Spotlight: SBA

SBA“The chief business of the American people is business,” said President Calvin Coolidge, speaking before a convention of newspaper editors 90 years ago. (His bon mot is often shortened to “the business of America is business.”) But just what kind of business? Coolidge, after all, made his remark in the golden age of the American corporation, the rising era of IBM, Boeing, General Motors, Columbia Broadcasting Service, and other huge firms across the economy. Then as now, small companies accounted for as much economic activity overall as large ones, but the prevailing assumption was that the corporations would eventually dominate—an idea enshrined in James Burnham’s highly influential book The Managerial Revolution, published just after the dust of the Great Depression had settled.

Enter the federal government, some of whose leaders worried that because of the economic concentration brought on by World War II, small businesses—defined as those with fewer than 500 employees—did not have a fair chance against their corporate competitors, especially when it came to securing loans to launch new enterprises that, if encouraged, would yield a flourishing economy. Established by law on July 30, 1953, in the early months of Dwight D. Eisenhower’s first term as president, the Small Business Administration had as its stated mission “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses.” A secondary part of the mission statement of the SBA adds “by assisting in the economic recovery of communities after disasters,” an important but often overlooked role, but its primary purpose has since been defined as encouraging small business and entrepreneurship by guaranteeing private loans in the event of default or bankruptcy.

The SBA has effected this encouragement in numerous ways. It has been a pioneer in loans to minority-owned businesses, opening, for instance, more than a hundred Women’s Business Centers across the country, establishing Internet portals for entrepreneurial resources and guidance, and developing a program of microloans of up to $50,000 for eligible applicants. It has recently given priority to helping military veterans establish businesses, while—of particular interest to our readers—it has operated its 504 Fixed Asset Financing Program, providing funding of up to $5.5 million for the purchase or construction of real estate or the purchase of business equipment and machinery. The program has provided a clearinghouse for the sale and purchase of real properties, especially in higher risk areas such as inner-city districts undergoing redevelopment.

The most notable role of the SBA–to federal lessors, at least–is that it reviews and approves the Small Business Subcontracting Plans required in lease transactions involving lessors that are categorized as large business.  In those lease contracts where the federal contractor (i.e. lessor) is a large business, goals must be established for subcontracting a certain portion of the lease related construction and property operations to small businesses. SBA further establishes the size standards that differentiate between “big” and “small” in all business categories.

The SBA has never been widely popular in the larger business community. From the outset, organizations such as the US Chamber of Commerce and the American Bankers Association opposed its creation, protesting that the government had no proper place in the lending business. It was slated for elimination under several administrations, including those of Ronald Reagan and George W. Bush, but saved by congressional intervention—interestingly, spearheaded by the commerce committees of both houses.

Calls to abolish the agency continue today, with critics of the SBA, among them the CATO Institute, arguing that its chief assumption is outmoded, namely that small businesses have unfairly limited access to credit as compared to larger ones. Those critics add that an unintended irony is that SBA-certified banks, which buy and sell risk-free loans guaranteed by the government, are more often than not the largest financial players on the block. Finally, given looser underwriting requirements than in the normal lending sphere and our recent history with the consequences of bad loan risks in the Great Recession, to say nothing of episodes of outright fraud, even supporters of the agency have called for greater oversight.

With fewer than 2,400 employees, headquartered in Washington but widely distributed in branch offices, at least one in each state, the SBA has a relatively small footprint. The outstanding loan guarantees it holds, amounting to about $100 billion, give it an outsize importance, however, which may explain why President Barack Obama elevated the SBA to the Cabinet level. Confirmed by the Senate, SBA Administrator Karen Mills thus enjoys even greater influence than her predecessors in office.

Reining in Lease Extensions: A New GAO Report Promises More Oversight on Federal Leases

GAO Lease Expirations Graph

The federal government spends too much money, and it doesn’t keep tabs on what it’s spending money on. That’s the constant complaint, especially from critics in an election cycle—but it’s also a refrain that’s coming from the federal budgetary watchdog, the Government Accountability Office, with respect to the huge portfolio of properties that the government leases.

A GAO report issued earlier this month notes that U.S. General Services Administration leases 7,435 properties from the private sector, for a total of almost 195 million square feet. Yet, in a study leases expiring in the FY 2012 to FY 2014 time period, more than half (1,455) of the leases that were set to expire in that window went into extension or holdover–or both. In addition, GAO found that 1,603 leases were already in extension or holdover status at the beginning of their study period. GSA’s liberal application of holdovers–or their close cousin, the short-term extension–can, as the report notes, understandably cause tension and ill will. The report adds that the strategy is thus risky and “should be avoided.”

