Data Center Consolidation: Getting There, But Not There Yet

This figure from GAO's report shows that roughly half of all federal data center a slated for closure and that, in fact, roughly 1/3 of federal data centers have already been closed. However, it's likely these are the low-hanging fruit.

This figure from GAO’s report shows that roughly half of all federal data center a slated for closure and that, in fact, almost 1/3 of federal data centers have already been closed. So, by this metric, agencies are making good progress.

In 2010, the Office of Management and Budget (OMB), the fiscal watchdog within the federal government, issued an order requiring that federal agencies consolidate data centers in order to save money and reduce redundancies. Twenty-four agencies, including elements of the Departments of Homeland Security, Treasury, and Defense, were tasked with identifying data centers under their purview, then to determine which could be closed and at what cost savings. Six years later, these agencies have collectively identified 10,584 data centers, of which 3,125, or about 30 percent, were reported closed as of the end of FY 2015. Another 2,078 were slated to be closed by the end of 2019, for a total of 5,203, or just shy of half the total number.

That would seem to be a significant savings, but a report issued last month by the US Government Accountability Office concludes that of the nine metric targets set by OMB, such as power usage, server utilization, and “virtualization density,” only one was met by half of the agencies, with the other eight falling short of even that halfway mark. Furthermore, the report continues, the agencies as a whole have underreported potential savings; the figure now stands at $8.2 billion, but “planned savings may be higher because 10 agencies that reported planned closures from fiscal years 2016 through 2018 have not fully developed their cost savings goals for these fiscal years.”

The GAO report indicates numerous pathways to improvement, noting, for example, that across the spectrum, only about 5 percent of federal server space is actually being used. OMB has recommended but not yet put in place a uniform metric for server utilization, which would seem to be a first step toward improving the efficient use of computer resources. Perhaps surprisingly, in response, the Department of Defense has stated that it “is moving toward commercial cloud hosting services to enable the migration of workloads to more efficient environments, thus positively affecting the virtualization and density metrics.” How hardened those cloud hosting services are—safe from hacking, that is—is, we imagine, a matter under review inside the Pentagon.

That 5 percent figure, incidentally, comes from 2009, indicating another source of frustration noted by the GAO evaluators—namely, that almost all the agencies in question have been slow to provide relevant, up-to-date data. One issue, GAO observes, is that some of the agencies in question are “decentralized,” so that cumulative data are hard to come by. Another, an objection raised particularly by the Department of Transportation, is that many data centers are housed in leased space without “dedicated metering” or uniform measures of performance and savings. One implication is that owners of leased property, if not the agencies themselves, may be required to put such measures in place.

The report recommends pointedly that all of the agencies take steps to improve their reporting and forecasting. This is especially pressing, the report adds, because of federal FITARA requirements that agencies calculate annual cost savings as part of an overall strategy to improve efficiencies and reduce costs.

The report concludes, somewhat circularly, that “until agencies take action to improve progress against OMB’s metrics, including addressing any challenges identified, they could be hindered in making progress against OMB’s optimization targets.” Yet, as noted above, many agencies have struggled to develop planned data center cost savings and avoidance targets. In other words, if the agencies don’t know what they’re supposed to be saving, they won’t be able to meet OMB’s goals. Or, put more simply: “If it can’t be measured, it can’t be managed.”

A GAO Report Calls for Heightened Building Security

Source: dhs.gov

Source: dhs.gov

Last August 21, federal workers in the heart of Lower Manhattan saw a terrible situation: A disturbed man with a gun entered a building in which passports were issued and immigration cases decided. He killed a security guard, then turned the gun on himself, leaving witnesses and investigators to wonder what had driven him to commit such a horrendous act.

For many and obvious reasons, statistics on attacks and other threats that occur within federal facilities are hard to come by. The Federal Protective Service, the division of the Department of Homeland Security that is directly responsible for facility security, calculates that it responds to 534,000 “calls for service” each year, but that is a broad category that runs the range from armed intruder to minor disturbance.

