Insuring Against Terrorism: With a Senator’s Parting Shot, a Bill Is Blocked

As of December 31, 2014, U.S. insurance companies will no long provide coverage against acts of terrorism, and neither will the U.S. government back them in doing so.

Those are the likely immediate effects of Congress’s failure to extend the Terrorism Risk Insurance Act (TRIA), blocked on December 16 in the Senate after outgoing Senator Tom Coburn (R.–OK) demanded changes to a provision authorizing multistate agency licensing.

TRIA was enacted in 2002 after private insurance companies refused to underwrite against acts of terrorism, fearing that there would be an increase in such crimes in the wake of the 9/11 attacks. It required insurance companies to pay out the first $100 million in damages caused by any such terrorist action, whereafter the federal government would pay 85 percent of any remaining losses. The provision of that insurance was considered of critical importance to the construction and real estate industries, as well as organized sports and entertainment, on the logic that buildings, sports events, concerts, and the like would make logical targets for our enemies.

TRIA has been twice reauthorized after 2002, and over the life of the legislation to date the federal government has not had to pay any damages. Observers thus forecast that the current reauthorization would go without a hitch, and indeed it passed through the House the week before by a vote of 417–7 before being blocked in the Senate.

That’s not to say that the House did not debate the bill extensively—so much so in the House Financial Services Committee, in fact, that there was some question about whether reauthorization would even be taken up on the floor.

Early iterations of the House and Senate versions of the bill, which went through committee this summer, differed in several respects, some substantial. The House bill would have reauthorized TRIA for five years, the Senate for seven; the House bill would have raised the floor from $100 million to $500 million in the case of “conventional attacks,” those that were not nuclear, biological, chemical, or radiological in nature. The House bill would also reduce federal government payouts to 80 percent rather than the current 85 percent. Finally, it mandated a certification process whereby the attorney general, secretary of treasury, and secretary of homeland security would issue a declaration that a given event was the result of terrorism within 15 days of its occurrence.

Like the House version, the Senate bill included provision for the establishment of a National Association of Registered Agents and Brokers (NARAB), which would allow agents and brokers to apply to a central clearinghouse, administered by state insurance commissioners, that would in turn streamline multistate licensing. The insurance industry reportedly favored the Senate version, especially after certain provisions of the Dodd-Frank Act were exempted, allowing energy and agricultural companies and other “end users” to use derivatives as a hedge. Democratic senators Elizabeth Warren (MA) and Charles Schumer (NY) publicly opposed the Dodd-Frank exclusion but voiced approval for the reauthorization of TRIA.

In the end, the House bill as passed had a threshold of $200 million, not $500 million, and extended TRIA for six years, not five. The Senate version, which had been revised to reflect changes in the House version, was held up as the Senate met in the final week before the Christmas recess. Senator Coburn led the opposition, demanding that a provision be added to allow states to opt out of the multistate licensing system.

Senator Coburn’s refusal to allow a floor vote to be held means that reauthorization of TRIA now must await the incoming Congress. Analysts believe that legislative approval will be forthcoming, though when it will appear on the calendar remains to be seen. Meanwhile, although the White House has voiced opposition to the Dodd-Frank exclusion, there is no indication that the reauthorization as it is now written runs the risk of a veto. We look to Capitol Hill for the next steps in reinstituting a law that, as of this writing, will expire in just two weeks.

Consolidations, Closings, and the US Postal Service

The Nat King Cole Post Office in Los Angeles is for sale for $8.3 million.

The Nat King Cole Post Office in Los Angeles is for sale for $8.3 million.

This is not a good time to consider embarking on a career as a letter carrier‚ especially not for someone living in a small town where not much mail comes down the chute. Neither is it a good time to be a senior postmaster, since, come January 9th, postmasters around the country will be affected by a sweeping reduction in force (RIF). About half of the thousands projected to be on the chopping block are eligible, by federal rules, for some sort of retirement benefit, but others will simply be put out to pasture—in theory, to be replaced by much less expensive hourly workers, though the projected savings are fast being whittled down as various union arbitration scenarios play out, all of them likely to raise the cost of those workers.

A final bit of bad news for the US Postal Service comes from its reckoning that in fiscal year 2014, it lost $5.5 billion—news balanced to some extent by a $1.4 billion profit earned from sales and managing what in the parlance of Washington is called “controllable cost.”

There are silver linings in the thoroughgoing program of belt-tightening for private investors, for even further trimming is likely to occur after the new Republican-dominated, privatization-inclined Congress is seated. In this climate, we are likely to see a significant number of postal properties on the block.

