Uncle Sam pulls back
Bureaucrats may soon find that their bureaus are just a little bit smaller.
As the city, state and federal governments tighten their belts, brokers are seeing them reduce the amount of office space they lease. And with several prominent government agencies studying ways to reduce their footprints further, some insiders are beginning to worry about the impact that those cuts are going to have on Manhattan’s commercial leasing market.
The uncertainty extends to some nonprofit organizations that depend on government funding, commercial agents said.
As of June 30, government, education and social services accounted for 7.6 percent of office space usage in Manhattan and 11.8 percent of new leasing, according to Cushman & Wakefield. While the numbers were largely stable from a year earlier, both the city and state are cutting jobs, and big tenants like the Metropolitan Transportation Authority are involved in high-profile consolidation efforts.
Brokers say government agencies are now putting every square foot in their portfolios under a magnifying glass.
“They’re so publicly scrutinized, especially today with all the budget issues and people being so sensitive with taxes and money in general,” said Janet Woods, an executive vice president at Jones Lang LaSalle. “I think that they are really looking more closely at their portfolios.”
Woods, who has worked with both the city and state government in New York, said agencies are analyzing their portfolios to see where they can backfill empty space — though that strategy can be a challenge because of the tricky logistics of shifting workers between offices.
The uneasiness has spread to some government-funded nonprofit groups as well, said David Lebenstein, the head of the not-for-profit group at Cassidy Turley.
“There’s always an issue of government funding. It’s worse now,” he said.
He explained that the problem is especially acute for social-service groups that rely on Medicare reimbursements, as well as housing, child care, English as a second language, and energy conservation organizations — areas that are a perennial focus in the annual city and state budget wrangling.
“We’re seeing a lot of that uncertainty, and it makes it difficult for groups to make long-term commitments, and difficult for groups to make any kind of decisions,” Lebenstein said. “Sometimes they’re paralyzed.”
Lebenstein said that between a third and one-half of the organizations his group deals with are putting off growth plans, and either stalling by renewing their existing leases, or negotiating with landlords to shrink their square footage.
Lebenstein said many landlords have been offering perks and concessions — including months of free rent as well as facilities upgrades, such as new windows and air-conditioning — to their more stable nonprofit tenants. For a landlord renting to nonprofits, he said, the aim is to identify which tenants have reliable funding, and to keep them happy.
“[A landlord is] going to do that for a group that can demonstrate that they have a good balance sheet, that they’re reasonably well-funded, and that they’re going to be around for more than a couple of years,” Lebenstein said. “And I think that’s the challenge.”
Such stable nonprofits, in fact, can be highly desirable tenants for landlords, said Jon Denham, a principal at Denham Wolf.
When an organization has a solid mission and an identified revenue stream, he said, “That’s a better fiscal base than many for-profits can demonstrate, that are out there struggling from day to day and week to week with no guaranteed revenue.”
Denham said government cuts will eventually trickle down to nonprofit leasing — but he predicted that the impact on the market overall would be marginal.
“Unless you believe that we’re going to see really significant cuts, huge cuts in government activity, those needs will be there, and therefore the space needs will be there,” he said.
Still, New York State’s fiscal year 2012 budget includes a 2.3 percent across-the-board cut in spending. And, the Human Services Council of New York City estimated that the reductions could lead to the loss of 11,000 nonprofit jobs in the city.
The city’s $66 billion budget, adopted in June, calls for the elimination of more than 1,000 workers at the Department of Housing Preservation and Development, the Administration for Children’s Services, the Department of Parks and Recreation, the Health and Hospitals Corporation and the Department of Transportation. Mayor Bloomberg has warned that cuts in next year’s budget could be even more difficult.
As part of a plan the mayor announced last July, the city is also in the process of shrinking its back-office operations , with the aim of saving $36 million annually by the end of 2014. So far it’s reduced its footprint of leased space by 311,862 square feet, with agencies like the Department of Citywide Administrative Services and HPD moving and consolidating space.
Other agencies, meanwhile, are moving out of Manhattan to where the rents are cheaper. For example, the Department of Health and Mental Hygiene recently moved thousands of workers to a new building in Long Island City.
In addition, the state-run MTA announced in April that it’s selling its Madison Avenue headquarters, and that it had already eliminated 3,500 jobs, significantly reducing its office-space needs. The agency’s office leasing, it said, was already down 12 percent from a year earlier.
Dwayne Doherty, a spokesman for Cushman & Wakefield, said such job cuts — and cuts that have been proposed during the city and state budget processes in recent years — are a critical factor in predicting the government’s office needs.
“With commercial real estate, it literally boils down to employment growth or contraction,” he said. “As employment falls, occupancy requirements fall, or organizations look to reduce their footprints.”
Josh Kuriloff, a Cushman broker who has worked with the MTA, said he could not discuss the agency specifically, but noted that many organizations moving into new offices are reducing their space needs by modernizing their office layouts.
In the last five years, he said, nonprofits and government agencies have adopted a trend that the private sector has already embraced: more collaborative space and less individual space. As a result, companies that once allocated between 300 and 350 square feet per worker now may use 30 percent less.
When those entities relocate, that can translate to a reduction in their space needs of 10 to 15 percent.
Kuriloff said it may be a little early to see the full effect on landlords of local governments’ reduction in office space usage — especially since other types of office tenants, like hedge funds, are doing relatively well.
Also slowing the process, said JLL’s Janet Woods, is the difficulty, for agencies, of eliminating unused space. “It’s a lot of people, and it’s a lot of coordination, and it’s a lot of things to do to make everybody happy,” she said.
Still, she added, the reductions are coming and the governments’ real estate representatives are on the case.
“They know how things need to get done,” she said. “Sometimes it’s just the process that slows them down a little bit.”
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