Information Technology and the Federal Government

March 2012

cassidyturley.com | 1

Doing More with LessJeffrey Kottmeier, Director of Research, DC Region

The Federal Government spends a signifi cant amount of money on information

technology. Indeed, an estimated $78.9 billion is budgeted for information technology

in Fiscal Year (FY) 2013.1 For perspective, total discretionary outlays for the Federal

Government are an estimated $1.3 trillion for FY 2013. That means for every $100 in

discretionary spending, over $6 is spent on information technology.

The mantra for federal information technology (IT) is “doing more with less.” For FY

2013, the proposed federal IT budget is 1.2% less than that in FY 2012; that is due

primarily to decreases in IT spending by the Department of Defense (DOD). From 2001

to 2009, aggregate IT spending by the government increased at a compound annual

growth rate (CAGR) of 7.1%; the CAGR estimate for IT spending from 2009 to 2013 is

virtually zero. It is also worth noting that recent budget proposals suggest that there will

be realized savings through effi ciencies from IT capital investments. In other words,

certain areas of IT will, in fact, see increases in budget authority, but those increases

will be offset by cuts in other areas.

Information technology plays a large role in the U.S. defense strategy. Department of

Defense IT outlays are an estimated $37.2 billion—accounting for 47% of the total FY

2013 federal IT budget—the largest share of any government agency. Additionally, the

Department of Homeland Security estimates $7.1 billion in IT outlays for FY 2013.

It is important to note that the FY 2013 budget is only a proposal and has not yet

been approved by the Congress. Remember also that 2012 is an election year.

Consequently, any budget approval is likely to be delayed by continued congressional

gridlock. The Federal Government will almost certainly operate under a continuing

resolution which implies similar funding levels as those in FY 2012. The following

outlines some of the Federal Government’s initiatives in IT and the implications on

commercial real estate.

Data center consolidation. In an effort to reduce federal spending, government

agencies have committed to close almost 1,100 data centers by 2015, which will save

an estimated $3 billion. To accomplish this, agencies will analyze current data centers

for ways to enhance their productivity and utilization. Data center consolidation has

already begun, with almost half (525) of the centers expected to close by the end of

2012. Although closures are planned for centers located across the U.S., there is a

high concentration of such data centers in the Mid-Atlantic region. In the future, the

government will require agencies to examine existing data centers for capacity and

energy usage. This means that buildings with the best space utilization and highest

energy effi ciency measures will meet future government leasing requirements.

So far, demand for leased data center space has not felt a signifi cant impact from

federal consolidations, though it may likely suffer an adverse impact going forward. The

extent of such adverse effects is hard to quantify, but could be enough to impact those

markets with a heavy concentration of federal data centers. If there are adverse effects,

federal data center consolidation will impact space leased or owned by third-party

$37

$6$7 $3$4$0$5

$10$15$20$25$30$35$40

Defense Health andHumanServices

HomelandSecurity

Treasury VeteransAffairs

$ B

illio

ns Total FY 2013 IT Spending = $78.9 billion

Defense Spends the Most President’s IT Budget for FY 2013

Source: Executive Offi ce of the President of the United States

$76.5

$79.8$78.9

$70$71$72$73$74$75$76$77$78$79$80

FY 2011 FY 2012 FY 2013

$ B

illio

ns

Federal IT Spending

Source: OMB

$0

$20

$40

$60

$80

$100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$ B

illio

ns

7.1% CAGR*FY 2001 – FY 2009

0% CAGRFY 2009 – FY 2013

$79 B

Federal IT Budgets Flat

Total for Major Agencies

*Compound Annual Growth RateSource: Whitehouse.gov

Copyright © 2012 Cassidy Turley. All rights reserved.

Information Technology and the Federal Government

March 2012

cassidyturley.com | 2

technology and data storage contractors such as BAE Systems, Microsoft and Google. The age and effi ciency of data center space

will play a role in determining future demand for specifi c buildings. In some cases, it is likely that the data center space being vacated

is older, since older centers are becoming functionally obsolete. Future demand will probably require the development of new, highly

sophisticated data centers. These are very expensive to build relative to other commercial product types.