As of 2012, the USPS, as the Wall Street Journal reports, “owned 197 million square feet of space in 8,606 buildings … and it leased an additional 81 million square feet across 24,000 properties. In the new wave of cost-cutting, many of those owned structures would be sold, and nationwide, more than 600 buildings have already been earmarked for sale.

In California, for example, the USPS has slotted a couple of dozen large facilities and numerous smaller ones for sale, part of a program that is intended to trim some $20 billion from operational costs in the next three years. One structure in downtown Los Angeles is on the market for $8.3 million, while two in Fresno are listed at a combined $2.9 million.

These sales are not without controversy. In Berkeley, the USPS has been attempting to sell its main facility for more than a year, an effort stymied by a lawsuit joined by the city government and the National Trust for Historic Preservation. The suit argues that the USPS has failed to observe federal historic preservation laws in establishing limits to the sale: a buyer, that is to say, will have to observe the laws affecting historic structures, not tear the old building down.

There is room, of course, under the preservation statutes for a buyer to make it over for uses such as condos—which is just happened in Modesto when the old post office there was converted to loft spaces. In just that way, outside California, the old downtown post office in Dallas, Texas, was converted into a luxury apartment building, while other post offices in Kansas and North Dakota have become office or commercial spaces.

A hearing on the Berkeley post office is scheduled to take place on December 11, and the outcome will be of interest to a broad audience well beyond the Bay Area. Meanwhile, a bill sponsored by Senators Tom Carper (D-Del.) and Tom Coburn (R.-Okla.) will grant the USPS relief from the burdensome retirement prepayment obligations that have hampered it for years, the source of a good part of that multibillion-dollar loss.

In exchange, however, USPS will be required to undertake such cost-saving measures as eliminating Saturday delivery and replacing house-by-house delivery with multiresidential curbside mailboxes. That bill faces considerable opposition, and at this writing there is substantial support within the lame-duck Senate for a general moratorium on postal closings and the sale of USPS buildings. All these matters are likely to be visited and revisited soon after the new congressional session begins.

Another Big Reason for the Pile-Up


(The graph above is interactive, pull the slider located above the column chart)

We have published a few articles on this blog about the stunning pile-up of lease expirations in GSA’s national lease inventory and the reasons that have contributed to it, including Freeze the Footprint, downsizing mandates, budget distress and the effects of partisan gridlock.

Yet, there is another really simple, if mysterious, reason for the dramatic pile-up of lease expirations: 2009. For some reason (and, so far, no one I’ve quizzed at GSA or elsewhere can recall exactly how or why this occurred) there has long been an unusually large volume of leases queued-up for expiration in the year 2009. This wasn’t apparent to us until we went back and looked at a table of GSA lease data we had received from the year 2000. From that vantage point, looking forward to the ensuing years, it was apparent that 2009 was going to be an unusually big year for expirations (see graph below for the lease expirations forecast as of FYE 2000).

FYE2000

To better understand how the year 2009 contributed to the pile-up, we put together a simple study in the interactive graph at the top of this article. We took lease expiration data from the end of each fiscal year from 2000 through 2014. Using each year’s data we created a column chart showing the lease expirations trend going forward from that year. If you move the slider all the way to the left, you will see that the level of lease expirations in 2009 stands tall, even from the perspective of FYE 2000. Advancing through the data sets (FYE 2001, FYE 2002, etc.) you begin to see the volume of lease expirations in 2009 increase, which is logical due to shorter-term leases and renewals executed in the intervening years that roll forward to 2009 expiration dates. As 2009 moves closer, the volume of lease expirations grows even larger due to kick-the-can extensions and holdovers (we call this effect the “Bow Wave”).

By the eve of 2009, more than 31 MSF of leases are scheduled to expire in that year–a towering wall of lease expirations. This volume was clearly beyond GSA’s capacity and so it is clear that an ever-greater volume of leases continued to roll forward on short term extensions (or holdovers), further exacerbating the trend in the years following 2009. Though the largest single-year expirations spike–34.8 MSF in 2012–has now been whittled down a bit, from where we sit today a breathtaking 100.3 MSF (half of GSA’s total inventory) is set to expire in the next five years.

SUMMARY

If the interactive at the top of this article doesn’t work for you, here are the highlights:

FYE 2000: From this vantage point, lease expirations slated for the fiscal year 2009 totaled 20.6 MSF, more than twice the average lease expirations for the years preceding it.

FYE2000

FYE 2008: By this point, lease expirations expected for 2009 had grown to 31.7 MSF due to renewals that occurred in prior years and also short-term extensions and holdovers.

FYE2008

FYE 2011: Because of GSA’s inability to keep up with the ever-growing leasing volume, expirations increased to their peak of 34.8 MSF in 2012.

