This increase reflects investments in

national security priorities such as cyber

security, satellites, and nuclear security.

If these IT and research-related initia-

tives come to fruition, defense technology

firms located in Northern Virginia would

benefit.

The FY 2012 proposal also includes cuts

in unneeded weapons, the Missile De-

fense Agency (Pentagon), a consolidation

of Air Force operation centers, reduced

Army construction costs and the Navy’s

use of multi-year procurement strategies.

Department of Homeland Security: The

President’s proposed budget also pro-

vides $43.2 billion in net discretionary

Copyright © 2011 Cassidy Turley. All rights reserved.

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Trill

ions

President's Budget Republican Budget Resolution

Sources: Whitehouse.gov, budget.GOP.gov

Long Term Budget Trends Up

1 A continuing resolution provides budget authority for federal agencies and programs to continue in operation until regular appropriations acts are enacted.

funding - an increase of $767.6 million

(1.8 percent) over 2010 funding lev-

els – for the Department of Homeland

Security (DHS). Budget increases in-

clude additional funding for information

network security and infrastructure. Spe-

cifically, the budget provides $459 million

for the National Cyber Security Division to

secure information networks and defend

against cyber-threats to federal networks,

the nation’s critical infrastructure, and

economy.

Despite proposed spending increases,

ongoing budget resolutions have stalled

government leasing activity across the

board in the capital region. Many gov-

ernment lease prospectuses are currently

on hold, awaiting congressional approval.

Furthermore, the White

House requested DHS’s

move to St. Elizabeth’s

campus and construc-

tion of the planned

Federal Emergency

Management Agency

(FEMA) headquarters

at St. Elizabeth’s to

be delayed “at least a

year” under President

Barack Obama’s FY

2012 budget proposal.

The budget calls for the

deferral of later phases

of the St. Elizabeth’s

project as well.

Department of Health and Human Services: The President’s FY

2012 budget includes

a slight increase from

$79.8 billion to $79.9

billion in discretionary budget authority

to support the Department of Health and

Human Services (HHS). Over the next

five years, the proposed HHS budget re-

flects a $308 billion (6 percent annual)

increase. The budget calls for an invest-

ment of $32.0 billion in biomedical re-

search including funding for the National

Institutes of Health’s (NIH)’s leading-edge

work in cancer science and research into

Alzheimer’s disease and autism spectrum

disorders. It supports basic and clinical

research to deliver better health care and

drive future economic growth.

These proposed increases would bode

well for the Montgomery County office

market in Suburban Maryland, which

is most renowned for its biotechnology

community. The I-270 Technology Corri-

dor in the County has attracted over 200

biotech companies and industry leaders

such as Celera, Genomics, MedImmune,

and Invitrogen. Montgomery County is

also home to 19 federal agencies, in-

cluding NIH, the National Institutes of

Standards and Technology (NIST), the

U.S. Department of Agriculture (USDA)

Research Center, and the National Naval

Medical Center.

Federal Employment

The Federal Government has helped the

DC region weather some tough times over

the years. During the 2007-2009 reces-

sion, the Federal Government added

16,000 jobs in the DC Metro area while

the private sector shed over 73,000 jobs.

Even so, other challenging economic

times resulted in fewer jobs in the DC

area. In the early 1990s, the Federal

Government downsized by approximate-

ly 427,000 federal jobs nationally and

about 37,500 in the DC region. The cuts

were primarily through attrition: workers

retiring rather than agencies laying off

employees. During that time, employ-

ment shifted from government jobs to

private contractors. In the mid 1990s,

procurement spending in the DC region

increased by $3.3 billion.

The DC region’s employment base has

become more diversified. At its 20-year

peak in 1992, federal government em-

ployment accounted for 18 percent of

total non-farm jobs in the DC Metro area.

Since then, that number has declined to

14 percent. The diversification of federal

and private employment will help the re-

gion perform well during periods of fed-

eral downsizing.

Copyright © 2011 Cassidy Turley. All rights reserved.

