State Governments Shedding Millions Of Square Feet Of Office Space Amid Hybrid Work Revolution

March 18, 2022   |   Tags:
State Governments Shedding Millions Of Square Feet Of Office Space Amid Hybrid Work Revolution

By Jarred Schenke and Matthew Rothstein of BisNow,

State and local governments lease tens of millions of square feet of office space across the country, but that number is falling fast as the push for remote and hybrid work has made civil servants rethink their real estate.

From California to Georgia and Maine to Utah, the pandemic thrust government agencies into an entirely new way of working. Two years later, many have found that offering flexible working arrangements can solve two ever-present challenges they face: attracting and retaining their workers and maximizing taxpayer dollars.

“The savings are real,” Nebraska Department of Administrative Services Director Jason Jackson said.

“I think future administrations are going to be hard-pressed to say, ‘We should be spending more on office space.’”

Philadelphia City Hall sits across the street from the Municipal Services Building, a more conventional office home to many of its departments.

At the end of 2019, state and local governments leased 22.6M SF of privately owned, corporate-grade office space across the U.S., comprising 21.6% of all government tenants, according to data compiled by JLL U.S. Office Research. By the end of last year, that total had dropped by 2M SF.

That nearly 10% reduction may be the tip of the iceberg, said Bob Hunt, the national leader of JLL’s public institution and higher education department. Over time, state and local office footprints could shrink by as much as 25% or 30%, Hunt told Bisnow.

The pandemic and its effects on remote work policies have prompted 87% of state governments to rethink their real estate strategies, according to a JLL survey conducted between February and April 2021. Forty percent of respondents said the rethinking would likely result in a reduction in office space, Hunt said during a November webinar with the National Association of State Facilities Administrators, while the other 60% were unsure what level of impact these considerations would have.

“That's a profound amount, for the vast majority [of states] to say, ‘Hey we're thinking about doing something differently as a result of this,’” Hunt said during the webinar.

For private companies, expenses on office space can be as much as 50% of their net income, according to a 2017 paper from The Wharton School of the University of Pennsylvania. The equation is less straightforward for the revenues and financial outlays of state and local governments, and functions like emergency services or community-based programs have non-negotiable space requirements.

But plenty of administrative functions have been carried out remotely since the pandemic began, and the offices they left behind represent real financial commitments.

“My impression is that last year and two years ago, when everyone was looking at empty buildings, they saw dollar signs,” said James Burroughs, an associate professor at George Mason University’s Schar School of Public Policy. “They were paying for things they couldn’t use when they emptied out a lot of departments and agencies. Now, I think discussions have evolved to be about the broad future of work.”

The city of Fort Worth, Texas, purchased the former Pier 1 Imports headquarters in 2021 to redevelop it as the new City Hall

State officials across the country told Bisnow in recent weeks that their workers have embraced the ability to go remote, and they see a chance to redefine their real estate portfolios to tilt more toward employee attraction and retention.

How much less space they take remains to be seen, as does how future budget impacts could play out. But the opportunity to spend more on services rather than office space isn’t lost on the civil servants making these decisions.

“I think whenever you're talking about several hundreds of thousands of dollars, you're talking about money that is meaningful to Nebraskans,” Jackson said. “For us, when we're talking about managing our real estate strategically, the total size of the opportunity there is pretty substantial.”

California has already cut 767K SF of its 14.4M SF office footprint, providing an annual savings of $22.5M. Over the next three years, California is looking to reduce 20% of its overall leased office portfolio, which will save the state $84.7M annually, California Department of General Services Deputy Director Monica Hassan said in an email to Bisnow. By comparison, the state already expects to have a surplus of $20B in its discretionary fund for fiscal year 2022-2023.

The Georgia State Properties Commission works with nearly 50 state agencies that occupy 12M SF of office, half of which is leased from private landlords, said Lee Nelson, GSPC's leasing manager and assistant director of space management.

“It seems like just about all of [the agencies] are in some stage of figuring out the proper way for us to be organizing our in-office experience going forward,” Nelson said, adding that many agencies have budgetary motivations to reduce leased space. 

The Georgia Department of Education has already decided to shrink its footprint at its 150K SF, state-owned headquarters in Downtown Atlanta down to 70K SF, with part of the staff working from home or in remote counties, Nelson said.

“We’ll find a state entity to backfill it,” Nelson said. “And whether that [entity] gets pulled from space that is leased from a private sector landlord hasn't been determined yet.”

The Maine state government recently consolidated a 180-employee department, which was spread across three office buildings, into a single space, Maine Bureau of General Services Director Bill Longfellow said during the NASFA webinar. About 75% of those 180 workers expect to work remotely three days a week as part of the arrangement, he said, which took away assigned desks.