Uncertainty is the chief driver for these extensions. In a climate of cutbacks and partisan division over funding, many agencies lack a clear picture of staffing and space requirements from one year to the next. “Such uncertainty can make it challenging for federal tenant agencies to effectively plan and budget for the long term,” observed GAO auditors in presenting the report to the Senate Homeland Security and Governmental Affairs Committee. Even though the government overall operates under the terms of the Office of Management and Budget’s “Freeze the Footprint” mandate, which specifies that agencies may not increase the total square footage of their domestic office and warehouse space beyond a baseline set in 2012, there is uncertainty even there, particularly as agencies are called on to do more—to serve, for example, an ever-growing number of retirees in the case of the Social Security Administration or of federal prisoners in the case of the Department of Justice.

As case studies, the GAO report focuses closely on ten instances of privately owned properties whose leases exceeded $500,000 annually. More than half of these were in the Washington, DC (National Capitol) area. GAO found that the agency most responsible for extensions or holdovers was the Department of Homeland Security, accounting for 21 percent of holdovers and 19 percent of extensions. The report does not say as much, but given the ongoing difficulties surrounding the consolidation of DHS space at the St Elizabeths Hospital site, it is not hard to see that future planning for employees and assets is a pretty fluid process.

But why worry about extensions at all? Hard feelings are one thing, but more to the point, as the report observes, federal agencies are forced into a weak bargaining position when they’re in danger of losing their space and have often responded by paying higher than the market rate to renew the lease.

Given that billions of dollars are at issue, better planning should yield better ability to bargain and reduce the need for extension, which the GSA deems “a lease action of last resort.” Even good planning cannot fully take into account the uncertainty produced by sequestration and budgetary reduction, but the GSA has announced that, effective in FY 2015, it will implement a portfolio planning initiative that is meant to ensure that leasing plans are in place before a given agreement expires. The initiative will focus on leases set to run out in the next three years.

Emerging Building Technologies and GSA

Earlier this month, the US General Services Administration (GSA) and Department of Energy (DOE) issued a joint request for information calling on vendors to propose innovative building technologies in support of federal guidelines and goals, or, as the GSA announcement puts it, “technologies that have the potential to improve economic and environmental performance in federal and commercial buildings.”

The jointly issued RFI is the outgrowth of a memorandum of understanding signed by the two agencies in February to promote cooperation in finding ways to reduce energy usage throughout the US government. The strategies encompassed by the memorandum include developing shared standards for building management systems, increasing the use of renewable energy in federal facilities, and sharing best practices for using and developing green building and clean energy technologies.

To that end, the agencies are soliciting through this RFI technologies in five categories: energy management, window attachments, fans and blowers, renewable energy, and water conservation and reuse. All these technologies are meant to support the Green Proving Ground (GPG) program of GSA and the High Impact Technology (HIT) program of the DOE. GPG coordinates with third-party evaluators to test the prerelease and early commercial stages of sustainable building technologies in federally owned building, while the HIT program supports the adoption of cost-effective energy efficiency technologies by facilitating their assessment in commercial buildings. The goal of the former program is to improve federal energy efficiencies, while the latter program is intended to influence the private marketplace to do the same

Last year’s RFI produced seven technologies that have been selected for evaluation:

  • A continuous combustion control system that optimizes the fuel mix in gas-fired boilers to increase boiler efficiency and reduce emissions (Lumec Control Products, Inc.)
  • Intelligent energy valves to reduce the energy consumed by hydronic systems by maintaining an optimal temperature difference between supply and return lines (Belimo Aircontrols USA, Inc.)
  • Daylight redirecting film, window film that redirects daylight through windows to the ceiling to extend the natural light zone (3M Company)
  • Circuit-level energy monitoring that collects and analyzes energy consumption in real time (Enertiv, Autodesk, Inc. and Panoramic Power)
  • Building integrated photovoltaics (BIPV) in windows that can improve energy efficiency while also generating electrical power (Solaria Corporation)
  • Smart ceiling fans that monitor room temperature and humidity to adjust fan speed for optimal comfort (Big Ass Solutions)
  • Smart scrubbers for HVAC load reduction, technology that reduces the volume of outside air drawn indoors by removing contaminants from HVAC airflow (enVerid Systems)

Within their specialized areas, these technologies reduce energy consumption and emissions, realizing savings of from 8 percent in the case of the gas combustion control system to 30 percent in the case of the intelligent energy valve system.

GSA and DOE note that if an applicant’s technology is selected for evaluation through the GPG program, an HIT Catalyst demonstration project, or both, it will be matched with federally owned buildings or commercial buildings for measurement and verification by independent evaluators.