FYE2011

FYE 2014: Recent data demonstrates that GSA has whittled down some of the pile-up of near-term lease expirations, though one-quarter of the inventory is still due to expire in the next two years and one-half of the inventory will expire in the next five years.

FYE2014

Colliers Releases Its Q3 2014 North American Office Report

US Office Trend

Colliers International has just released its 3Q 2014 North America Office report. It notes that office demand is improving and the United States is on pace this year to create the most jobs since 1999. Further, office-using employment growth, at 2.8%, was even stronger than overall job growth. This was assisted by recovery in the FIRE sector. Indicative of the broadening economic and office market recoveries, just 15 of the 84 U.S. metro areas tracked by Colliers lost office-using jobs year-over-year in August 2014. Previous laggards such as Las Vegas, Los Angeles, Sacramento, Phoenix and Jacksonville were among the strongest markets for office-using job growth. This has fueled net demand for office space, causing the U.S. vacancy rate to decline to 13.5%, the lowest since Q2 2008.

To read more, click here.

Federal Warehouses: Assets in Need of Better Management

Vacant GSA Warehouse in Washington, DC (photo from GAO Report 15-41)

Vacant GSA Warehouse in Washington, DC (photo from GAO Report 15-41)

Ninety million square feet. That’s about three times the size of Manhattan’s Central Park. According to a new report to Congress from the US Government Accountability Office, that’s also the amount of warehouse space the federal government leases or owns for its civilian agencies, warehouse space comprising some 19,000 buildings across the country and its territories.

Foremost among these agencies are the General Services Administration (29,293,442 square feet), the Department of Interior (15,266,082 square feet), and the Department of Energy (11,475,630 square feet). GSA, of course, acts as a sort of landlord for the government, dispensing warehouse space to other agencies. Most of this space is considered “utilized” and “active,” though the GAO did note that among the warehouses were numerous unused buildings, some having been vacant for several years. “This discrepancy,” notes the GAO report, “raises questions about the transparency and usefulness of the Federal Real Property Portfolio (FRPP) warehouse data, which could be misinterpreted by decision makers, including Congress and the Office of Management and Budget.”

GAO Report Table 1

What is being stored in those warehouses? Having no statutory obligation to ask, the GSA has no answers. Individual agencies have a better idea; the Department of Interior, for instance, reports that its 10,000-odd warehouses, most owned rather than leased, are mostly used to store government records or equipment such as snowplows and firefighting gear, in keeping with its mission to safeguard natural resource and cultural assets. Some aspects of that mission require special facilities—for instance, as the report notes, the US Geological Survey holds ice core samples brought up from deep below the surface in places such as Greenland and Antarctica and are kept in deep-freeze units in an industrial warehouse in metropolitan Denver. Similarly, the Department of Energy has facilities storing such things as windmill blades for use in testing wind turbines, as well as warehousing nuclear waste and other unusual materials.

The report identifies challenges in acquiring, managing, and disposing of federal warehouses. Owing to atypical needs such as DOE’s ice core storage, for instance, warehouse spaces must sometimes be custom-designed; maintaining them can be costly, especially as they age; and disposing of them can be difficult, especially if a warehouse is so specialized that it cannot find a civilian user, has outlived its usefulness generally, or has been used for unusual and sensitive purposes such as storing hazardous materials. In such cases, disposal usually equates to demolition.

More, though, the report notes that many federal agencies have long misinterpreted FRPP standards for measuring utilization, a key factor in deciding whether the government has too much or too little warehouse space. Before 2013, the operative categories were simply “utilized” and “unutilized,” defined as a percentage of occupied space. The guidelines have now been made more rigorous with the addition of an “underutilized” category and definitions for each class: a utilization score of 40 or more is required for “utilization,” while 1 percent or less constitutes “unutilized.” By this measure, about 15 percent of GSA-held warehouse space is considered unutilized for the purposes of the report, adjusting for property that had been incorrectly categorized by the various agencies.

Of particular interest to our readers, the GAO report notes in passing that civilian agencies leased more than 1,100 warehouses nationwide, covering about 24 million square feet of space. This figure diverges from FRPP data, which puts the figure (as of 2013) at 600 warehouses—a discrepancy, to be sure. Whatever the case, the report calculates that rent for this space amounted to $170 million in 2013.

Confusion surrounds much of the present discussion in part because, as the report adds, GSA has not developed firm strategies for the best use of warehouse space, most of its efforts having gone to office space instead. “As agencies work to reduce their footprint,” the report notes, “this could be an ideal time to develop a strategic approach that would capitalize on broader trends, economies of scale, leading practices, and private industry experience in the warehouse area. The report concludes by noting that GSA agrees with its recommendation that it should “develop a government-wide strategy to promote effective and efficient practices in warehouse management.”