DHS may provide an administrative home for FPS, but there is another fit that does not come so easily: Those federal facilities are managed by the General Service Administration (GSA), and although GSA staff in theory oversee or at least monitor what happens within them, they have no meaningful oversight over the security that FPS provides—and vice versa.
 So it is, a recent report by the Government Accountability Office (GAO) concludes, that although GSA and FPS have formulated an overall strategy for facility security, neither agency has actually signed off on it. Indeed, after spending untold hours on that strategy, the report notes that both agencies requested that the accord be shelved until “after they address other priorities,” whatever they might be and whenever that might occur.

FPS, as the agency website notes, is divided into 11 regions nationwide and protects more than 9,000 federal facilities, with more than 200 field offices and some 1,300 field agents and officers, as well as more than 13,000 contracted security guards. The agency was once operationally governed by a memorandum of agreement specifying its responsibilities with respect to GSA, but the MOA, drafted in 2006, did not accurately describe on-the-ground realities with respect to policy and organizational changes. The two agencies entered into discussions to revise the MOA in August 2015, but because this has not been effected, GAO notes, officials did not know which procedures to follow—a situation that exposes federal facilities and employees to increased risk.

These inefficiencies are probably to be expected, given that by mandate both GSA and FPS are in charge of facility security; both agencies have distinct cultures, and it is instructive that the two do not even agree on how many facilities there are under their shared aegis. (GAO gives the number as 8,900.) But this division is recent; until 2003, the report notes, FPS was housed within GSA, transferred to DHS only after the creation of the new department. A flowchart of post-move responsibilities shows overlap and redundancy; both agencies, for example, can issue security credentials allowing visitors and contractors access to sites. But, the report notes, given existing “previously found problems with the quality of data exchanged between GSA and FPS on facilities and their locations,” these credentials are not necessarily shared or even known to the other agency.

In a pointed case study, GAO identifies a GSA facility that was built to its specifications at a cost of some $75 million, comprising about 180,000 rentable square feet intended to house law enforcement agencies. However, the building was built with energy-efficient systems in place that barred the construction to FPS specifications of armories and holding cells. Because no communication had taken place between the two agencies beforehand, despite a requirement to that effect in the 2006 MOA, GSA wound up with a new facility that could not be used for its intended purpose.

Among other GAO key recommendations are that a schedule be set for a new MOA and a joint security strategy that will clarify the division of tasks and responsibilities. The report concludes that enhanced communication between and collaboration among the agencies must be made priorities: “The lack of collaboration in communicating compatible policies and procedures,” the GAO notes, “makes it difficult for the agencies to effectively implement their security mission and can negatively affect day-to-day operations.”

FBI Field Office Sales Revisited

In November 2013, I published a brief analysis looking at the cap rate trend for FBI field office sales tracked from the end of the Global Financial Collapse. FBI field offices are a good subject for this type of analysis because they are mostly build-to-suits, generally homogenous and there are enough sales of long-term (15+ year) leased assets to construct a reliable trend.

When we looked at the trend back in 2013 the most recent sale traded at a 6.8% cap rate–down considerably from an 8.7% cap rate trade at the beginning of 2009. The lowest cap rate reported for any transaction during that 5-year period was the 6.4%. At the time “low 6″ cap rates felt like a pretty tight yield but based on where the trend has gone since, maybe not. The most recent field office trade was recorded at a cap rate just less than 6%–and that building had a second-generation lease.

Draw a trend line through the data and we can see that the vector has not changed much from our analysis more than two years ago. Cap rates have continued to decline about 46 bps each year.

The Big Question, of course, is will this trend continue? On the one hand, projected increases in the federal funds rate will ultimately inflate Treasuries, which will squeeze the delta between that financial instrument and cap rates. At some point this will dull interest in federal properties. On the other hand, there is a lot of capital chasing long-term federally leased assets while the number of those assets is dwindling. Among those investors seeking safe harbor real estate investments, price competition will intensify.

