GSA: The Elephant in the Room No one Wants to Talk About

The General Services Administration (GSA) is the government arm that oversees real estate activity, including leasing, for most federal agencies. According to a recent report by the Washington Business Journal, GSA spends $5.7B a year in rent on leased space throughout the country. Occupying more than 180 million square feet over 7,700 leases, they are the single biggest occupier of leased space in the United States.

For years there has been talk of federal office downsizing. Between 2011 and 2022 the government did cut a net 1,165 leases comprising roughly 14 million square from its national portfolio. For an entity like the federal government, that a drop in the bucket. However, when analyzed more closely the impact to certain sub-markets can be downright devastating.

As one might imagine, COVID has accelerated work-from-home and hybrid work policies across most government agencies. Layer on the government’s desire to reduce its carbon footprint – which is most easily achieved by occupying less space – and it becomes clear the trend established over the past decade will only accelerate.

This tsunami of vacant office space puts downward pressure on rents and upward pressure on vacancy in various markets, softening an already reeling real estate asset class. But one of the most understated, if not outright missed aspects of this trend, is the impact to local taxing jurisdictions and their property tax revenue base.

Commercial office buildings are assessed based on the income they generate. Higher vacancies at both the building and sub-market level drive down assessed values and reduce the property tax generated by office buildings. In certain sub-markets, the fed’s downsizing effect combined with other office leasing trends will leave some local budgets reeling.

Take the DMV, our backyard, as an example. Unsurprisingly, the national capital region has the highest concentration of GSA-leased assets in the country. In fact, approximately 46 million square feet of the total 180 million square feet of leased space is in Washington, D.C., Maryland, and Virginia. That equates to GSA leases accounting for roughly a quarter of total space!

And here’s the kicker. Approximately 40% of that leased space is scheduled to expire over the next 4 years. Knowing what we know, the implications of that will be significant.

Consider the fact that those same expirations generate approximately $650M in annual rent – and that the taxable value attributed to that loss most likely exceeds $7B. That’s more than $100M in real estate tax revenue lost due to a single tenant’s downsizing! That may not send shivers down your spine, but against the backdrop of downsizing trends across the rest of the private sector, it doesn’t bode well for tax coffers.

At this point, you may be asking “why do I care?” The reason is simple: because property taxes make up more than 5% of local government budgets. When the assessment bases that drive those revenues decline, tax rates usually go up to offset the difference. That means commercial real estate owners and homeowners in areas with high concentrations of GSA leasing activity should be prepared to see their own taxes rise.