Cloud computing. Cloud computing entails the delivery

of computing services over a network, typically the

internet. In order to streamline systems and applications

and to better utilize technology assets, the Federal Cloud

Computing Initiative was introduced in 2009. In 2011,

U.S. Chief Information Offi cer Vivek Kundra estimated

that approximately $20 billion—or one quarter of the

Federal Government’s aggregate IT spending—are

potential budget targets for moving to the cloud.2

Agencies with the largest potential for spending on

cloud computing are the Departments of Homeland

Security and Treasury (over $2.4 billion each), followed

by the Departments of Defense, Veterans Affairs and

Transportation.3

The government has the potential of increasing its use

of cloud services. According to a recent white paper

released by IDC,4 expenditures for public IT cloud

services5 accounted for the smallest share of government sector IT budgets compared to that of any other sector of the economy.

IDC estimates that governments—federal, state, and local—spent 1 to 1.25% of their 2011 IT budgets on public IT cloud services.

Applying these percentages to the Federal Government’s IT budget, an estimated $765 to $956 million was spent in 2011 on public

cloud services. IDC expects to see increased federal government demand for more private cloud services in the future which will

include email, portal development and collaboration.

By using cloud technology for IT services, the Federal Government estimates it could reduce data center infrastructure expenditures by

30%. Currently, the Federal Government’s server utilization rate is typically less than 30%. Cloud computing would mean improved

server utilization – at 60% to 70% or greater, likely requiring fewer machines that take up less space. But reducing the amount of

equipment could have implications for commercial real estate. Higher server utilization rates could mean decreased demand for the

number of data centers or space allocated for equipment in offi ce buildings. On the other hand, newer technology could drive demand

for high-tech data center development.

Cybersecurity. Cybersecurity is key to our national defense. Even in the face of austerity measures and a decreasing defense budget,

cybersecurity and information technology have been spared. Secretary of Defense Leon Panetta outlined the DOD’s strategy to

President Obama at the beginning of this year6 in which he plans cost cutting measures, but also stated that he would protect (and in

some cases increase) investments in cyber capabilities.

The Department of Homeland Security (DHS) will play a crucial role in cybersecurity. Under the Homeland Security Act of 2002, DHS

set up the Information Protection and Information Security (IPIS) program, which protects IT infrastructure and information. The IPIS

program will drive initiatives in cybersecurity, including programs that collaborate with public, private, and international partners. IPIS

also includes the National Cybersecurity Division (NCSD) which partners with both private and public sector entities to defend against

threats to information technology. Many of these federal programs will generate business with private sector technology contractors.

According to the FY 2013 budget proposal, DHS estimates IPIS program expenditures of $1.167 billion in FY 2013, or approximately

3% of DHS’s total budget. This compares to the $888 million estimated for the IPIS program in FY 2012 and $1.0 billion spent in FY

2011.

Data Center ClosuresActual and Planned

Source: Data.gov

Information Technology and the Federal Government

March 2012

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Healthcare IT. Information technology has become an important part of healthcare. The FY 2013 budget for the Department of

Health and Human Services (HHS) includes an estimated $7.1 billion for IT. As part of the Patient Protection and Affordable Care Act

of 2010 (also known as the Healthcare Reform Act), IT will enable the establishment of State-based Affordable Insurance Exchanges

that are scheduled to be implemented by 2014. HHS will direct part of its budget for resources to build IT capacity and create an

infrastructure for these exchanges. Additionally, infrastructure is needed to provide cost-sharing and insurance premium information.

Companies specializing in IT infrastructure and databases have the potential to garner future business.

Increased mobility. Federal agencies aim to increase federal workforce productivity while becoming more effi cient with their real estate

“footprints.” Technology will assist the agencies in reaching these goals. Already, agencies have developed or are developing telework

policies and increasing mobility through the use of technologies such as laptops, smart phones, tablets and the cloud. Additionally,

the Federal Government is using hoteling and virtual workplaces to increase utilization of current offi ce space. According to the U.S.