I won’t tackle the Big Question directly in this article but will note that sub-5% cap rates will be achieved only for long-term leased assets where at least one of these conditions is also present: 1) The real estate itself warrants more aggressive pricing (this is why many properties in big-city downtown markets like Washington, DC routinely trade in the low 5% cap range); 2) The government’s rent is at or below market rent; 3) The rent includes bumps (which is rare); 4) The mission criticality of the facility ensures the tenant’s “stickiness”, and/or; 5) The lease contains modifications (like net of electric clauses) that condition common risk factors associated with GSA leases.

Where the Federal Leases Are

The U.S. government leases space all across the nation–including in some pretty remote locations. Yet, the bulk of federal government tenancy can be found in just 20 markets. The map above shows the 20 largest markets for U.S. Government leases as measured by Core Based Statistical Area (CBSA)*.

We track nearly 7,000 properties that are leased in whole or in part by the federal government (this includes all of the buildings leased by GSA as well as many other leased by agencies using delegated or statutory leasing authority). Together, these buildings measure 213.4 million rentable square feet. 65% of this space (138.3 million rentable square feet) is located in just 20 market areas.  Chances are that if you are an investor of federal properties, you own something here:

* CBSA is the new term for a Metropolitan Statistical Area (MSA). For more info read this.

Renewal Rents Usually Increase

PreviousvsRenewalRentChange

There are few investors of GSA-leased properties who have not engaged in hand-wringing over renewal rents, even when buying properties years in advance of the lease expiration date. Normally when presented with the question of whether the future rent is likely to increase, my response is to simply look at market rents on the whole. If they are rising then there is a good chance your renewal rent will too. One might also observe that many GSA leases are structured with levelized (non-escalating) base rents. So, if market rents increase even modestly through the term of the GSA lease, the renewal rate is bound to be higher than the previous rate. Yet, the normal laws of logic and market physics don’t always apply to GSA leasing–primarily because it is usually a “Lowest Price Technically Acceptable” procurement process that is heavily influenced by competition, delineated search area, changing mission needs of the agency, emerging legislative mandates and so forth.

It is impossible to capture all of this nuance in a single analysis but we thought it would be instructive to simply look at the renewals and see what happened. We analyzed every “single tenant” GSA property in the United States that was at least 85% occupied with a GSA lease expiring between 2005 and 2015. We also decided not to look at anything smaller than 5,000 RSF of leased space. Finally, we did not evaluate lease extensions–only renewal leases. These filters yielded 271 properties that we could look at to determine how the rental rate changed from the last month of the expiring previous lease to the first month of the new renewal lease.

The results are shown in the graph above. Every circle represents a property plotted such that the final rent of the expired previous lease is shown on the horizontal axis and the new renewal rent is shown on the vertical axis. The 45 degree trend line illustrates where the renewal rent and previous rent are exactly equal. Any properties above that line (shown in green) experienced higher renewal rents. Properties below the trend line (shown in red) experienced lower renewal rents. The red and green is shaded to reflect the percentage increase or decrease from the previous rent.

What does this tell us?

  • Renewal rents tend to increase. Of the 271 properties we analyzed, 206 enjoyed higher rents upon renewal (rents in another 14 properties did not change at all).
  • Renewal rent increases were nearly universal where the previous rent was less than $20.00/RSF.
  • As the previous rent became larger, the renewal rents were more erratic. Logically this makes sense because larger rents receive more scrutiny–and in some instances the previous rents may have been inflated due to amortization of TI and shell improvements.
  • When renewal rents increased, they did so by an average of 29.07% (22.03% median). When they decreased the average was -12.96% (-10.36% median). Across the entire 271 property set, rents increased by an average of 19.66% (14.97% median).

