Federal spending impacts the DC region's economy and commercial real estate market. While cuts are proposed for FY2011 and FY2012, key agencies for the region like HHS saw increases in 2011. Long term trends still point to overall growth in federal budgets. The region has historically fared well even when federal spending slows as the private sector picks up. Defense remains important for Northern Virginia but the region has diversified. Federal employment declines may slow absorption temporarily but the office market typically performs well as private sector demand recovers.

1. Insights: How will Federal Spending Impact
the DC Region?
Given the current U.S. deficit, there has But these “cuts” may not be as bad as decrease, year over year, for FY 2012,
been a great deal of speculation about originally thought. First, the government although budgets for every year from
how changes in federal spending will considers a cut as a reduction in future 2013 onward reflect increases proposed
impact the DC region. During the 2007- spending plans. Additionally, a cut can by both parties. What the final ratified
2009 recession, the DC region led the be defined as a reduction in the rate budget will be is still uncertain, but at
country in economic and real estate per- of spending increases. Many believe least the long-term trend seems to be the
formance, due in part to the extent to that the announced cuts merely reflect same—up.
which federal expenditures are concen- changes in accounting practices.
Department of Defense: According to the
trated in this region. It is increasingly likely
Despite these budget cuts, the DC region FY 2012 budget submission by Presi-
that federal spending in the DC region will
may actually fare rather well with the lat- dent Obama, the Department of Defense
moderate over the next two years from its
est round of FY 2011 budget revisions. base budget would increase to $553 bil-
record-highs of 2010. This white paper
Funding for agencies and initiatives that lion. This increase reflects investments in
offers a brief analysis and summary of the
are key to the DC region actually in- national security priorities such as cyber
implications of proposed changes in fed-
creased in 2011 compared to 2010: security, satellites, and nuclear security.
eral spending on the DC region economy
• Health and Human Services - an If these IT and research-related initia-
and the commercial real estate market.
increase of $14.9 billion in 2011 tives come to fruition, defense technology
FY 2011 Budget (+2.7% year over year) firms located in Northern Virginia would
Following weeks of debate over a possible • Department of Defense - an increase benefit.
federal government shutdown, the U.S. of $5 billion (+1% year over year)
The FY 2012 proposal also includes cuts
Congress passed a continuing resolution • Securities and Exchange Commis-
in unneeded weapons, the Missile De-
(CR)1 for the remainder of fiscal year (FY) sion - an increase of $74 million
fense Agency (Pentagon), a consolidation
2011, which runs through September 30, (+7% year over year)
of Air Force operation centers, reduced
2011. The budget resolution compromise • No cuts to federal allocations for DC
Army construction costs and the Navy’s
trimmed $38.5 billion from the current Metro public transit
use of multi-year procurement strategies.
operating budget. Those budget cuts in- With the concentration of health services
clude: and research in Suburban Maryland and Department of Homeland Security: The
• $19.2 billion from Education, Labor, Northern Virginia’s focus on defense, both President’s proposed budget also pro-
health care programs of these regions appear likely to benefit vides $43.2 billion in net discretionary
• $3.5 billion from the children’s health from these increases in the short-term.
Long Term Budget Trends Up
care initiative
• $2.2 billion from the health care in- The Long-Term: FY 2012 and Beyond $6.0
$5.5
surance CO-OPS program There is much uncertainty related to the $5.0
federal budget and the implications for
Trillions
• $500 million from funding for federal $4.5
Pell grants the Washington, DC region. As of this $4.0
$3.5
writing, the FY 2012 budget is being de-
• Cuts in other programs, including job $3.0
bated in Congress. Both the President’s
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
training, highway and high-speed rail
and the Republican Congressional lead- President's Budget Republican Budget Resolution
projects, and rural development ini-
ership’s proposal call for a two percent Sources: Whitehouse.gov, budget.GOP.gov
tiatives
1 A continuing resolution provides budget authority for federal agencies and programs to continue in operation until regular appropriations acts are enacted.