The current RFI is addressed to industry stakeholders and commercial organizations, as well as educational institutions, and nonprofit organizations. The application period ends at 11:59 EST on Friday, December 11, 2015. Anyone interested in responding to the RFI can review it at, while any questions can be directed to

National Broker Contract, Round 3

The General Services Administration (GSA) has issued its RFP for the third generation of its broker and leasing support services contract – formerly the National Broker Contract (NBC), now named GSA Leasing Support Services (GLS). The new GLS contract provides broker and leasing services (i.e. market surveys, site visits, document preparation, and negotiation) for GSA’s contracting officers across all 11 GSA regions. Proposals were due in May and contracts are expected to be awarded to multiple brokers later this year.

Many owners of GSA-leased property are somewhat familiar with the current NBC contract (one year base plus four annual renewal options) which is the second iteration awarded in 2010. They may have worked with a specific broker assigned by GSA to their leasing action in the region where their property is located. There are four brokerage firms currently participating in the NBC program. However, if you’re a new owner and are not familiar with NBC, it may be helpful to understand how the program works and what services are performed by brokers.

How has NBC performed over the last nine years? According to GSA, the program has yielded the following results to date.

(Source: GSA)

  • 30% – Average broker utilization rate for leased space
  • 3,056 leases totaling 94.1 million square feet
  • $18 billion – Total contract value of leases awarded
  • $214.9 million – Total commission credits passed on to tenant agencies
  • 511 leases totaling 19.7 million SF currently in the pipeline
  • $6 billion – Total contract value of current lease pipeline
  • $74 million in anticipated commission credits

GSA’s current lease portfolio contains over 8,400 leases, with an annual rent outlay of $5.6 billion. At a time when GSA’s budget is under constant scrutiny and the ongoing focus is on downsizing, consolidation and lease reform, the third generation of NBC will garner significant attention. GSA recently stated that the new GLS contract “…is expected to generate approximately $100 million in rent credits to tenant agencies and substantially reduce lease cycle times by eliminating workload redundancy.” Based on industry feedback, the GSA has focused on revising certain components of the new contract including: strategic planning services, commission agreements, small business and training to improve efficiency and flexibility, and conformity to normal broker industry practices. Once the new GLS contract is awarded, it will be interesting to see how performance is measured, and if the changes in the contract meet the objectives and yield the results established by GSA.

Top Federal Property Owners (2015 Edition)

Top OwnersWelcome to our third year tracking the largest property investors in the federal space. For those of you who have reviewed the 2013 and 2014  editions of our “top 10″ list, you know that we limited those lists to owners of GSA-leased properties. While GSA is the primary lessee of space on behalf of federal tenants, there are any number of agencies that use delegated or statutory authority to execute leases directly. This year, we are expanding our top owners tally to include those properties too–we exclude only US Postal Service leases. This modest methodology tweak has re-shuffled our list slightly from previous years.

Otherwise, as in years past:

  • We have ranked owners by square footage and not by rent or any other measure because square footage is the most unimpeachable metric available to us.
  • We only tallied leases that have commenced. If a lease has been awarded but not yet commenced (as in a lease-construct project, for example) we haven’t counted that in this list.
  • Determining “ownership” is tricky business. We have typically defined the owners as those operating partners who are the face of these properties–the people who ultimately manage the assets. However, we recognize that for some properties there may be behind-the-scenes equity partners whose ownership stake is substantial. We have not attempted to identify these equity partners in this list.
  • If you think we’ve mis-counted your portfolio, email me or leave a comment below.

Here is this year’s ranking:

1. Government Properties Income Trust

Government Properties Income Trust (NYSE: GOV) remains at the top of the list. The REIT owns 71 properties totaling 10.7 MSF, though 6.9 MSF are leased to federal tenants and the remainder to State agencies, the United Nations and a smattering of private-sector tenants. The firm remains an active buyer of government properties, though it has not purchased any new federally-leased buildings since we published this list last year.

2. The JBG Companies

The JBG Companies is a Washington, DC-focused developer and investor, but its experience building GSA-leased properties is second to none. JBG has completed four GSA-leased buildings totaling more than 2.5 MSF of GSA-leased space since the beginning of 2013. Among the largest properties owned by JBG are the 1.35 MSF U.S. Department of Transportation headquarters, the renovated Parklawn Building, which houses 935,000 SF of U.S. Health and Human Services tenants, a 575,000 SF facility housing NIH’s National Cancer Institute and a recently constructed 538,000 SF Social Security Administration building in Baltimore.

3. Corporate Office Properties Trust (COPT)

Corporate Office Properties Trust (NYSE: OFC) is a $2.2 billion REIT with a property portfolio totaling 18 MSF. About 3.8 MSF of this space is leased to federal tenants. What makes the COPT portfolio unique on this list is that GSA leases comprise less than 2% of COPT’s federal tenancy. Most federal leases are with other U.S. Government entities, primarily the U.S. Army Corps of Engineers, which sources space for military and intelligence users.

