IT and the Federal Government - Doing More with Less

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The Federal Government spends a significant amount of money on information technology. Indeed, an estimated $78.9 billion is budgeted for IT in Fiscal Year (FY) 2013. For every $100 in federal discretionary spending, over $6 is spent on information technology. Federal government IT spending has the potential to impact local IT employment and thus demand for industrial and office space.

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IT and the Federal Government - Doing More with Less

  1. 1. Information Technology and the Federal Government March 2012 Federal IT Spending Doing More with Less Jeffrey Kottmeier, Director of Research, DC Region $80 $79 $79.8 $78 $78.9 The Federal Government spends a significant amount of money on information $77$ Billions $76 $76.5 technology. Indeed, an estimated $78.9 billion is budgeted for information technology $75 $74 in Fiscal Year (FY) 2013.1 For perspective, total discretionary outlays for the Federal $73 $72 Government are an estimated $1.3 trillion for FY 2013. That means for every $100 in $71 $70 discretionary spending, over $6 is spent on information technology. FY 2011 FY 2012 FY 2013 The mantra for federal information technology (IT) is “doing more with less.” For FY Source: OMB 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 efficiencies from IT capital investments. In other words, Federal IT Budgets Flat certain areas of IT will, in fact, see increases in budget authority, but those increases Total for Major Agencies will be offset by cuts in other areas. $100 0% CAGR FY 2009 – FY 2013 Information technology plays a large role in the U.S. defense strategy. Department of 7.1% CAGR* $80 $79 B FY 2001 – FY 2009 Defense IT outlays are an estimated $37.2 billion—accounting for 47% of the total FY $ Billions $60 2013 federal IT budget—the largest share of any government agency. Additionally, the $40 Department of Homeland Security estimates $7.1 billion in IT outlays for FY 2013. $20 $0 It is important to note that the FY 2013 budget is only a proposal and has not yet 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 been approved by the Congress. Remember also that 2012 is an election year. *Compound Annual Growth Rate Consequently, any budget approval is likely to be delayed by continued congressional Source: Whitehouse.gov 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 Defense Spends the Most agencies have committed to close almost 1,100 data centers by 2015, which will save President’s IT Budget for FY 2013 an estimated $3 billion. To accomplish this, agencies will analyze current data centers $40 for ways to enhance their productivity and utilization. Data center consolidation has $35 $37 already begun, with almost half (525) of the centers expected to close by the end of $30 Total FY 2013 IT Spending = 2012. Although closures are planned for centers located across the U.S., there is a $ Billions $25 $20 $78.9 billion $15 high concentration of such data centers in the Mid-Atlantic region. In the future, the $10 $5 government will require agencies to examine existing data centers for capacity and $7 $6 $4 $3 $0 energy usage. This means that buildings with the best space utilization and highest Defense Health and Homeland Treasury Veterans Human Services Security Affairs energy efficiency measures will meet future government leasing requirements. Source: Executive Office of the President of the United States So far, demand for leased data center space has not felt a significant 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-partyCopyright © 2012 Cassidy Turley. All rights reserved. cassidyturley.com | 1
  2. 2. Information Technology and the Federal Government March 2012technology and data storage contractors such as BAE Systems, Microsoft and Google. The age and efficiency of data center spacewill play a role in determining future demand for specific buildings. In some cases, it is likely that the data center space being vacatedis older, since older centers are becoming functionally obsolete. Future demand will probably require the development of new, highlysophisticated data centers. These are very expensive to build relative to other commercial product types.Data Center Closures Cloud computing. Cloud computing entails the delivery of computing services over a network, typically theActual and Planned 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 Officer 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 useSource: Data.gov of cloud services. According to a recent white paper released by IDC,4 expenditures for public IT cloud 5services 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 publiccloud services. IDC expects to see increased federal government demand for more private cloud services in the future which willinclude email, portal development and collaboration.By using cloud technology for IT services, the Federal Government estimates it could reduce data center infrastructure expenditures by30%. Currently, the Federal Government’s server utilization rate is typically less than 30%. Cloud computing would mean improvedserver utilization – at 60% to 70% or greater, likely requiring fewer machines that take up less space. But reducing the amount ofequipment could have implications for commercial real estate. Higher server utilization rates could mean decreased demand for thenumber of data centers or space allocated for equipment in office buildings. On the other hand, newer technology could drive demandfor 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 toPresident Obama at the beginning of this year6 in which he plans cost cutting measures, but also stated that he would protect (and insome 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, DHSset up the Information Protection and Information Security (IPIS) program, which protects IT infrastructure and information. The IPISprogram will drive initiatives in cybersecurity, including programs that collaborate with public, private, and international partners. IPISalso includes the National Cybersecurity Division (NCSD) which partners with both private and public sector entities to defend againstthreats 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 approximately3% 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 FY2011. cassidyturley.com | 2
  3. 3. Information Technology and the Federal Government March 2012Healthcare IT. Information technology has become an important part of healthcare. The FY 2013 budget for the Department ofHealth and Human Services (HHS) includes an estimated $7.1 billion for IT. As part of the Patient Protection and Affordable Care Actof 2010 (also known as the Healthcare Reform Act), IT will enable the establishment of State-based Affordable Insurance Exchangesthat are scheduled to be implemented by 2014. HHS will direct part of its budget for resources to build IT capacity and create aninfrastructure 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 efficient with their real estate“footprints.” Technology will assist the agencies in reaching these goals. Already, agencies have developed or are developing teleworkpolicies 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 office 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 five years.7IT Employment, Defense Procurement, and IT-Related Commercial Real Estate (ii) IT Services Defense Procurement Exposure to Changes in Fed. IT (i) Contracts (Bil. $) Spending (iii) Market Employment As % of Total (Ths., NSA) 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(i) Select cities/metro divisions. 2011 figures, 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 cassidyturley.com | 3
  4. 4. Information Technology and the Federal Government March 2012Impacts 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, andSan 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 andthus demand for industrial and office space. As mentioned earlier, the DOD accounts for 47% of all federal IT outlays. Defenseprocurement—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 asWashington, DC, San Francisco/Silicon Valley, Dallas, Baltimore, and Atlanta—will arguably have the largest exposure to changes infederal IT expenditures.1 Office 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 Office 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 Briefing Room, The Pentagon, Washington, DC, January 05, 2012.7 GSA Office of Government-wide Policy, Office 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 and no representation is made as to the accuracy thereof. Cassidy Turley is a leading commercial real estate services provider with more than 3,500 professionals in more than 60 offices nationwide. The company represents a wide range of clients—from small businesses to Fortune 500 companies, from local non-profits to major institutions. The firm completed transactions valued at $22 billion in 2011, manages 455 million square feet on behalf of institutional, corporate and private clients and supports more than 28,000 domestic corporate services locations. cassidyturley.com | 4

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