On the whole, this is good news for investors–especially portfolio investors hoping to maintain or increase yield. In a future article we’ll look at the factor that has much greater impact on capitalized value: renewal term.

Anticipating one final question: We did not empirically study what happened in those instances where rent decreased during the previous lease term due to de-amortization of the tenant improvement component. Yet, anecdotally, our review of the data indicates that the subsequent renewal rent had little correlation. Renewal rents appeared to rise or fall in those instances about as they did across the entire sample.

Top 20 Office Markets

Colliers International issued this week its Top Office Metro Snapshot, the firm’s review of the 20 largest office markets in the U.S. The bad news for the federal government is that rents are now rising in all 20 markets, further indication that the window of opportunity to improve rents is closing. That said, the Washington, DC market, in particular, remains soft and GSA is still striking some very good deals.

Yet, the agency’s focus on big headline-grabbing wins has distracted it from harvesting all of the low-hanging fruit that can be yielded simply through firming up soft term, early exercise of renewal options and agreeing to quick succeeding leases at solid discounts. For every one great deal GSA is making, it is missing the opportunity to complete 20 good transactions.

Many lessors are eager to accommodate GSA’s desire to drive down rents, if they can receive extended term. Never have the landlord’s and tenant’s interests been in greater alignment, yet further improvement in the office markets will ultimately drive them apart.

Public Buildings Reform and Savings Act

On February 8th, Congressman Lou Barletta introduced a new bill (H.R. 4487) known as the Public Buildings Reform and Savings Act of 2016. Some aspects of the legislation relate to the Federal Protective Service and economic development partnerships, but in this short summary we will only focus on the contents of the bill that could affect the federal leasing market. The goals of the new procedures set forth in H.R. 4487 are identical to those enumerated in H.R. 2322, which was introduced in 2015 but never enacted into law, and are as follows:

(1) reducing the costs to the Federal Government of leased space, including—

(a) executing long-term leases with firm terms of 10 years or more and reducing costly holdover and short-term lease extensions, including short firm term leases;

(b) improving office space utilization rates of Federal tenants; and

(c) streamlining and simplifying the leasing process to take advantage of real estate markets; and

(2) significantly reducing or eliminating the backlog of expiring leases over the next 5 years.

The key components of the legislation pertain to the acquisition of small leases, prospectus-level projects, GSA’s exchange authority and the Department of Energy (DOE) Headquarters in Washington, DC.

Background

  • GSA’s inventory includes approximately 8,323 leases totaling 190 MSF.
  • More than 50 percent of these leases are set to expire over the next 5 years.
  • GSA is overworked and needs help eliminating the backlog.
  • GSA continues to lower utilization rates and reduce its leased footprint.

Simplified Lease Acquisition

Mr. Barletta’s legislation directs GSA to implement a 5-year pilot program using “special simplified procedures” to address leases that fall below a Simplified Lease Acquisition Threshold (defined as any lease with an annual rental obligation of less than $500,000, net of operating expenses). According to the Government, 87 percent of all GSA leases fall under this threshold. We estimate this 87 percent covers 58 MSF, or 30 percent of the total square footage under lease. While we are not certain what form the GSA’s pilot program would take if this bill becomes law, one logical solution might be to utilize the GSA’s existing AAAP system as a mechanism to handle the growing backlog of expiring leases.   

For one, the AAAP has proven to be effective and is already up and running on a national basis. Second, the AAAP accelerates the procurement process and would allow GSA to take advantage of the tenant-favorable market conditions that exist today. Third, the program allows landlords to submit offers for 10-year firm term leases (new or succeeding), in accordance with the goals of this legislation.

In most cases, the landlord community welcomes the push for longer lease terms. Firm, long term lease contracts with the federal government typically offer landlords stability, higher market valuations and open up a variety of opportunities for financing, disposition and capital investment into a property. On the other hand, short term lease extensions or holdovers essentially “kill” a property from a financing or sale perspective, remove a landlord’s incentive to invest in upgrades and ultimately result in an inferior working environment for the end users and a higher rent bill for the U.S. taxpayer.