4. Vornado Realty Trust

In last year’s ranking I remarked that Vornado (NYSE: VNO) may deserve an award for resilience, having managed to maintain substantial government occupancy despite the fact that BRAC caused more than 2 MSF of Department of Defense tenants to vacate its Northern Virginia portfolio. Much of this space has been backfilled and VNO has been awarded substantial recent leases that will solidify its federal occupancy into the future, including the recent award of a 370,000 SF U.S. Marshals Service lease.

5. NGP

NGP is now investing its sixth fund devoted to government-leased properties. It has, so far, purchased four buildings under this new fund, yet it also retains control of the 42 properties in its fifth fund, which has recapitalized for long-term ownership. Having accumulated almost 3.2 million federally leased square feet, this veteran government property investor remains near the top of our annual list.


LCOR appears on our list this year (and every year) based on its role as the asset manager for an investment group of high net worth individuals that own the 2.4 MSF headquarters of the U.S. Patent and Trademark Office (PTO), the largest GSA lease in the United States. The PTO lease spans five office buildings in Alexandria, Virginia. LCOR developed this campus in 2003.

7. Brookfield Office Properties

Brookfield Office Properties (NYSE: BPO) is among the world’s largest property investors. In the United States alone, Brookfield has more than 40 MSF of office properties under management. Yet, despite its size, Brookfield appears on this Top 10 list for the first time, primarily because we now tally all federal (non-Postal Service) leases. In addition to a sizable GSA lease portfolio, Brookfield is landlord to several agencies with statutory leasing authority including the Transportation Security Administration, the Pension Benefit Guaranty Corporation and the Smithsonian Institution.

8. Boyd Watterson

No firm has been buying government properties at a faster clip than Boyd Watterson (formerly investing under the name of Titanium Asset Management Corp). Since we published our “Top 10″ last year, Boyd Watterson has closed on 20 new federally leased properties, earning a spot on this year’s list. The firm’s two government property funds are now invested in 60 buildings totaling 2.1 MSF.

9. UrbanAmerica Advisors

UrbanAmerica has been one of the largest U.S. federal property owners since purchasing the 15-building Rubicon America Trust portfolio in 2008. Last year, UrbanAmerica sold five of those properties, causing it to move down our ranking from 4th to 9th. Its remaining properties–some of which are now partially or fully vacant–are being marketed for sale, making it likely that this spot will open to a fresh face next year.

10. Saban Capital Group

L.A.-based Saban Capital remains among the largest federal property owners, despite the sale of two buildings earlier this year. The private equity firm run by entertainment and media billionaire Haim Saban owns 19 federal government-leased buildings. In total, the portfolio contains a bit more than 2 MSF of federally leased space.

Sales Market Insights – Mid-Year 2015

Mid-Year 2015 GSAX Report[1]GSAXCHANGE, the investment sales arm of Colliers Government Solutions, has published its Mid-Year 2015 “Government-Leased Assets” report, which includes an overview of sales activity and trends in the federal sector. 

Some insights from this report:

  • Cap rates on longer-lease term assets continue to trend slightly downward, and cap rates on medium- and shorter-lease term assets drop as investors seek opportunities further down the lease term spectrum;
  • Consolidation of leases, multi-agency occupancy, and relocation of leases to GSA-owned buildings continues to take place;
  • GSA lease solicitation opportunities overall appear to be on the upswing, although the GSA’s occupancy of newly constructed buildings and solicitations for new lease-construct projects continue to decline;
  • Ownership of GSA and other Federal Government-leased property is consolidating.

To read the full report click here.

GSA’s Leasing Capacity

In a recent Washington Business Journal article entitled “Time is running out for the feds to take advantage of Washington’s tenant market” (*paywall*), the reporter noted that GSA will struggle to take full advantage of the current tenant’s market before the pendulum swings back to the landlord’s favor. This, despite the fact that GSA has many leases expiring in the near term, creating immediate opportunities to negotiate new low-cost contracts. I was quoted as saying (with dubious grammar): “The window is closing on the GSA…Part of the problem is that at no point in GSA’s history has the agency been able to do not even half of the volume of leasing that needs to be done here.”

This comment, sitting alone without context, could be interpreted as a cranky indictment of GSA’s leasing capability. It was wasn’t intended as that, though the statement is mostly correct. It will take time for GSA to work through the massive pile-up of near-term lease expirations; therefore, the government will not be able to take full advantage of current market conditions.

Let’s take a look at the facts. The table below shows the volume of new leases GSA has “completed” in each of the past ten fiscal years (see the note at end of this article to understand how lease commencements are used as a proxy for completed leases).