The Positive Result of the Mid-Term Election

A Republican Wave

In last week’s election, the Republicans won majority control of the Senate and further solidified their control of the House of Representatives. This means that the Republicans will lead the 114th Congress when it convenes next year.

Is this event positive for federal property investors? The answer is a resounding yes, but not necessarily for any ideological reason. It is simply that the Republicans’ victory reconciles a split Congress. In the last two Congresses (the 112th and 113th), the House was controlled by a Republican majority and the Senate controlled by a Democratic majority.

As we shall explore in this article, growing partisanship guarantees gridlock in our legislative branch unless both chambers of Congress are in alignment. This gridlock has had negative consequences for the government-leased property market, which should therefore benefit from last week’s election results.

Unified Control of Congress Matters

Split majority control of the two chambers is a rare but significant occurrence. In the past 100 years only three Presidents (Obama, Reagan and Wilson) have had to endure this split, as depicted in the chart below (clipped from Wikipedia and modified by me).*

Updated_congress_map

Perhaps for this reason, Congress’s power and influence–and thus the perils of a divided Congress–are underappreciated. In the U.S. form of government, only Congress is authorized to write laws and to appropriate the budget, powers that have tremendous impact on nearly everything, including federal real estate.

As evidence that the split matters, the 111th Congress was the last unified Congress and it’s generally regarded as among the most productive in U.S. history. It was also among the most partisan–members of its House Democratic majority voted with their own party 94% of the time (with similar results in the Senate).

In the 112th Congress, the Republicans wrested majority control of the House but not the Senate, splitting party leadership of the two chambers. The split, compounded by the growing partisan divide, was enough to flip the switch from a hyper-productive legislature to the least productive (as measured by laws enacted) in U.S. history. The split continued into the current 113th Congress, which is on pace to edge out the prior session for the ignominious title of “least productive Congress ever”.

The Growing Partisan Divide

As noted above, the problems created by a split Congress are amplified by growing partisanship. Over the past half century, Democratic and Republican congressional members have grown a bit further apart ideologically but, more significantly, they’ve become much more partisan in their voting patterns, rarely breaking rank with their own party. With House and Senate control divided among the parties, increased partisanship has made a difficult situation much worse.

Thomas Mann and Raffaela Wakeman at the Brookings Institution put together a fascinating study of this emerging partisanship, including a series of scattergraphs that measure both ideology and the frequency with which Democratic and Republican members of the House of Representatives vote with their own parties. Their graphs plot the voting behavior of each member of the House of Representatives for each congressional term in U.S. history. Each Representative’s ideology is plotted on the horizontal axis (left side of the scale is more liberal and right side is more conservative). The frequency with which that person voted with the majority of his or her own party is plotted on the vertical axis. The selected graphs below demonstrate the House’s voting trend since the start of the Nixon Administration, almost a half century ago.

At the start of the Nixon administration, the House demonstrated ideological diversity and also less partisan voting than is evident among today’s lawmakers. For example, as shown on the horizontal axis, the voting records of some Democratic members of the House were more conservative than many members who identified with the Republican party. Most of these were Southern Democrats who not only voted conservatively but also showed a willingness to vote apart from the rest of their party.

Partisanship 91st Congress

By the second congressional term of Reagan’s presidency, some partisan separation had begun, though there were still Democratic and Republican Representatives who identified ideologically with the other party and who were willing to join in votes across the aisle. It is also interesting to note that Reagan’s was, until the Obama presidency, the last truly split Congress. The Republicans controlled the Senate but the Democrats (led by Speaker Tip O’Neil) held majority control of the House.

Partisanship 98th Congress

By the end of the George H.W. Bush presidency, Representatives routinely voted with their own parties, and the ideological gap between Republicans and Democrats had widened a bit further.

Partisanship 102nd Congress

Both trends continued through the Clinton Administration to the start of the George W. Bush presidency, as shown below. By this point–both in reaction to the eight years under Clinton’s liberal leadership and the 9/11 terrorist attacks–the Republican party, in particular, had shifted further to the right, and Representatives on both sides of the aisle were voting almost exclusively along party lines.

