Report: New York City Needs to Control Rising Costs for Leased Space

John Jordan | August 2019

New York City

NEW YORK—A report released this week by the Citizens Budget Commission calls for the city to better manage city government leased space costs, which rose to $1.1 billion in 2018.

Given the rising costs, the Department of Citywide Administrative Services, which manages the city’s real estate portfolio, should accelerate efforts to improve its management, monitoring and analysis of leased space to ensure its use is efficient and cost-effective, the Citizens Budget Commission recommends.

The more than $1 billion spent by the city in fiscal year 2018 to lease space for public facilities and offices—is 40% higher than the costs incurred in fiscal year 2014, which was faster than the rate of growth of the New York City budget, office rental asking prices, and the number of city employees during that time period.

New York City government leases 22 million square feet (of an estimated 37 million square foot real estate portfolio) from private owners. Most leased space houses agency offices (13.5 million square feet), but the city also leases space for public services ranging from schools and day care centers to warehouses, tow pounds, and courts, the report released on Aug. 27 states.

Over the last decade, the city has launched multiple efforts to rein in leasing costs, according to the Citizen Budget Commission report. In fiscal year 2010 the Bloomberg administration launched the Office Space Reduction program to reduce the size of the city’s office portfolio by 1.2 million square feet. DCAS developed new space guidelines to bring the city’s office spaces in line with private sector best practices, with a goal of bringing usage to 176 square feet per employee. The city hired a chief asset manager, developed space utilization metrics to identify underutilized space, adopted open plan layouts, and relocated or consolidated agency spaces. DCAS also began reporting the average square footage of office space per employee and the percentage of vacant desks in the Mayor’s Management Report.

Through fiscal year 2012 the program reduced occupied office space by 400,000 square feet and saved $15 million in annual rent expenses and $4 million in energy costs. The average square footage occupied per employee declined 8.6% from a high of 280 square feet in fiscal year 2012 to 256 by 2016. The program was not sustained, and beginning in fiscal year 2017 DCAS stopped reporting space utilization metrics in the MMR, according to the report.

In response to continued growth in spending, in fiscal year 2017 DCAS and the Office of Management and Budget announced two new initiatives—Space Management and Enhanced Space Management—to improve DCAS’ real estate management and reduce or contain costs. Under Space Management DCAS proposed to “undertake a more thorough review process” for space requests with a goal of matching agencies with existing space. Under Enhanced Space Management, DCAS created a new space management taskforce and hired a vendor to build a custom database to track the city’s real estate portfolio and help DCAS “make strategic decisions on space requests.”10

These initiatives were projected to save $13 million starting in 2019 rising to $23 million annually by 2021. The initiatives did not set reduction targets and did not report metrics, such as square footage per employee, to track progress.

Implementation appears to be slow and results limited, according to the Citizens Budget Commission. Collecting basic data on how much space the city controls has been an initial challenge. The Wall Street Journal reported DCAS launched the space management initiatives in 2018 by setting out to quantify owned and leased space; as of July 2019, DCAS had measured just 3 million of an estimated 37-million-square-foot portfolio. The agency expects it will take until the end of fiscal year 2022 to complete its surveying efforts.

Two years into the initiative, savings have also fallen short of expectations, the report states. In fiscal year 2019, DCAS realized less than $1 million in budget savings and $2.5 million in avoided costs.12 DCAS now expects to save $8 million in fiscal year 2020 (down from an original goal of $18 million) and just $15 million by 2022—likely to be less than 1% of citywide leasing costs. One reason for DCAS’ modest impact is savings have come from small agencies, like the Public Administrator of New York County and the Commission on Human Rights, and from small spaces occupied by larger agencies. It has yet to achieve substantial savings from the large agency office leases that represent the majority of the city’s leasing budget.

The Citizens Budget Commission concluded in its report: “Active management of the city’s real estate portfolio is essential to ensuring that city agencies use space efficiently and minimize costs. Upholding the Charter-mandated obligation to collect, monitor, and publish data on the city’s real estate holdings is an important first step. These data, along with space standards and continuous analysis and management, are essential for DCAS to evaluate whether agencies efficiently use their facilities, whether owning or leasing space is more cost effective, whether expiring leases should be extended or vacated and whether space utilization is becoming more efficient.

The CBC is a nonpartisan, nonprofit civic organization whose mission is to achieve constructive change in the finances and services of New York City and New York State government. Its mission is rooted in serving the citizenry at large, rather than narrow special interests; preserving public resources, whether financial or human; and focusing on the well-being of future New Yorkers, the most underrepresented group in city and state government.

 

 

 

John Jordan
Editor, Real Estate In-Depth