GSA Leasing Capacity

Looking back at this ten year stretch, GSA has completed an average of 15.2 MSF of new or replacing (i.e. “renewal”) leases annually. In the best of these years (2011), GSA completed 19.8 MSF of new/replacing leases. The total volume scheduled to expire in FY 2015 is 29.4 MSF. That’s  87% more than the GSA’s average leasing volume and 48% more leasing than GSA accomplished in its best year. Maybe I’m guilty of a little hyperbole as quoted by the Washington Business Journal; yet, the gist of my statement holds true.

So, what happens to the leases that GSA does not negotiate anew? As evidenced from GSA’s own data, most leases simply extend at the end of their terms (and unfortunately sometimes that method of extension is holdover). The primary reason for the high volume of extensions is overwhelming workload paired with budgetary and planning challenges associated with edicts to freeze and ultimately reduce the footprint, actions that typically require significant rethinking of the workplace.

Of course, we should not expect the complete eradication of lease extensions. When used strategically, extensions have a useful purpose, allowing for future consolidation or realignment of facilities. Yet, as a practical matter, the government mostly relies on extensions as a form of triage. The great irony is that extensions provide only a modest shortcut through the procurement process. Even short-term extensions are presented with a bureaucratic obstacle course that takes time, sustained effort and limitless patience.

Can GSA ever catch up to its workload? The answer is yes, but it will take a while. If you do the simple math assuming you want to achieve “normal” leasing flow where, say, 90% of leases are new/replacing and only about 10% are extensions (a fantasy that exists only in the slumberland musings of the nation’s largest federal property investors) and the remaining leases roll forward in a bow wave to future years, then it would easily take about five years for GSA get its workload fully under control. To put that in political terms, it will take the remainder of this presidential administration and the entire the elected term of the next one. A lot can happen in the interim.

A note regarding these numbers

We use the word “completed” to generically describe leasing volume based upon lease commencements. We don’t actually know when all of these leases were originally executed, which would have been our preferred standard. Unfortunately, it’s impossible to estimate lease execution dates based upon lease commencement because sometimes the government will execute leases years in advance in the case of build-to-suit projects or after commencement in the case of holdovers. Given the limits of GSA’s publicly available data, “completed” (i.e. commenced) leases will have to suffice.

A second note regarding these numbers

Some would argue that any analysis of GSA leasing capacity should focus on the number of leases GSA completes instead of their square footage (looking at the number of leases completed instead of square footage yields a slightly more hopeful outlook, by the way). There’s pretty solid logic to that since small deals are subject to the same cumbersome procurement process as larger ones, despite GSA’s efforts to implement streamlined procedures. However, the largest leases must endure congressional prospectus approval and a towering hierarchy of scrutiny. It doesn’t take many of these to really gum up the works, so we look at square footage as the preferred measure.

Which Way The Political Wind Blows

During the first half of this year Congress has hosted a number of hearings, both on Capitol Hill and in various cities across the United States, that provide a clear view of its objectives regarding federal real estate. All of these hearings have one goal in common: reduce costs.

This goal is not new of course, but faced with the prospect of ever-increasing federal debt, leaders in both parties have begun to press the issue harder. Listening to the hearings, it is often difficult to distinguish the Republicans from the Democrats. Committee members from both parties recognize that there is room to reduce real estate costs, making the issue one of rare bipartisan agreement and improving the likelihood that progress will be made.

The means by which Congress expects this cost reduction to occur can be grouped generally into three initiatives: 1) dispose of vacant and underutilized properties; 2) reduce reliance on “costly leased space” and; 3) find ways to lower the cost of the space that the government continues to lease. As detailed below, each initiative has its merits and its challenges.

1) Dispose of vacant and underutilized properties

One would expect that disposing of unneeded federal properties would be the simplest means of paring federal real estate costs, especially as there are roughly 77,000 such properties, which cost $1.66 billion annually to maintain. Yet, implementation of an efficient and comprehensive federal property dispositions program remains elusive.

To that end, on June 16th, both chambers of Congress held hearings related to federal real estate. In the morning, the Senate Homeland Security and Governmental Affairs committee hosted a hearing entitled “Federal Real Property Reform: How Cutting Red Tape and Better Management Could Achieve Billions in Savings” and in the afternoon the House Transportation and Infrastructure subcommittee on Economic Development, Public Buildings and Emergency Management held its hearing entitled “Saving Taxpayer Dollars in Federal Real Estate: Reducing the Government’s Space Footprint.”  Senate committee Chairman Ron Johnson set the tone for the day in his opening statement, asking the witnesses to comment on “what is being done today to stop wasting taxpayer dollars on unneeded and unused properties, what can be done to manage and provide reliable data on real property, what more needs to be done to truly see results, and what Congress can be done to make reform a reality.”

It was clear from the testimony that the fundamental challenge is simply identifying which properties need to be disposed. According to David Wise, the U.S. Government Accountability Office (GAO) Director of Physical Infrastructure Issues, federal real property management has remained on his agency’s “High-Risk List” since 2003, largely because the real property data reported by federal agencies are unreliable. Though President George W. Bush created the Federal Real Property Council more than a decade ago to establish and maintain a federal real property database, the data are still insufficient to support asset-level decision making.