Copyright © 2011 Cassidy Turley. All rights reserved.

2. Agency Budgets
Department or Other Unit 2012 Vs. 2013-2016 Furthermore, the White community. The I-270 Technology Corri-
2011 Annual House requested DHS’s dor in the County has attracted over 200
change Average
(estimate) Change move to St. Elizabeth’s biotech companies and industry leaders
Department of Agriculture -1.5% -2.3% campus and construc- such as Celera, Genomics, MedImmune,
Department of Commerce 13.9% 1.0%
tion of the planned and Invitrogen. Montgomery County is
Department of Defense 0.7% 2.5%
Federal Emergency also home to 19 federal agencies, in-
Department of Education 38.5% 5.4%
Management Agency cluding NIH, the National Institutes of
Department of Energy -12.7% 1.6%
(FEMA) headquarters Standards and Technology (NIST), the
Department of Health and Human Services -1.0% 7.8%
Department of Homeland Security 1.8% 2.0%
at St. Elizabeth’s to U.S. Department of Agriculture (USDA)
Department of Housing and Urban Development -15.5% -0.4% be delayed “at least a Research Center, and the National Naval
Department of the Interior -4.4% -1.5% year” under President Medical Center.
Department of Justice -5.1% 1.7% Barack Obama’s FY
Federal Employment
Department of Labor -27.2% -11.4% 2012 budget proposal.
Department of State 9.1% -1.8% The budget calls for the The Federal Government has helped the
Department of Transportation 68.1% -2.3% deferral of later phases DC region weather some tough times over
Department of the Treasury 11.4% 15.5%
of the St. Elizabeth’s the years. During the 2007-2009 reces-
Department of Veterans Affairs 4.5% 5.5%
project as well. sion, the Federal Government added
Environmental Protection Agency -11.2% -0.2% 16,000 jobs in the DC Metro area while
General Services Administration -9.0% Department of Health
-0.1%
the private sector shed over 73,000 jobs.
Social Security Administration (On-Budget) -39.1% 1.3%
and Human Services: Even so, other challenging economic
Social Security Administration (Off-Budget) 12.9% 6.3%
The President’s FY times resulted in fewer jobs in the DC
Total budget authority 0.9% 4.3%
2012 budget includes area. In the early 1990s, the Federal
Sources: FY 2012 Budget of the US Government (OMB), Cassidy Turley a slight increase from Government downsized by approximate-
$79.8 billion to $79.9 ly 427,000 federal jobs nationally and
funding - an increase of $767.6 million
billion in discretionary budget authority about 37,500 in the DC region. The cuts
(1.8 percent) over 2010 funding lev-
to support the Department of Health and were primarily through attrition: workers
els – for the Department of Homeland
Human Services (HHS). Over the next retiring rather than agencies laying off
Security (DHS). Budget increases in-
five years, the proposed HHS budget re- employees. During that time, employ-
clude additional funding for information
flects a $308 billion (6 percent annual) ment shifted from government jobs to
network security and infrastructure. Spe-
increase. The budget calls for an invest- private contractors. In the mid 1990s,
cifically, the budget provides $459 million
ment of $32.0 billion in biomedical re- procurement spending in the DC region
for the National Cyber Security Division to
search including funding for the National increased by $3.3 billion.
secure information networks and defend
Institutes of Health’s (NIH)’s leading-edge
against cyber-threats to federal networks,
work in cancer science and research into The DC region’s employment base has
the nation’s critical infrastructure, and
Alzheimer’s disease and autism spectrum become more diversified. At its 20-year
economy.
disorders. It supports basic and clinical peak in 1992, federal government em-
Despite proposed spending increases, research to deliver better health care and ployment accounted for 18 percent of
ongoing budget resolutions have stalled drive future economic growth. total non-farm jobs in the DC Metro area.
government leasing activity across the Since then, that number has declined to
These proposed increases would bode 14 percent. The diversification of federal
board in the capital region. Many gov-
well for the Montgomery County office and private employment will help the re-
ernment lease prospectuses are currently
market in Suburban Maryland, which gion perform well during periods of fed-
on hold, awaiting congressional approval.
is most renowned for its biotechnology eral downsizing.