Prospectus-Level Leases 

H.R. 4487 would allow GSA to bundle multiple projects into a single prospectus, with conditions imposed to ensure greater efficiency and lower utilization rates (<=170 USF per person), puts a 5-year window on GSA’s ability to commit the authorized funds (use it or lose it), requires notification to Congress in instances where project scope and size are expected to vary by 5 or more percent compared to authorized amounts (and amended prospectuses when size or scope varies by more than 10 percent).

Finally, and this did not appear in last year’s version of this bill, the legislation would require GSA to provide a written justification for its customary practice of using three separate rent caps for prospectus-level leases in DC, Maryland and Virginia and an evaluation of whether these caps provide for maximum competition for build-to-suits between the jurisdictions. Many have argued, quite convincingly, that this structure automatically puts suburban locations, and Prince George’s County in particular, at a disadvantage. Consider the following real-world scenario: In 2009, GSA submitted a prospectus for a 1.1 MSF DHS consolidation lease that would have required new construction if satisfied with a single lease award. GSA imposed rent caps of $49.00 PSF for DC, $38.00 PSF for Virginia and $34.00 PSF for Maryland. Under that structure, a DC landlord’s offer for a 20-year, 1.1 MSF lease at $49.00 PSF ($1.08B aggregate lease value) would have been acceptable, while a Maryland landlord’s offer for a lease of the same size at $39.00 PSF (costing the taxpayer $220 million less than the DC alternative) would have been deemed “non-responsive” because it exceeded the rent cap for Maryland.

GSA’s Exchange Authority and the Forrestal Complex

The legislation would require GSA to obtain prospectus approval for the costs associated with any exchange of property with a fair market value of more than $2.85MM. Additionally, the law would require GSA to sell or exchange enough of the Forrestal Complex to generate the funding for a new DOE Headquarters, which must be a government-owned building on government-owned land.  In keeping with the ongoing trend, it is reasonable to expect that a new DOE headquarters would result in the consolidation of some DOE leased locations into federally owned space.

Doing Dispositions FASTer

Rep. Jeff Denham (R-CA)

Rep. Jeff Denham (R-CA)

When ordinary citizens find themselves with too much stuff, they have a garage or yard sale—even call in a clutter consultant, which explains why organizing maven Marie Kondo is in such high demand these days. But when the federal government sits on too much stuff, it usually stays sat upon, unused or underused until its inevitable obsolescence.

That has long been a source of concern to Rep. Jeff Denham (R-CA), who has sponsored legislation such as the House Passes Civilian BRAC Bill, mandating the regular review of inventory and the sale of high-value federal property deemed to be excess or otherwise unneeded. Passed by the House, CPRA was referred to committee in Senate but not enacted, cause for Denham to now offer a bill that is much the same but somewhat broader in scope, the Federal Asset Sale and Transfer (FAST) Act of 2016.

Denham argues that the last Federal Real Property Summary identifies 77,000 buildings in the federal inventory, about a third of total holdings, as being underused, costing $1.7 billion annually. Existing regulations requiring government agencies to identify and dispose of these properties in keeping with a smaller federal footprint have been unsuccessful, by his account—and thus the new legislation.

Among other things, the FAST Act would require that an independent Public Buildings Reform Board be constituted to review federal holdings and directly advise the Office of Management and Budget (OMB) of candidates for sale or disposal. This board would have as its mandate the task of identifying $8 billion in such properties, which the relevant agencies would then have to sell off within a set period of time. The Act would also require the General Services Administration (GSA) to develop and maintain a comprehensive database of all federal real properties with an assessment of whether the property is underused, unused, or otherwise unneeded.