Another long-standing challenge is the lengthy and cumbersome disposal process, which requires agencies to engage in any number of studies to determine the status of title, historical and archeological significance, NEPA compliance, hazardous materials mitigation and so forth before disposing of any property. The process also includes special provisions for “public benefit conveyances” – the act of first offering properties to local governments and certain public interest organizations. Chief among these provisions is the McKinney-Vento Homeless Assistance Act, which mandates that federal properties are offered to homeless service providers before they may be sold or otherwise conveyed. As demonstrated in the June 16th hearing testimony, however, McKinney-Vento is a hurdle to disposition that yields very little public benefit relative to the effort it imposes. Since its inception in 1987, the program has transferred just 122 of the 40,000 screened federal properties (0.31%) to homeless service providers. The public benefit conveyance review was required in all cases even though 80% of those 40,000 screened properties were obviously not practical for homeless use due to their location in national forests, on military bases and the like.

Norman Dong, GSA’s Public Buildings Commissioner, pointed to a related problem — that there is little incentive for agencies to engage in the arduous process of property disposals when they receive none of the proceeds from these sales. In Dong’s view, it is essential to compensate the agencies for the resources they must expend to run the dispositions gauntlet from end to end.

There have been recent legislative proposals that would resolve these and the other issues critical to identifying viable dispositions and executing transfers. In 2012 the Civilian Property Realignment Act (CPRA) and the Federal Real Property Asset Management Reform Act were introduced in the House and Senate, respectively. The two bills sought to address the property disposal problem through slightly different approaches, yet neither could attract the support necessary to be enacted.

Given the significant attention put to the dispositions problem in recent hearings and the bipartisan nature of the effort, it seems that Congress is poised to take up the issue yet again. We would expect to see the Civilian Property Realignment Act rekindled, especially as it passed the House when it was originally introduced. And it is possible that McKinney-Vento will be amended to allow for a more rational screening mechanism for potential homeless facilities.

2) Reduce reliance on leased space

At nearly every hearing on cutting federal real estate costs, one or more participants has issued soundbites regarding “costly leased space” and “reducing reliance on costly leasing.” Listen further and it is clear that one of the primary means by which those participants intend to reduce the government’s reliance on leasing is to shift tenants into federal buildings. This strategy has been featured in congressional hearings, White House budget requests and GAO reports back to the late 1980s (and perhaps further). Yet, the current emphasis on spending reductions has focused Congress on this issue as never before.

In both June 16th hearings, the witnesses noted that restrictions on GSA’s access to the Federal Buildings Fund are impeding the agency’s efforts to draw tenants out of leased space and into the owned inventory. As I observed in an earlier blog article, the counter-intuitive dynamic in federal real estate is that restrictions on GSA’s budget appropriations buttress demand for leased space. This is because GSA lacks the financial resources to fund the renovations to its owned assets that would be necessary to attract and accommodate new federal tenants.

GSA hopes to coax improved appropriations from Congress by providing case studies of cost savings from consolidation of federal tenants into owned buildings. In his testimony before both congressional committees, Commissioner Dong cited the example of HUD in Minneapolis, where GSA relocated the tenant from leased space into an historic downtown federal building. According to Dong, the move saved the federal government $700,000 in annual lease costs and reduced the agency’s footprint by more than 9,000 square feet. GSA would like to build further on this and has requested $200 million in the FY 2016 budget to fund renovations that would enable additional consolidations.

Funding is tight, however, and is expected to remain so. Congress will likely budget additional funds to help GSA continue to consolidate leased space into owned buildings but not the amount that GSA is requesting. Congress also expects GSA to use its public-private exchange authorities, such as its  “412 Authority”, to negotiate transactions that require fewer (if any) appropriations. GSA is using these authorities to procure a new headquarters for FBI in the Washington, DC metro area and to award a swap-construct contract that will yield a new facility for the Department of Transportation at the Volpe Center in Cambridge, Massachusetts.

Though the Democrats and Republicans are generally in sync regarding their desire to decrease the leased inventory in favor of owed buildings, the largest such project, the DHS headquarters consolidation planned for St. Elizabeths, underscores the political difficulty in funding large-scale federal construction. Though it would ultimately enable DHS to vacate more than 40 leased locations in the Washington, DC metro area, the project has been stalled by repeated appropriations restrictions. In the nine years since the project was first announced, only the US Coast Guard headquarters building has been completed (and it was built with Recovery Act funds). There is little appetite, especially among congressional Republicans, to fund the estimated $3.2 billion to finance the remainder of the consolidation, and congressional leadership has expressed doubt regarding the project’s viability, as evidenced in the Department of Homeland Security Headquarters Consolidation Accountability Act,  introduced this year in both the House and Senate. This Act calls for additional scrutiny of the cost-benefit logic of the project.

