Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why the Government Pays Twice for Its Own Office Space
Transcript
- Lucas: So there's this building in downtown Washington, D.C., nine stories, about 200,000 square feet. The government built it in the early 2000s for roughly forty million dollars. But over the last two decades, the agencies inside it have collectively paid more than sixty million dollars in rent. Rent that goes right back to the government. Luna: Wait, the government pays rent to itself? That sounds like a way to make the numbers look bigger on both sides of the ledger. Lucas: Exactly. It's called 'rent to self' in the jargon, and it's the heart of how the federal government handles its own real estate. The General Services Administration, the GSA, acts as the landlord. It builds or buys buildings, then charges tenant agencies annual rent. That rent is supposed to cover maintenance, utilities, and the cost of the building itself. But the way the accounting works, it rarely lines up. Luna: So it's like a company that rents office space from its own real estate subsidiary, and the subsidiary is also part of the same company. The cash just moves from one pocket to another. Lucas: Right. And the problem is that the rent is often higher than what the private market would charge. The GSA sets rates based on the 'replacement cost' of the building, not what a comparable office would lease for. So agencies end up paying a premium for space that's often older and less desirable than what they could get on the open market. Luna: And that's not just a minor inefficiency, is it? I remember a report from a few years back that said the government was overpaying by hundreds of millions a year on its real estate. Lucas: Yeah, the Government Accountability Office has flagged it repeatedly. In fiscal year 2020, the federal government spent about two billion dollars on rent for its own buildings. That's two billion that could have gone to actual programs, or to reduce the deficit, or just stayed with taxpayers. Luna: But why does the government build instead of lease? Isn't leasing more flexible, especially now with remote work and all that? Lucas: You'd think so. But there's a bias toward building. Politicians love cutting ribbons on new federal buildings in their districts. And once a building is owned, there's a sunk cost fallacy: 'We paid for it, so we should keep using it.' But the actual costs don't stop with construction. There's maintenance, security, utilities, and eventual renovation. And the rent charged to agencies is supposed to cover all that, but it often doesn't. Luna: So the GSA is like a landlord that's also the tenant, and neither side has a real incentive to negotiate a lower rate. Lucas: Exactly. If the GSA charges too much, the agency has less money for its mission. If it charges too little, the GSA has a shortfall and can't maintain the building. So you get this constant tension, and the system tends to inflate costs because nobody feels the pain of the rent check. It's just a transfer within the same government. Luna: But isn't there some logic to it? The government can borrow at low rates, so building might actually be cheaper than leasing over the long term. Lucas: Sometimes, yes. The government can borrow at the risk-free rate, which is lower than what a private developer pays. But that doesn't mean the government is a good construction manager. There are countless examples of federal buildings coming in over budget and years late. And then the rent is set to cover the inflated cost, so agencies pay more than they would on the private market. Luna: Can you give me a specific example? I'm a visual person. Lucas: Sure. The U.S. Courthouse in Los Angeles, the one that opened in 2016. Original budget was about three hundred and fifty million dollars. Final cost? Over four hundred million. And it was several years late. Now the GSA charges the court rent based on that inflated cost, so the taxpayer is paying for the overruns again. Luna: Ouch. So it's not just that the government pays itself rent, it's that the rent is based on a number that's already bloated. Lucas: Right. And that's the core issue: the system doesn't reward efficiency. There's no private sector incentive to cut costs because the 'landlord' and the 'tenant' are both the government. If a private company overpays for its office space, that's money out of shareholders' pockets. But in the federal government, it's just a line item that gets approved because the money is already budgeted. Luna: So what's the fix? Some people say the government should just sell off its buildings and lease back, like a sale-leaseback deal. Lucas: That's one idea that's been floated. The government could unlock billions in cash by selling its real estate, then lease it back at market rates. But there's a catch: the government typically gets a lower yield on its investments than the cost of leasing, so it might end up paying more over time. Plus, you lose control over the property, and you're at the mercy of the landlord when it comes to rent increases. Luna: So it's not a silver bullet. But maybe the bigger issue is