Nelson and Longfellow also cited cost savings as a motivation behind their respective consolidation drives.

The state of Tennessee introduced a remote work option for employees of 16 departments starting in 2016, initially as a cost-saving measure. Tennessee Department of General Services’ former deputy commissioner, Reen Baskin, told Governing.com that the state only realized the benefits for worker retention after the fact, but well before the pandemic forced the consideration onto other jurisdictions and the private sector.

In Nebraska before the pandemic, the concept of remote work “wasn’t even on our radar,” said Jackson, the state’s director of general services. Now 18 of 80 state agencies, accounting for 13,000 employees, continue to employ remote or hybrid work arrangements.

“We surprised ourselves with our own capability to leverage this [situation],” Jackson said.

The potential for budget savings is just one motivation for states to look at reducing their office usage; work flexibility has been a major factor in employee recruitment and retention, particularly in a job market increasingly defined by labor shortages.

State and local governments are used to doing more with less, but allowing remote and hybrid work is already necessary to stop a major brain drain, Hunt and Burroughs said.

“At the end of the day, state and local governments are employing knowledge workers, just in a different regulatory environment [from the private sector],” Hunt said. “And they had an issue with attraction and retention to begin with.”

Figuring out how to formulate long-term work strategies is what JLL’s public sector and higher education division, led nationally by Hunt, has been focusing on since before the pandemic. His team consulted on a 2019 pilot program in the state of Utah with the goal of getting 8,000 employees to work from home part time over three years, but around 10,000 Utah employees signed up for the program in just three months, Hunt said. 

His team is now under contract to consult with Oregon’s state government, with the assumption that hybrid work will be a permanent part of its real estate equation.

Allowing workers to stay remote, in full or in part, is as easy as sending an email in many cases, but amounts to a triage effort for keeping workers happy, Burroughs said. For the model to be sustainable long-term, it requires a right-sizing of real estate usage and a redesign of often outmoded office spaces to the shared desks, conference and breakout rooms heavily utilized by coworking operators and private companies with permanent remote work plans, and such overhauls come with price tags.

“No one’s going up to a legislator and suggesting a $1B plan to redesign an office so that it will eventually save money,” Hunt said. 

The easiest and cheapest option for transitioning to a new work model is to simply let leases in private office buildings expire and move those functions either to another space with more time on its lease or one that a jurisdiction owns.

“They’ve got to address the human problem immediately, but if you do it without addressing the design problem, ultimately you’ve got a lot of idle space,” Hunt said.

There are very real limitations of remote work in the public sector, which go beyond the need for police stations and schools. Departments having staff available for local residents who struggle either with internet access or phone usage is key to ensuring equitable access to government services regardless of means.

Smaller local governments have less need to radically rethink their real estate, especially since so many already own their own city halls and county complexes, said Chrelle Booker, the mayor pro tem for the town of Tryon in western North Carolina.

For much of the pandemic, city employees came to work in person when they were allowed at Tryon Town Hall, Booker said, and public meetings were still held in person in the town of fewer than 2,000 people. 

“The pandemic didn’t change anything for us,” Booker said. “It's almost as if we were in another part of the world I guess. Our own little private island.”

Booker, who is on the board of directors for the National League of Cities and is running for a seat in the U.S. Senate, said her peers in larger cities could benefit from building a one-stop shop for multiple city services. In Tryon’s case, no consolidation was necessary.

“Our police station is part of the same building, and of course, they can't just sit at home,” she said.

Office footprints of bigger cities could increasingly look more like Tryon’s as they consolidate departments and lean on hybrid work. 

Last year, Fort Worth, Texas, purchased a 20-story, 425K SF tower that had been the headquarters of Pier 1 Imports to convert into its new seat of government. The new Fort Worth City Hall will be home to 16 different departments that had occupied nine other city-owned buildings between them, Fort Worth Director of Property Management Steve Cooke told Bisnow.

The consolidation helps especially in the case of individuals or businesses who need permits or forms from multiple departments. Whereas previously, someone might be running all over town to get the correct materials, the new City Hall can function as a one-stop shop, Cooke said.

“We're going to be putting that big, pretty building on the front of everything so that it becomes the face of the city,” he said. 

The city of Fort Worth paid $69.5M for the building and initially estimated that renovations would cost around $30M, compared to the $200M it estimated new construction would cost. Unlike many other jurisdictions, Fort Worth is amenable to selling the properties it is vacating, further defraying the cost of the move.

“We’re going to empty them and sell them for the most part. To sit here and say that it’s going to save us 30 million bucks, I can’t do that sitting here right now,” Cooke said. “But it certainly helps.”

Tyler Durden Fri, 03/18/2022 - 21:40


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