While the future of the massive DHS consolidation remains unclear, smaller consolidation projects have been successfully completed. These modest “case studies” have been conducted by GSA using what limited funding they have in an effort to rally additional support. Clearly they have begun to nibble at the edges of the leased inventory. As I noted in a blog article earlier this year, GSA has moved a million square feet from leased space into owned buildings in each of the past two fiscal years. That figure is three times the average of prior years.

3) Find ways to lower the cost of the space the government continues to lease

Still, leased properties, will remain a significant component of the federal inventory. Leases are quicker to acquire and easier to dispose of, tend to be in buildings that are newer and of better quality than most federal buildings and are generally coupled with private-sector funding for tenant alterations.

Congress’s goal is simply to reduce rental costs by improving space utilization and by making better deals. Rep. Lou Barletta has led the charge on rent reduction since he was appointed Chairman of the House Transportation and Infrastructure subcommittee on Economic Development, Public Buildings and Emergency Management. He has hosted 13 hearings and roundtables devoted to federal property issues–both on Capitol Hill and at regional locations throughout the United States. He observes that it is still a tenant’s market in most of the major metros and is a great time to achieve very low rents if GSA is willing to engage in long-term leases. Further, GSA has the right timing to take advantage of this market because half of the leases in its inventory expire in the next five years. His constant refrain: “We don’t want to miss this opportunity”.

Barletta’s approach is pretty practical. Disposing of properties and moving from leased space to owned federal buildings may save money but those initiatives will also require the passage of new laws or increased appropriations. Good leases, on the other hand, can be had right now, and the savings gained from a strategic leasing program arguably will exceed the savings that can be achieved through other cost reduction efforts, at least in the near-term.

Though no legislation is required to enable more effective leasing, Barletta has nonetheless introduced the Public Buildings Reform and Savings Act to prod the effort forward. This bill seeks to implement a streamlined leasing pilot program with the goal of “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” (emphasis added).

Without the force of law it is unclear if or when GSA will adopt a long-term leasing posture. Throughout its recent history, GSA has routinely structured termination rights in three-quarters of its leases. It does this to control its exposure, hedging against the possibility its tenant agencies will cancel their occupancy agreements with GSA and vacate space, leaving GSA on the hook to pay the rent. When Barletta routinely asks hearing and roundtable participants if they will commit to implementing long-term leases of 10 years or more, many artfully dodge the question, but all agree that long, firm-term leases will yield better lease deals.

The federal attraction to short-term leases persists because agencies are under increasing pressure to reduce the amount of real estate they occupy. These space reductions require planning and funding that take extra effort, leading agencies to buy time with lease extensions while they organize themselves.

Agencies are grappling with these planning issues right now. Beginning in 2012, the Office of Management and Budget (OMB) issued a memorandum directing agencies to freeze the size of their leased and owned real property inventories. This Freeze The Footprint policy immediately blunted net demand and it has even caused some reduction in the GSA leased inventory. More recently, OMB issued its Reduce The Footprint mandate. This goes further, requiring agencies to develop 5-year plans.


Bipartisan efforts to reduce federal real estate costs are likely to intensify. Already this effort has resulted in declining demand for leased space. I expect that trend to continue, especially as it is politically expedient.

Congress also is working to accelerate the most obvious form of cost reduction — for the federal government to rid itself of vacant and underutilized properties. Private-sector property owners would welcome that because federal property dispositions will help agencies achieve their footprint reduction goals before having to reduce leased inventory.

The government will also seek to improve its investment in its remaining assets, though budget constraints and GSA’s limited capacity to plan and execute consolidations will slow the transition away from leased space.

Therefore, one of GSA’s best opportunities for near-term cost reduction is in the leased inventory. But as long as GSA aspires to consolidate its leased space, long firm-term leases will be difficult to achieve. Most tenant agencies don’t seem to have the confidence–whether due to budgetary concerns or mission planning uncertainty–to enter into long-term agreements without generous termination rights.

In the meantime, there still exists a pretty wide gap between the government’s goals and the reality of what GSA has been able to achieve. Yet, the rhetoric issued from congressional and executive leadership indicates which way the political wind blows and where the market is headed.

The Key Sustainable Products Initiative

Is your bathroom tissue squeezably soft? Does your soap leave your hands germ-free? Advertisers lie awake at night worrying about whether consumers are worrying sufficiently about such things. And as for the federal government—well, officials there have been worrying that suppliers and agency managers haven’t been paying quite enough attention to the environment, whence a set of guidelines that has recently come online governing procurements ranging from flooring and insulation materials to hand soap to the little paper liners on top of cafeteria trays.