Partisanship 107th Congress

By the start of the Obama presidency, the parties that comprised the 111th Congress were now fully separated ideologically. At least as evidenced by voting behavior, the most conservative Democrat was now more liberal than the most liberal Republican. Further, most Representatives were voting almost exclusively with their party majority. The Democrats controlled both chambers of this Congress and wielded that control to issue landmark legislation, including the $814 billion stimulus, the Affordable Care Act, climate change law, a slew of tougher regulations on Wall Street and also the creation of a consumer protection watchdog agency. The Republican opposition was effectively rebuffed in this most partisan Congress in U.S. history, with the Democrats victorious on partisan votes well more than 90% of the time in both the Senate and the House.

Partisanship 111th Congress

The 111th Congress is generally regarded as the most productive Congress since the era of LBJ’s Great Society so it is shocking that this uber-productive Congress would be followed by one that was, by most measures, including legislative output, the least productive in U.S. history.

In fact, as measured by party unity and ideology, the 112th Congress looked a lot like the 111th. So what caused the dramatic decline in productivity in a single term of Congress? The answer is simple: The 112th Congress was split. The Republicans had taken majority control of the House but the Democrats still controlled the Senate. That internal division, coupled with growing partisanship, resulted in gridlock.

Partisanship 112th Congress


Partisan Voting Trends

The real significance of the growing partisanship that is evident in the Brookings study charts is its effect on voting behavior. The graphs below (created by Gregory Koger, a professor at the University of Miami) illustrate in dramatic fashion the increase in partisan voting pattens. For each vote in the House of Representatives, Koger plotted the percentage of Republican and Democratic members who voted for the measure. In the Koger graphs, votes plotted in the upper right corner indicate consensus because the measures received an overwhelming majority of “ayes” from members of both parties. Clusters of votes in the upper left or lower right corners, however, indicate partisan voting behavior because those measures received an overwhelming number of “ayes” from one party with very little (if any) agreement from the opposing party.

For example, in the graph below, it is clear that there was no strong partisan voting behavior in the 95th Congress (convened at the start of the Carter Administration), but a significant number of measures received consensus support.

95th Congress (1977-1978):

95th House maj votes only

By the start of the Clinton Administration in 1993, partisan voting had become more common.

103rd Congress (1993-1994):

103rd House maj votes only

By the third and fourth years of the George W. Bush presidency, the partisan trend in the House had progressed even further with very tight clusters at the extreme corners of this graph.

108th Congress (2003-2004):

108th House maj votes only

And, by the beginning of the Obama administration, in the 111th Congress, the hardening of partisan lines was essentially complete. Most votes were partisan, few votes achieved consensus and almost all votes attracted the near-complete support of one party or the other, drawing all voting behavior out to the edges of the scattergraph below.

111th Congress (2009-2010):

111th House maj votes only

The following Congress, the 112th, had similar voting behavior in the House, and so will the current Congress, the 113th, once its record is tallied. Yet both the 112th and 113th Congresses were rendered largely ineffective by partisan gridlock between the House and Senate. With Republican control of the House and Democratic control of the Senate, legislation proffered by either chamber had no hope of passage through the other.

Does Gridlock Really Matter?

Do we really care if Congress is split and therefore gridlocked? Federal property investors certainly should. When the chambers of Congress are unable to agree and take action, the federal agencies are caught in the middle–they lack the budget clarity and confidence to engage in long-term planning. As a result, during recent split Congresses agencies have become reluctant to execute long-term leases. In the past few years, nearly half of GSA leases were for terms of three years or fewer as agencies kicked the can. This pattern is not welcome to property investors.

Much of the fundamental disagreement between Democrats and Republicans relates to the critical issues of federal spending and increasing national debt. The U.S. Debt Held by the Public now stands at almost $12.9 trillion the highest level since World War II. Despite a reduction in deficit to $483 billion (a substantial recovery from the 2009 through 2012 period when annual deficits exceeded $1 trillion) deficit spending is expected to continue to fuel the debt. The reason for this is that two-thirds of the federal budget funds mandatory spending, primarily comprised entitlement programs such as Medicare, Medicaid and Social Security, and, to a growing degree, interest on the national debt. Congress, therefore, only has appropriations control over one-third of the federal budget. No matter how hard Congress works to throttle back discretionary spending, its efforts are doomed to be overwhelmed by ever-growing mandatory spending.

Increasing spending and debt are structural issues that Congress can resolve only through some form of Grand Bargain that includes tax reform (to improve revenue) and/or entitlements reform (to reduce spending). This is why a functioning Congress is so important. Congress is the branch of our federal government that writes laws and authorizes and appropriates the budget. Only Congress can legislate to address these critical issues. Yet the split Congresses of recent years have been rendered completely incapable of action due to their internal conflict.

We do not expect partisanship to fade any time soon–it took a half-century for these party lines to harden. Yet, Congress has proven itself effective when both chambers are unified under one party. This is why the recent election results and unification of Congress under Republican control holds promise for federal property investors.