We’ll track Rep. Denham’s bill as it makes its way through Congress. For the time being, the text of the act, headed “To decrease the deficit by consolidating and selling Federal buildings and other civilian real property, and for other purposes,” can be read here.

Spotlight: Secret Service

SecretServiceHow much office and other space does the US Secret Service occupy? That turns out to be a difficult question with a simple answer: It’s secret. Its Washington headquarters, a building on H Street, looks nondescript, save for the radio antennas and microwave dishes studding the roof, and its interior tells the casual visitor at once that the best thing to do is turn around and leave: The agency shield is visible, but there are no lobby displays, no tours, no brochures, no public access to speak of.

We have clues, though, through the budgetary process. In the immediate aftermath of the 9/11 terror attacks, the agency was allocated $918 million for total expenses, including a fleet of vehicles carefully restricted to 755 automobiles and motorcycles “for police-type use.” As of FY 2015, that figure had increased to more than $1.6 billion, with concomitant growth in vehicle use, rental space, and other categories (including, broken out, guard booths in several locations throughout the capital). That said, a congressional report published on December 9, 2015, observed that the agency is both underfunded and inconsistently funded, owing to on-the-fly budget cuts, as well as understaffed. The report criticizes agency leaders for not being proactive in stating the case for staff upgrades and other needs, as well as being insufficiently attentive to how existing funds are allocated and spent.

The Secret Service, which currently has a little more than 6,300 employees, has two overall purposes. The first, for which it is best known, is to protect the President of the United States from threats against his (or her) person. That protection extends to the vice president, former presidents, visiting heads of state, and other dignitaries. The second purpose, the more secret of the Secret Service’s raison d’être, is to guard against financial crimes such as counterfeiting, securities fraud, and other misdeeds—including, increasingly, cybercrimes of a financial nature. Once part of the Treasury Department, the Secret Service is now under the aegis of Homeland Security, though it operates with broad independence. It is unlikely, for example, has not been revealed whether its headquarters will move when the DHS consolidates its offices at the former St. Elizabeths Hospital campus in southeast Washington.

The Secret Service also maintains offices throughout the country and the world—at last count, at least 136 (the “at least” qualifier being because some offices may not be known to the public). These are of varying sizes; the Boston office is estimated to house some 40 officers, about half the number of the New York office, while the office in Pretoria, South Africa, has just a few agents. Wherever they are located, agents tend not to spend much time at their desks, constantly employed in the field or traveling to protect the dignitaries under their charge. Famously, for instance, the New York offices, then located adjacent to the north and south towers of the World Trade Center, were destroyed in the 9/11 terrorist attack. Even so, within 48 hours of being relocated, the Electronic Crimes Task Force, headquartered there, had tracked cell phone traffic among several of the terrorists involved in the conspiracy, providing essential evidence in determining a connection to Al Qaeda and Osama Bin Laden.

Because of the recent bad behavior of a handful of field agents, the Secret Service has come under scrutiny and criticism. That congressional report, for instance, was meaningfully subtitled “An Agency in Crisis.” The report recommends that Congress support the President’s fiscal year 2016 request for the agency, especially because presidential candidates come under protection in election years, though with the proviso, “provided that there are adequate controls in place to ensure that the funds are used to address ongoing hiring challenges.” That request is substantial: for FY 2016, President Obama requested more than $1.9 billion for the agency.

It has often been remarked that the Secret Service makes news only when it does wrong, never when it does right—as it does every day. That is because, unlike its shortcomings, the successes of the agency are not advertised. In short, they’re secret.

Notable Transactions of 2015

Though the federal lease inventory continued to shrink in 2015, there was plenty of action, especially in the Washington, DC area where most of the big federal tenants reside. Here is a selection of the most notable transaction activity this past year:

The Largest New Lease

In October, GSA announced the award of a 839,000 RSF lease to Stonebridge Carras to house a Department of Justice (DOJ) consolidation at Constitution Square. This was the largest lease of the year and when it commences (in phases ending in 2018) it will be the 10th largest lease in GSA’s national inventory.