General Services Administration, today’s prevailing standard workspace average is approximately 190 usable square feet per person,

and the space allocation could hit a mere 60 square feet in the next fi ve years.7

IT Services (ii) Defense Procurement Contracts (Bil. $)

Exposure to Changes in Fed. IT Spending (iii)

Market (i) Employment (Ths., NSA)

As % of Total Non-Farm

Atlanta 45 2.0% $4.9 Medium

Baltimore 28 2.2% $5.6 Medium

Chicago 49 1.3% $4.3 Low

Columbus 25 2.7% $1.3 Low

Dallas 37 1.8% $5.8 Medium

Denver 24 2.0% $2.4 Low

Detroit 7 1.0% $0.1 Low

Houston 26 1.0% $3.9 Low

Los Angeles 27 0.7% $10.6 Low

Minneapolis 23 1.3% $1.4 Low

New York 49 1.0% $1.7 Low

Northern NJ 12 1.2% $1.2 Low

Omaha 7 1.5% $0.7 Low

Philadelphia 31 1.7% $4.6 Medium

Portland, OR 8 0.9% $0.6 Low

Salt Lake City 9 1.5% $0.9 Low

San Francisco/ Silicon Valley 104 3.8% $6.3 Medium

Oakland 19 2.0% $0.6 Low

San Francisco 37 3.9% $1.0 Low

San Jose 48 5.5% $4.7 Medium

Seattle 29 2.1% $3.1 Low

Washington, DC Metro 148 6.1% $34.7 High

IT Employment, Defense Procurement, and IT-Related Commercial Real Estate

(i) Select cities/metro divisions. 2011 fi gures, except Defense Procurement (2010).(ii) Includes custom computer programming, computer systems design, computer systems facilities management,

other computer-related services.(iii) Based on IT employment and defense procurement.

Sources: BLS, Census Bureau, Moody’s, Cassidy Turley Research

Information Technology and the Federal Government

March 2012

1 Offi ce of Management and Budget. Fiscal Year 2013 Analytical Perspectives, Budget of the U.S. Government, February, 13 2012.2 The White House. Federal Cloud Computing Strategy, February 08, 2011.3 Agency estimates reported to the Offi ce of Management and Budget (OMB).4 Gantz, John, Anna Toncheva, & Stephen Minton. Cloud Computing’s Role in Job Creation, March 2012.5 Public cloud services include third-party data storage, as opposed to private clouds that are internal to an organization. 6 Statement on Defense Strategic Guidance as delivered by Secretary of Defense Leon E. Panetta, Press Briefi ng Room, The Pentagon, Washington, DC,

January 05, 2012.7 GSA Offi ce of Government-wide Policy, Offi ce of Real Property Management Performance Measurement Division. Workspace Utilization and Allocation

Benchmark, July 2011.

Disclaimer

This report and other research materials may be found on our website at www.cassidyturley.com. This is a research document of Cassidy Turley in Washington, DC. Questions

related to information herein should be directed to the Research Department at 202-463-2100. Information contained herein has been obtained from sources deemed reliable

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Impacts on Employment and Commercial Real Estate. Generally, employment in IT services plays a small role in local labor markets.

IT services in most of the metros studied account for 2% or less of those metros’ workforces. The exceptions are Washington, DC, and

San Jose (Silicon Valley), California in which IT services comprise 6.1% and 5.5%, respectively, of the local labor forces.

Federal IT outlays—especially expenditures related to national defense—have the potential to impact local IT employment and

thus demand for industrial and offi ce space. As mentioned earlier, the DOD accounts for 47% of all federal IT outlays. Defense

procurement—the amount the Federal Government spends on private sector contracts—is well correlated with IT services employment

(R2=0.69). Therefore, metros with a substantial IT services workforce and sizeable defense procurement spending—such as

Washington, DC, San Francisco/Silicon Valley, Dallas, Baltimore, and Atlanta—will arguably have the largest exposure to changes in

federal IT expenditures.