that the government doesn't track its real estate well. I've heard that the GSA doesn't even know how many buildings it owns. Lucas: That's actually true. In 2017, the GSA admitted it didn't have a complete inventory of its properties. They had a database that was missing thousands of buildings. So you can't manage what you can't measure. And when you don't know what you own, you can't make smart decisions about whether to keep, sell, or renovate. Luna: That seems like a fundamental problem. If a company like Walmart didn't know how many stores it had, it would be a crisis. Lucas: Exactly. And Walmart is a good comparison. They're one of the most efficient real estate operators in the private sector. They know exactly what every square foot costs, what it generates in revenue, and whether a store is worth keeping open. The federal government doesn't have that kind of data. It's a different scale, obviously, but the principle is the same. Luna: So the government should think more like a business when it comes to its own buildings. It should ask: 'Is this asset earning its keep?' Lucas: Right. And there are some agencies that do that. The GSA has been trying to consolidate offices and dispose of underused properties, but it's slow. There's a lot of political resistance to closing field offices, especially in congress members' districts. And there's the cost of environmental cleanup on some sites, which can be huge. Luna: But even with those challenges, wouldn't a more disciplined approach save billions over time? I mean, we're talking about the second largest asset of the federal government, after the Pentagon and maybe the national parks. Lucas: It's definitely one of the largest portfolios in the world. The GSA owns or leases over 370 million square feet of space. That's roughly the size of all the office space in Manhattan. And a lot of it is underutilized. A 2019 report found that federal office buildings were on average only about 40 percent occupied. That's a huge waste. Luna: Forty percent? That's insane. And yet they're still building new ones, right? Lucas: There's been some progress in reducing the footprint, but the pandemic changed things. Now there's even less need for federal office space, yet the rent payments continue. The GSA is stuck with long-term leases it can't easily get out of. So this is a problem that's only going to get bigger if they don't start making smarter decisions. Luna: What would a smarter decision look like? Should they just shrink the portfolio and move everyone to hot desks? Lucas: Well, hot desking might be a bit extreme for federal agencies, but they could definitely consolidate more, share buildings, and get rid of the ones they don't need. The challenge is that the budget process encourages agencies to hold onto their space. If an agency gives up a building, it doesn't necessarily get to keep the savings. So there's no incentive to give anything back. Luna: So it's a classic tragedy of the commons. Everyone's better off if the government shrinks its real estate footprint, but no individual agency wants to be the one to give up its turf. Lucas: Exactly. And that's why you need top-level leadership to set targets and force agencies to justify every square foot they keep. The GSA has started doing some of that, but it's an uphill battle. There's a lot of inertia. Luna: So what's the takeaway for a regular citizen? This is our money being spent, after all. Lucas: The takeaway is that government waste isn't always about procurement scandals or fraud. Sometimes it's just the slow, quiet inefficiency of an organization that doesn't have to compete for its survival. Every dollar wasted on unnecessary rent is a dollar that could have funded a teacher, or a road, or reduced the national debt. And that's worth paying attention to. Luna: And speaking of paying attention, if you're getting value from these conversations, a couple of dollars a month makes a real difference. It's what keeps the podcast ad-free and lets us keep digging into stories like this. You can support us at buy me a coffee dot com slash fexingo. Every bit helps. Lucas: Yeah, that's true. It's something listeners often ask about, and we appreciate every bit of support. But back to the buildings — I think the real question is whether the government will ever adopt a more market-based approach to its real estate. There have been proposals to create a 'public benefit corporation' to manage federal property, but nothing's moved yet. Luna: So it's another one of those things where the problem is clear, but the political will is missing. Lucas: Sadly, yes. But I think it's a reminder that small inefficiencies, repeated across thousands of buildings, add up to real money. And that's often where the biggest savings are hiding — not in the flashy headlines, but in the mundane details of how the government manages its own stuff. Luna: Well, I'll never look at a federal building the same way again. Lucas: That's the hope. When you walk past a courthouse or an office building with a federal seal, you can ask yourself: how much of that space is actually being used, and how much is it really costing us?