Three Constitution Square and the adjacent, to-be-built Four Constitution Square will house the 839,000 RSF DOJ consolidation lease. (photo: CoStar)

Three Constitution Square and the adjacent to-be-built Four Constitution Square will house the 839,000 RSF DOJ consolidation lease. (Photo: CoStar)

The Largest Lease (That Wasn’t)

Had it stuck, the second-largest lease of the year would have been the TSA headquarters deal at Victory Center, 5001 Eisenhower Avenue, Alexandria, Virginia. In August, GSA executed a 625,000 RSF, 15 year lease at this property. Yet, a subsequent protest by a competing bidder led the U.S. Court of Federal Claims to issue a decision voiding the lease, noting that it included “free space” that was a violation of GSA’s congressional appropriation.

GSA award the _______ RSF TSA lease to Victory Center, though that lease was later voided by a _____ Court judge. (photo: CoStar)

GSA award the 625,000 RSF TSA headquarters lease to Victory Center, though that lease was later voided by a U.S. Court of Federal Claims judge. (Photo: CoStar)

The Largest Sale

Based solely on dollar volume, the biggest sale of the year was Jamestown’s $298 million purchase of Stafford Place I and II in Arlington, Virginia. These buildings are primarily occupied by the National Science Foundation (NSF), though Jamestown’s purchase anticipates re-positioning both buildings since NSF is slated to vacate by the end of 2017.

Stafford Place I and the adjacent Stafford Place II, both home to the National Science Foundation, were purchased by Jamestown in September for $220 million. (photo: CoStar)

Stafford Place I and the adjacent Stafford Place II, both home to the National Science Foundation, were purchased by Jamestown in September for $298 million. (Photo: CoStar)

If we focus instead on the largest sale of a true (i.e. long-term leased) federal asset, then the winner is the $96.7 million sale of the Suffolk Building, a 258,000 RSF, high-security facility in Falls Church, Virginia. NGP purchased this building from Carr Properties after GSA executed a 10-year renewal on behalf of the Dept. of Defense.

The high-security Suffolk Building was the largest long-term leased property sale of the year.  (photo: Google Maps)

The high-security Suffolk Building was the largest long-term leased property sale of the year. (Photo: Google Maps)

UPDATE: One additional notable sale we originally missed was the end of year transfer of a 49% interest in Patriots Plaza, a 3-building, 981,000 RSF project that is primarily leased to federal government tenants.  The 49% interest sold for $223.9 million, based on a total project valuation of $457 million.

The Longest Renewal

We complain a lot about the federal government’s predilection for kicking the can with short term extensions, and their insistence on termination rights. So it’s notable when the government executes a long-term lease, especially one that is a renewal. GSA did exactly that this year when it renewed a lease on behalf of the U.S. Fish and Wildlife Service at 1011 E. Tudor Road in Anchorage, Alaska for a term of 20 years (with cancellation rights after the 15th year). GSA was encouraged to enter into a long term renewal based upon substantial renovations the owner agreed to implement.

GSA renewed its lease for this 98,000 RSF building in Anchorage, Alaska for 20 years.

GSA renewed its lease for this 98,000 RSF building in Anchorage, Alaska for 20 years. (Photo: CoStar)

The Largest Government Purchase(s)

GSA rarely exercises renewal options but it is hard to resist when the purchase costs just $1.00. In Detroit earlier this year, GSA exercised its $1.00 purchase option to acquire 985 Michigan Avenue. The building was built for the federal government in 1995 and has been occupied by IRS for the ensuing 20 years. GSA now plans to spend $75 million to renovate the building, downsize IRS and consolidate multiple federal agencies from other leased locations in the Detroit area.