Of course, the outstanding question is whether the Republicans will use the next two years to implement tax and spending legislation that will ultimately create some headroom in the discretionary budget (which is where rent is paid), or whether they will simply use this time to posture for advantage in the 2016 presidential election. The answer will do much to shape the federal real estate market.

* At the start of George W. Bush’s first presidential term the Senate was split evenly. Eventually, Jim Jeffords (R-VT) changed his party affiliation to Independent and caucused with the Democrats, effectively giving them control of the Senate and splitting control of the two chambers of Congress. In any case, the 9/11 terrorist attacks occurred shortly thereafter, shaping the agenda and unifying that 107th Congress on most issues through the remainder of its term.

Continuing Resolutions, Continuing Crisis

If you think getting an immigration bill, say, or healthcare reform through a bitterly divided Congress is hard, try an annual budget. In mid-September, Congress, having been unable to agree on that budget, passed what is called a continuing resolution (CR), an instrument that, absent just such an agreed-upon budget, allows for the ongoing funding of federal agencies at current levels. The current CR expires on December 11, making provision for funding in that first part of FY 2015 at FY 2014 appropriations levels.

Though an agency such as the Department of Defense may not be funded with all the dotted eyes and crossed tees of formal legislation, the use of the CR means that the planes do not have to stop flying and soldiers shooting until Congress works out the details. What it can and often does mean, however, is that the Pentagon cannot plan with confidence for any growth in its budget, or generally any budgetary change at all beyond the possibility of reduced spending. For some programs, this uncertainty has proven more an inconvenience than a hobble, but large and small agencies alike find it difficult to plan realistically in the face of the uncertainty the use of the CR yields.

For instance, problems in securing realistic appropriations and full, multiyear funding with timely payment have hampered plans to build a permanent headquarters for the Department of Homeland Security in Washington. Even so critical a branch of government as Defense, as the Congressional Quarterly notes, is rendered less effective by the CR, since it relies on multiyear contracts with suppliers and spending can change dramatically within any given phase of the development of a weapons system—or, for that matter, a boots-on-the-ground operation. Unless Congress soon authorizes a yearlong CR, much less a budget, the Pentagon will not be able to make new procurements in 2015, at least not without much internal juggling.

The specter of government shutdown is bound up in the funding battle and the question of the CR as well. We saw as much in the 16-day hiatus of 2013, when, among other effects, certain benefit programs for military families were suspended and the national park system was forced to shut down.

Use of the continuing resolution is nothing new. Its use has increased over the course of the new century, but we are still a far cry from 2001, when 21 CRs were passed over a year that saw tremendous economic and political turmoil. Even the still more economically tumultuous year of 2008 saw only four CRs. The disparity can be explained in part by the fact that many of the 2001 CRs lasted for a single day, whereas, according to a 2009 GAO report, most CRs hold, on average, for about three months. The most recent CR before the present one lasted nearly six months in FY 2013, that notorious year of government shutdown.

Indeed, while the CR is common, agreeing on a yearlong budget is increasingly rare. Between 1985 and the present, only three years—1998, 1995, and 1997—have seen that concord.

Still, critics worry that reliance on the CR instead of an agreed-upon budget lends a provisional, ad hoc quality to the workings of government. Champions of a limited federal budget, however, argue that the CR denies free-spending legislators the wherewithal to do so. One thing seems certain, however: now that legislators have determined how to make political hay from it, the instrument is not likely to be shelved anytime soon.

The current CR makes allowance for some spending beyond the 2014 appropriation, including battling ISIS/ISIL in Syria and Iraq, combatting the spread of the Ebola virus, and supporting the government of Ukraine in its current crisis, now at a stalemate, with neighboring Russia. Stalemate is the operative word, and now that a single party is in control of Congress, there is some prospect for a little more smoothness in the appropriations process. We’ll all need to stay tuned to see what happens next—as soon as December 12, that is—with respect to the flow of federal dollars.

Rolling Termination Rights Now Extend to AAAP Program

AAAPAs of last month, the Automated Advanced Acquisition Program (AAAP) still allowed GSA and interested landlords to enter into leases of 5 years, 10 years or 5 years with a fixed-price five-year renewal option. However, this month saw the most significant revision to the AAAP program in many years – no longer will landlords have the ability to secure this 5+5 lease structure through AAAP. Instead, GSA amended the Request for Lease Proposals (RLP) to now solicit proposals for a 10-year lease with GSA having rolling termination rights after the 5th lease year. The basic 5-year firm (which is hardly ever used) and 10-year firm alternatives remain unchanged, but this AAAP revision is noteworthy because it introduces cancelable lease term into the AAAP for the first time.