Department or Other Unit 2012 Vs. 2011

change (estimate)

2013-2016 Annual Average Change

Department of Agriculture -1.5% -2.3%

Department of Commerce 13.9% 1.0%

Department of Defense 0.7% 2.5%

Department of Education 38.5% 5.4%

Department of Energy -12.7% 1.6%

Department of Health and Human Services -1.0% 7.8%

Department of Homeland Security 1.8% 2.0%

Department of Housing and Urban Development -15.5% -0.4%

Department of the Interior -4.4% -1.5%

Department of Justice -5.1% 1.7%

Department of Labor -27.2% -11.4%

Department of State 9.1% -1.8%

Department of Transportation 68.1% -2.3%

Department of the Treasury 11.4% 15.5%

Department of Veterans Affairs 4.5% 5.5%

Environmental Protection Agency -11.2% -0.2%

General Services Administration -9.0% -0.1%

Social Security Administration (On-Budget) -39.1% 1.3%

Social Security Administration (Off-Budget) 12.9% 6.3%

Total budget authority 0.9% 4.3%

Sources: FY 2012 Budget of the US Government (OMB), Cassidy Turley

Agency Budgets

2

Commercial Real Estate

What will happen to DC Metro real es-

tate markets? Historically, the DC region’s

economy and its commercial real estate

markets perform well even when federal

spending is “slow”. In fact, the region’s

office market is at its best when federal

spending is slow. Federal spending and

federal employment tend to be stronger

during recessionary periods when the

private sector is not performing well. As

the economy improves, the private sector

tends to increase employment.

Defense spending plays a significant role

in the Northern Virginia economy, but it

is not dependent solely upon the Federal

Government. It should be noted that in-

creases in defense spending do not trans-

late directly into office space demand.

There were healthy increases in procure-

ment spending in both 2002 and 2009,

but the NoVA office market experienced

negative net absorption. Additionally,

the NoVA economy has become more

diversified as a result of private sector

companies – such as Hilton Worldwide,

Volkswagen and VeriSign – relocating to

the region. Consequently, a decrease in

defense spending will not mean that the

Northern Virginia office leasing market

will come to a halt.

Suburban Maryland shows a similar pat-

tern. In 2000, Suburban Maryland ex-

perienced one of its best years in office

demand. This was due primarily to the

strong performance by the Professional

& Business Services and Financial sec-

tors and small spending increases in the

Federal Government sector. Even with

decreases in non-defense federal pro-

curement spending in 1994, 1996 and

2007, the Suburban Maryland market

experienced average to above average of-

fice demand.

The future of health-care reform legisla-

tion will have an impact on the Suburban

Maryland market, due to the large pres-

ence of HHS and the NIH. Although

the reform bill was passed by Congress

last year, the House of Representatives

passed H.R. 2, “Repealing the Job-Killing

Health Care Law Act” in January, 2011.

Congressional Budget Office estimates

show that HHS will incur costs between

$5 billion to $10 billion over 10 years to

carry out its responsibilities for enacting

the full reform legislation. Depending on

what parts of the legislation are repealed

or revised, if any, both HHS and private

contractors in the Maryland market could

feel the impact.

Outlook

Until the federal budgets are approved,

federal agencies are in a “wait and see”

mode. That will likely lead to a short-term

slowdown in office space demand. As far

as leasing activity is concerned, it is on an

agency-by-agency basis however, agen-

cies will most likely a) renew in place for

the short-term, or b) temporarily place re-

quirements on hold. Nevertheless, these

options will eventually lead to an uptick

in demand in the long-term. Additionally,

contractors will be slower to make real es-

tate decisions until they are more certain

of future programs and federal budget al-

locations.

While government spending may de-

crease both nationally and in the DC

region over the next year, historical evi-

dence suggests that budget cuts will have

minor effects on commercial real estate

in the DC region. If history is any guide,

federal outlays have increased every sin-

gle year for the past 20 years in the DC

area. Still, DC will most likely not see as

many colossal federal leases signed over

the next couple of years. We anticipate

the region’s office demand to increase as

private sector demand improves.

For more information contact:

Jeffrey Kottmeier at 202.463.2100 or

Urmi Joshi at 202.463.2100

Published June 2011

Copyright © 2011 Cassidy Turley. All rights reserved. 3

0%

2%

4%

6%

8%

10%

12%

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Fede

ral S

pend

ing

(%ch

g)

0

1

2

3

4

5

Net

Abs

orpt

ion

(sq

ft, m

illio

ns)

DC Absorption Federal Spending (%chg)

Sources: GMU Center for Regional Analysis; Cassidy Turley

DC performs well when fed

spending is “slow”

Sources: GMU Center For Regional Analysis, Cassidy Turley

$0

$20

$40

$60

$80

$100

$120

$140

$160

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Fede

ral O

utla

ys, B

illio

ns $

Reagan Bush I Bush IIClinton Obama

What will happen to federal spending? Federal Spending in the DC Region