985 Michigan Avenue was built for IRS and includes a The building was built for IRS and includes a three-level computing and data center. Now, with IRS downsizing, GSA will renovate the building and backfill with other federal tenants. (photo: CoStar)

985 Michigan Avenue was built for IRS and includes a three-level computing and data center. Now, with IRS downsizing, GSA will renovate the building and backfill with other federal tenants. (Photo: CoStar)

If we instead look at the largest purchase as measured by the dollar amount of the transaction, the nod goes to 4700 River Road, a 337,500 RSF building occupied by the FDA in Riverdale, Maryland. GSA exercised its option to purchase the building for $30.6 million ($90.67/RSF).

4700 River Road, Riverdale, Maryland was purchased this year by GSA for $30.6 million (photo: CoStar)

4700 River Road, Riverdale, Maryland was purchased this year by GSA for $30.6 million (Photo: CoStar)

The Biggest Exit

The biggest tenant to vacate this year was the U.S. Navy, from the Transpoint Building at the tip of Buzzard’s Point in Washington, DC.  The Navy occupied the 600,000 SF Transpoint Building in order to facilitate renovations planned at the nearby Navy Yard in the wake of the September 2014 shooting on that installation. Transpoint had been earlier vacated by the U.S. Coast Guard when that agency’s new headquarters was completed at St. Elizabeths. However, it was still under lease after Coast Guard’s departure. Now it is vacated for good.

The Transpoint Building, 2100 2nd St, SW, Washington, DC is the largest block of space vacated by the federal government this year (photo: CoStar)

The Transpoint Building, 2100 2nd St, SW, Washington, DC is the largest block of space vacated by the federal government this year.  (Photo: CoStar)

The Largest Build-to-Suit Award
(Outside of Washington, DC)

Technically, the largest build-to-suit lease to be awarded this year is the DOJ lease described at the top of this article. This is true even if we account for the fact that roughly 360,000 RSF of the 839,000 RSF required by DOJ will be accommodated in an existing building.

But what if we look outside of Washington, DC? Well, then we would have to look all the way across the country to the other Washington–Washington State, that is. In April, GSA awarded a 300,000 RSF build-to-suit lease to Panattoni Development Company for the construction of a new FAA regional headquarters in Des Moines, Washington, near SeaTac Airport. The 20-year lease is slated to commence in mid-2017.

The FAA Northwest Mountain Regional Headquarters will be built in Des Moines, WA by Panattoni Development Corp. (Rendering: CollinsWoerman Architects)

The FAA Northwest Mountain Regional Headquarters will be built in Des Moines, Washington by Panattoni Development Corp. (Rendering: CollinsWoerman Architects)

The Biggest Tenant in the Market

The biggest new prospective federal tenant to emerge this year is the consolidation of several NIH functions in North Bethesda, Maryland. The proposed transaction would combine two prospectus approvals into one lease that may be as large as 539,000 RSF. Despite its size, this consolidation would yield a net space reduction of approximately 155,000 (22%). The new lease should be awarded in mid-2016 with occupancy projected for late 2017 (pretty tight timing).

One and Two Rockledge Centre are currently home to the bulk of the NIH tenancy contemplated under the new consolidation lease.

One and Two Rockledge Centre are currently home to the bulk of the NIH tenancy contemplated under the new consolidation lease. (Photo: CoStar)

The Highest New Rent

The highest* rent negotiated for a new lease this year (according to GSA data) is $63.56/RSF for laboratory space housing DEA’s Western Region lab. The DEA lab is located in Pleasanton, California, in a a renovated flex building that formerly housed a Nissan training center. The developer, Western Devcon, transferred the property to Easterly REIT shortly after the lease commenced.

* I identified the “highest” rent based on non-airport leases >3,000 SF that commenced this year. I omitted any leases outside the 50 U.S. States.

This former Nissan training facility in Pleasanton, California was been converted to a DEA regional lab.

This former Nissan training facility in Pleasanton, California was converted to a DEA regional lab. (Photo: CoStar)