The 10 year/5 firm structure has been GSA’s default approach to its non-AAAP lease procurements for many years. Despite congressional pressure on GSA to secure longer lease terms and resistance from private industry, this latest evolution of the AAAP demonstrates GSA’s desire to have the AAAP program “fall in line” with its longstanding national leasing policies and it’s aligned with GSA’s apparent attempt to remove the human element from the business of real estate leasing by automating as much of it as possible. GSA’s continued reliance on cancelable leases is one of the reasons GSA’s average remaining lease term, across its national portfolio, continues to decrease.

Because this 10/5 structure is already familiar territory for virtually all of GSA’s contracting officers, and because AAAP transactions are less susceptible to protests, it is quite likely this latest change will result in an uptick in AAAP leasing activity and further establish the AAAP as GSA’s preferred lease acquisition method for the major metropolitan markets in the United States.

District of Columbia: LEEDing by Example

leed-plaquesRecently adopted standards in the District of Columbia now require new buildings to meet LEED standards. That is, they must meet the Green Building Council’s energy-efficient, environmentally friendly requirements of building design and construction, operation and maintenance, and, what is less easy to control, interaction with the surrounding neighborhood. All new buildings in the District of Columbia must now meet LEED standards or their close equivalents, according to regulations established last spring, while those in neighboring Maryland must conform to less rigid but still challenging environmental requirements, also endorsed by the Green Building Council. Virginia is likely to follow suit soon.

Relatively few projects aim for LEED Gold or Platinum certification, more elite designations. Part has to do with reasons of cost, since meeting those standards can involve layering on all sorts of unanticipated expenses; one gets bragging rights for the special LEED status, but not much else tangible in the way of payback, since building codes are generally in line with LEED in many costly details of the physical plant, such as how much water a toilet uses or whether lights are programmed to go off when a room is not in use. (Most LEED regulations have to do with mechanical and electrical components of buildings.) Part, too, has to do with LEED’s difficult demands, especially in that fitting-in-with-the-neighborhood component. For example, we spoke with one architect who said he lost Gold certification in one outlying county because the schedule of municipal buses bringing workers to the building was not printed to LEED’s liking.

“We had one building that got Gold certification with no problem,” he said. “It sailed right through the process. We had another one, designed exactly the same, that was a nightmare getting approval for. Same standards, same firm, different inspectors, different outcomes. The system isn’t foolproof, and I’m not really convinced that there’s a need to have the merit badge. It adds so much cost and so much energy to any building effort.”

Still, that cost and energy is a requisite in much building work for the federal government. That will even be more so when, on November 13, new regulations by the Department of Energy go into effect that require that new and retrofitted federal buildings meet energy and mechanical requirements according to Green Building standards. The regulations are in concord with Executive Order 13514 and the Energy Independence and Security Act (EISA), and they are being followed by the GSA, which has overall responsibility for federal properties, whether in the District or far beyond.

The relevant DOE document states, in a somewhat circular fashion, “Under the regulations established today, if a Federal agency chooses to use a green building certification system for a new building or major renovation covered by today’s rule, the green building certification system for Federal buildings must meet the certification standards established in today’s rule.”

Dodgy phrasing aside, there has been some resistance to LEED standards on the part of firms and organizations within the building and construction materials industries, largely because of the increased expenses meeting those standards entails. Some of the resistance has to do with inadequate grandfathering of existing stocks of materials such as adhesives and flooring that met standards yesterday, but not today; some, of course, has to do with dislike of federal authority generally. Still, builders and architects have found LEED certification to be a widely understood stamp of approval, and even if it costs a client more, it’s a selling point on the part of those seeking to sell buildings, whether to the government or to private buyers.

Nonetheless, it’s not unusual for builders to choose to exceed the code, functionally meeting LEED standards without the paperwork. It appears, though, that paperwork may become increasingly difficult to avoid. In the case of the District of Columbia, the government requires the rating—a requirement that, all signs now suggest, is likely to become more widespread.

The Trouble with Rising U.S. Debt

Federal Debt Held By The Public

The federal debt held by the public in the second quarter of 2014 was $12.57 trillion. That equates to 72.6% of GDP, down slightly from the post-WWII peak of 74.0% that was recorded in the first quarter of this year. This slight reduction is the only good news that will be reported for the remainder of this article.

Rapidly rising U.S. debt is a problem for all of the reasons normally cited by economists, but for investors of federal government-leased properties there is an additional cause for concern: efforts to contain or reduce the growing debt through spending restrictions have come at the expense of the federal discretionary budget. Unfortunately, this is the same budget from which rent is paid.

