Lost In Space: Uncle Sam's Crazy Building Spree

Construction of office buildings in downtown Atlanta has ground to a halt. It's no surprise, given a vacancy rate hovering near 30%. Yet one developer is blithely plowing ahead with plans for a $300 million, 1.3 million-square-foot skyscraper: Uncle Sam. When the Atlanta Federal Center opens its doors in 1997

to 8,000 government workers, it may doom hopes for a near-term rebound in the local commercial real estate market. "It is a misallocation of resources," says Atlanta real estate consultant David F. Haddow. "You've got whole buildings that will become potential dinosaurs overnight."

As Washington goes on a construction spree, other cities across the country may also start to resemble Jurassic Parks. Although many markets are hung over from the real estate orgy of the 1980s, $10 billion in federal projects either are in progress or have secured funding. That means Washington isn't taking advantage of bargain properties available in many markets. Moreover, by building new space, Uncle Sam is helping to lower property values and threatening the solvency of some private landlords. "It defies all logic," says Thomas Schatz, president of Citizens Against Government Waste, a Washington advocacy group.

PAMPERED JUDGES. Of course, Washington has a logic all its own. Contractors and unions, who often are heavy campaign contributors, promote projects now that privately financed construction has dried up. Congress has been unwilling to give government agencies the flexibility needed to snap up bargain properties. And despite rhetoric about cutting the budget deficit, lawmakers thrive on pork-barrel building projects, which create construction jobs in the district and help revive depressed downtown areas. Even reform-minded Clinton officials find it hard to kill costly developments: In November, members of Congress scotched plans by the new head of the General Services Administration, Roger W. Johnson, to delay or kill 10 proposed federal courthouses. "I hadn't recognized how big a problem it is in Congress to rescind something," admits Johnson, a former chief executive of Western Digital Corp.

To be fair, a number of these projects were planned long ago, when real estate markets were more robust. And some of the new buildings, particularly the courthouses, are needed. With the dockets of most federal courts swollen with drug and other criminal cases, for instance, the government estimates it may need to build $7.5 billion in new courts over the next 10 years. Judicial officials say that existing commercial buildings don't meet the security requirements of courts.

But the General Accounting Office, Congress' investigative arm, says judges are requesting 52% more space than they need. Others critics charge that the judiciary is demanding such lavish amenities that costs are soaring out of control. New federal courthouses--which have been known to include nonworking marble fireplaces, rooftop gardens, and private kitchens and showers--are built at an average $230 a square foot, vs. $96 for a comparable state or local court. Plans for a $218 million federal court in Massachusetts include a public boating dock providing access to Boston Harbor. And a $61 million courthouse planned for Charleston, W.Va., will sport an illuminated, perforated-steel dome that's 25% larger than the one on the U.S. Capitol. "We're building Taj Mahals that we don't need," complains Senator Byron L. Dorgan (D-N.D.).

MOVIES, TOO. The most stunning example of waste, government watchdogs say, may not be a courthouse, however. That honor is reserved for the International Center for Trade & Technology, going up in Washington in the last free space between the White House and Capitol Hill. Conceived by Senator Daniel P. Moynihan (D-N.Y.) in 1987, the $360 million project was designed to house several federal trade agencies, foreign trade offices, and a new U.S. commission that would promote exports.

But when costs skyrocketed, upping the rent tenants would have to pay, U.S. agencies began to pull out. The GSA scrambled to convert it to a general-purpose federal building, but no one wanted to cover the costs of such frills as lap pools, movie theaters, and a world-class French restaurant.

The project received a new lease on life when the export-minded Clinton Administration revived its original mission. But priced at more than $650 million--making it one of the costliest federal buildings ever--it's a boondoggle, critics charge. The project is "a monument to the fiscal stupidity of federal construction policy," says Peter Sepp, an official at the Washington-based National Taxpayers Union. "We probably would have done better taking that money and granting tax breaks to companies that export."

The view is far different on Capitol Hill. North Dakota's Dorgan says he could find only three co-sponsors for a pending Senate bill that would impose a two-year freeze on new federal leasing and construction. That may be because other lawmakers are busy fighting for construction projects for their own districts: Last summer, Congress appropriated $925 million for new buildings, nearly 50% more than the previous year.

Likewise, efforts by the GSA's Johnson to slow the building binge face an uphill battle. Shortly after taking office last year, he boldly froze nearly 200 pending contracts, a move many observers took as a signal that radical surgery was ahead. But Johnson's first progress report, issued in December, recommended killing only five projects--including a parking garage in Iowa and a $2 million courthouse in the Virgin Islands.

"NEEDED." The report recommended only minor cost cuts in 70 other projects, totaling $624 million over 30 years. Atlanta's Federal Center, for instance, was reduced by 300,000 square feet, chopping just $80 million off its $380 million price tag. Congressional sources say that a band of lawmakers, including Senator Robert C. Byrd (D-W.Va.) and Representative Peter J. Visclosky (D-Ind.), successfully appealed to the White House to beat back Johnson's attempts to kill or postpone courthouses in their states. Visclosky defends his action, noting that the Hammond, Ind., courthouse was first approved by the Bush Administration and that it will save $13 million over its life. "This building is needed," he says.

Johnson says he still intends to find ways to cut the government's real estate costs. "I am here as a reformer," he vows. He may be determined and well intentioned. But with Congress in the wings protecting its pet projects, don't count on Uncle Sam to turn off the cranes and bulldozers anytime soon.

TABLE: WASHINGTON'S BIGGEST BUILDING BOONDOGGLES
      Project                        Cost         Problem
      INTERNATIONAL CENTER FOR    $656 million    The government's  priciest-ever
      TRADE & TECHNOLOGY                          building, even though proposed lap
                                                  pools,
      Washington, D.C.                            theaters, and French restaurant are
                                                  out
      FEDERAL CENTER              $300 million    Adds 1.3 million square feet to
                                                  downtown
      Atlanta                                     with 30% vacancy rate
      NAVAL UNDERSEA               $27 million    Was built even as the Navy prepared
                                                  to
      WARFARE CENTER                              relocate employees to Rhode Island
                                                  Suffolk, Va.
      FEDERAL DISTRICT COURT      $224 million    At $299 per square foot, it's three
                                                  times
      Seattle                                     pricier than nearby state
                                                  courthouses
      DATA: BUSINESS WEEK
      
Before it's here, it's on the Bloomberg Terminal. LEARN MORE