Copyright © 2011 Cassidy Turley. All rights reserved. 2

3. Commercial Real Estate Suburban Maryland shows a similar pat- in demand in the long-term. Additionally,
What will happen to DC Metro real es- tern. In 2000, Suburban Maryland ex- contractors will be slower to make real es-
tate markets? Historically, the DC region’s perienced one of its best years in office tate decisions until they are more certain
economy and its commercial real estate demand. This was due primarily to the of future programs and federal budget al-
markets perform well even when federal strong performance by the Professional locations.
spending is “slow”. In fact, the region’s & Business Services and Financial sec-
What will happen to federal spending?
office market is at its best when federal tors and small spending increases in the
Federal Spending in the DC Region
spending is slow. Federal spending and Federal Government sector. Even with
$160
federal employment tend to be stronger decreases in non-defense federal pro-
$140
during recessionary periods when the curement spending in 1994, 1996 and $120
Federal Outlays, Billions $
private sector is not performing well. As 2007, the Suburban Maryland market $100
the economy improves, the private sector experienced average to above average of- $80
tends to increase employment. fice demand. $60
$40
$20
Defense spending plays a significant role The future of health-care reform legisla-
$0
in the Northern Virginia economy, but it tion will have an impact on the Suburban
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
is not dependent solely upon the Federal Maryland market, due to the large pres- Reagan Bush I Clinton Bush II Obama
Government. It should be noted that in- ence of HHS and the NIH. Although Sources: GMU Center For Regional Analysis, Cassidy Turley
creases in defense spending do not trans- the reform bill was passed by Congress
late directly into office space demand. last year, the House of Representatives While government spending may de-
There were healthy increases in procure- passed H.R. 2, “Repealing the Job-Killing crease both nationally and in the DC
ment spending in both 2002 and 2009, Health Care Law Act” in January, 2011. region over the next year, historical evi-
but the NoVA office market experienced Congressional Budget Office estimates dence suggests that budget cuts will have
negative net absorption. Additionally, show that HHS will incur costs between minor effects on commercial real estate
the NoVA economy has become more $5 billion to $10 billion over 10 years to in the DC region. If history is any guide,
diversified as a result of private sector carry out its responsibilities for enacting federal outlays have increased every sin-
companies – such as Hilton Worldwide, the full reform legislation. Depending on gle year for the past 20 years in the DC
Volkswagen and VeriSign – relocating to what parts of the legislation are repealed area. Still, DC will most likely not see as
the region. Consequently, a decrease in or revised, if any, both HHS and private many colossal federal leases signed over
defense spending will not mean that the contractors in the Maryland market could the next couple of years. We anticipate
Northern Virginia office leasing market feel the impact. the region’s office demand to increase as
will come to a halt. private sector demand improves.
Outlook
DC performs well when fed
Until the federal budgets are approved, For more information contact:
spending is “slow”
federal agencies are in a “wait and see”
12% Jeffrey Kottmeier at 202.463.2100 or
5
mode. That will likely lead to a short-term
Urmi Joshi at 202.463.2100
Net Absorption (sq ft, millions)
10% 4
slowdown in office space demand. As far
Federal Spending (%chg)
8%
3 as leasing activity is concerned, it is on an Published June 2011
6%
4%
2 agency-by-agency basis however, agen-
2% 1 cies will most likely a) renew in place for
0% 0 the short-term, or b) temporarily place re-
quirements on hold. Nevertheless, these
87
89
91
93
95
97
99
01
03
05
07
09
19
19
19
19
19
19
19
20
20
20
20
20
DC Absorption Federal Spending (% chg)
options will eventually lead to an uptick
Sources: GMU Center for Regional Analysis; Cassidy Turley
Copyright © 2011 Cassidy Turley. All rights reserved. 3