In fact, we’ve already seen the early effects of these cuts. In response to historically high deficits and the resultant rapidly increasing debt, the White House and Congress have both begun imposing austerity measures on the federal inventory. The first of these were space utilization restrictions established by the House of Representatives as part of its prospectus approval process. Shortly thereafter, the White House issued its “Freeze The Footprint” policy, which prohibits agencies from increasing the size of their real estate inventories above the level established in FY 2012. Both of these measures have blunted GSA’s leased inventory growth and we are beginning to see downsizing in the works.

Much of this downsizing is being accomplished through reconfiguration of offices to achieve better space utilization. Occasionally this is taken to the extreme, transforming workplaces into telework environments where most employees don’t come into the office, and those who do are provided temporary workspaces to conduct that day’s activities. The net result is that there is slightly less GSA-leased space now than a year ago.

Discretionary Share of Income

The Heritage Foundation included this graph in its “Federal Spending By The Numbers” report last year, using data from the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB) to forecast the squeeze put on the discretionary budget by entitlement spending and interest on the national debt.

Is this a temporary problem or a persistent one?

Ever optimistic, real estate investors hold out hope that the Ryan-Murray budget agreement and last year’s deficit reduction are signs that the economy is righting itself and that we will soon shift back into growth mode. Yet, that is unlikely.

According to the Congressional Budget Office (CBO) Extended Baseline forecast the national debt is expected to decline over the next few years, but then it will rise again (see chart below). The Extended Baseline estimate is CBO’s rosiest view of future debt because it is based on current law, which includes the expiration of certain tax breaks and medicare reimbursements. In reality, those revenue-reducing provisions are consistently renewed. The Alternative Fiscal Scenario model, which is designed to consider past behavior in anticipating future results, yields a more worrisome trend. The most realistic forecast probably lies somewhere between these two measures but, in any case, the results show that within the next ten years debt will begin to grow again, exceeding current levels and ultimately surpassing the entire size of the U.S. economy.

Federal Debt Trend

From “The 2014 Long-Term Budget Outlook” published July 2014 by the Congressional Budget Office (CBO).

Both parties recognize that the root cause of ever-increasing debt is growth in entitlement spending (primarily Medicare, Medicaid and Social Security) and, to a lesser degree, increased net interest on the national debt. Currently, discretionary spending is a bit less than one-third of the federal budget, and mandatory spending (including net interest) is the other two-thirds. Though the Tea Party and other fiscal conservatives have waged relentless efforts to reduce discretionary spending, those gains toward debt reduction have been easily overwhelmed by entitlement spending. Part of the problem relates to lackluster GDP growth, which limits available revenues, but the big-picture math is pretty simple: bringing the federal budget under control will require statutory changes to contain entitlement spending and/or increase taxes. Looking into the future, Fred Hiatt, Washington Post editorial editor, assessed the situation in an op-ed article last week: “the government will be spending on entitlement programs and interest alone just about what it spends today on the entire budget. Everything else—schools, pre-K, Pell grants, national parks, mass transit, housing subsidies—will get squeezed, or taxes will soar, or both.”

This is why we are unlikely to see a return to inventory growth anytime soon. Creating headroom in the discretionary budget is not possible without entitlement and tax reform, legislation requiring seemingly impossible congressional agreement in the current hyper-partisan political environment. Further, with a presidential election ahead in 2016, any legislative effort at deficit reduction is more likely to be a political statement than a real effort at compromise.

How can this get better?

The Ryan-Murray budget agreement was a two-year resolution. That provides about the most budget stability we’ve seen in the past several years. Further, it’s possible that the Republicans will capture both houses of Congress next month. If that occurs, the result for the federal-leased property market is likely to be positive simply because it consolidates control of the legislative branch with a single party. Split control of 112th and 113th Congress (Republican majority in the House and Democratic majority in the Senate) is a fairly rare circumstance, one that has manifest itself in legislative gridlock. The resulting state of limbo, paired with a slow and fragile economic recovery, has put agencies into a holding pattern, kicking the can with short term leases.

The irony for the feds is that intensifying budget pressure on leasing can be resolved through downsizing and consolidation, yet the budget is too tight to fund those activities. If the November mid-term election unifies congressional control it may provide a clearer path for agencies simply by providing greater predictability to the budgeting process. However, any improvement would be incremental–the government takes a shockingly long time to plan and execute even the simplest of leasing actions.

The trouble with rising debt cannot be enduringly addressed without landmark revisions to tax and spending legislation. Without action it is a certainty that federal real estate will remain subject to cost-cutting. Property investors must hope that our future political leadership finds a solution to this important issue.