As a result, as of late in FY15, new regulations are online by way of the Public Buildings Service (PBS) of the General Services Administration (GSA) covering what are called “Key Sustainable Products.” These are defined as the materials and products used in the construction and operation of buildings—and in particular, buildings owned and leased by the federal government.

The product of several related policy and executive orders (particularly EO 13693 Planning for Federal Sustainability in the Next Decade, signed by President Obama on March 19, 2015), the KSP initiative holds that these products and materials are as important as energy use and waste management in the overall “green” operation of federal properties, and it requires that all federal organizations and employees under PBS jurisdiction, as well as contractors, follow guidelines found in the online Green Procurement Compilation. Key sustainable products are defined as those that PBS uses most frequently and for which it (or other agencies, such as the EPA) has developed environmental standards. Among the products listed are nylon carpet, acoustical ceiling tiles, concrete, floor cleaner, interior latex paint, paper towels, and wastebasket liners, along with the aforementioned hand soap, bathroom tissue, and tray liners.

For example, acoustical ceiling tiles in new construction projects must meet California section 01350 standards for low-VOC (volatile organic compound) materials—and not just that, but they must also be at least 20 percent recycled content, be recyclable themselves, and meet USDA Certified BioPreferred guidelines. Bathroom tissue must be at least 25 percent postconsumer recycled content, while concrete must be greater than 25 percent fly ash, a waste product of coal firing, or greater than 15 percent ground granulated blast-furnace slag. And as for carpeting, in the language of one regulatory document: “Face yarn must be 100 percent nylon fiber. Loop Pile shall be 100 percent Bulk Continuous Filament (BCF); cut and loop shall be 100 percent BCF for the loop portion and may be BCF or staple for the cut portion; cut pile carpet shall be staple or BCF.”

There’s some inconsistency built into the standards as they are now set. For example, vendors and suppliers are being actively solicited to provide a range of products, adding to the roster of existing contractors and supply lines. As the GSA notes, almost all the listed products are available at prices less than or equal to their non-sustainable counterparts, conforming to government policies otherwise mandating cost saving. At the moment, though, lessors are not bound by the standards set for wastebasket liners, since products have not yet come onto the market that meet both the environmental and the cost-effectiveness requirements.

General contractors, janitorial-services providers, office-supplies sales personnel, property holders and lessors—the KSP initiative affects a wide range of people and agencies. How thoroughly they comply with the new guidelines remains to be seen—and it will be seen, since the GSA has also instituted a program of audits and “green lease clause” tracking instruments.

For those of you who have been actively leasing over the last couple of months, you may have noticed new lease clauses relating to this policy. We believe GSA’s sustainability policies will continue to evolve, especially as there are other initiatives underway.

Non-Cancelable GSA Leases Are Now Even Scarcer

GSA Leases Cancelable vs Non-CancelableDespite increasing congressional pressure to improve the number of long, firm-term leases, GSA and its tenant agencies have proven that they are not yet serious about weaning themselves from their addiction to termination rights. As measured from the leasing peak in 2010 (note: some of the leases in that year are due to short term Census leases), the number of cancelable leases remains nearly unchanged. Yet, during that same five-year period, the number of non-cancelable leases (>=3,000 RSF*) has declined by a little more than 18%. The net result is that GSA has been executing a smaller proportion of non-cancelable leases in an inventory that is also shrinking.

That unfortunate trend would be mitigated if the leases that were executed achieved longer firm terms. Alas, they are not. In fairness, I have not studied this in detail, but the back-of-the-envelope analysis is as follows: Currently, in the entire United States there are only 129 leases that have remaining non-cancelable terms of 10 years or more. Given that the pile-up of GSA lease expirations is such that the agency is executing approximately 1,100* lease actions annually, it is pretty easy to conclude that the process is yielding an exceedingly low volume of long firm-term leases.

The data in the graph above tracks these figures through the end of the 2014 fiscal year (i.e. 9/30/2014) so the trend could potentially improve when we revisit it again at the end of fiscal 2015. Certainly congressional intervention has ramped up substantially in this past year and we would expect that to have some influence on federal leasing. Yet, so far this fiscal year (looking at the data available through May 2015), we see only a very slight, half percentage point improvement in the ratio of non-cancelable to cancelable leases.

As we’ve discovered in our recent study of lease expiration dates, there is some “seasonality” to GSA leasing. So, we will revisit this again at the end of the year to conclusively determine if Congress is having any influence over GSA’s leasing activities or if the agency is merely paying lip-service to its legislative branch colleagues.

* Throughout this article we base our analysis on GSA leases that are at least 3,000 RSF in order to improve the focus on traditional leases, eliminating many TSA on-airport leases, storage leases, parking leases and other esoteric leases.