The Federally Leased Property Market is Getting Smaller

The following is an excerpt from a presentation I gave at the National Federal Development Association conference earlier this month in Washington, D.C. The presentation covered three themes: 1) The size of the federally leased property market is small; 2) It is getting smaller, and; 3) There are five factors that could return the market to future growth. This article profiles the second theme. To read about the first, click here. The final segment will be posted soon.

GSA Lease Inventory Trend

GSA Lease Inventory Trend

After a half-century of consistent growth, the federally leased property market is now getting smaller. From its peak at the end of 2012, the GSA-leased inventory has declined by 5.1 MSF. That’s only about a 2.5% reduction, but it is still the most significant downturn in the 50 years for which inventory data is available.

The graph’s modest downturn belies a steeper decline because, all things being equal, the GSA lease inventory would naturally grow. This is because in 2007 the agency dramatically restricted leasing delegations and since then GSA’s leasing responsibilities have expanded. Many of the leases previously leased directly by agencies are now transferring to GSA’s control upon their expiration. Further, some agencies have relinquished their statutory leasing authority (contracting authority provided by law).

One such recent example is the Transportation Security Agency (TSA). TSA was formed in 2001 by the Aviation and Transportation Security Act. That same legislation also provided TSA with the authority to acquire real estate, an authority TSA used to sign a 545,000 direct lease for its new headquarters in Arlington, Virginia. With that lease now approaching expiration, TSA has relinquished its leasing authority and engaged GSA to procure its replacing lease. When GSA finally completes this transaction, TSA will consolidate and downsize slightly into its new location, however, the net impact on the GSA lease inventory will be growth. Despite this, we will probably see the overall GSA lease inventory decline.

Anecdotally this seems especially probable when we look at the lease procurements that are just beginning because, in nearly all cases, some form of downsizing is planned. What’s causing this? The most direct answer is “Freeze The Footprint” and now “Reduce The Footprint” policy mandates from the Office of Management and Budget (OMB).

“Freeze The Footprint” is the name given to OMB’s May 11, 2012 memorandum, which ordered that agencies may not increase their inventory of civilian real estate above the level established in FY 2012. Earlier this year, OMB refined its guidance, requiring agencies to reduce their real property holdings by “prioritizing actions to consolidate, co-locate and dispose of properties.”

We can trace the roots of this austerity back even further to 2011 when the fiscal conservatives took control of the House of Representatives and wielded their prospectus approval authority to demand cost reduction of the nation’s largest leases. Now, whether due to congressional or executive action, the federal property market is beginning to react to these edicts.


Tactically, how is the government accomplishing this downsizing? This photo of the renovated 7th floor of GSA’s headquarters tells it all…


Before it was renovated, this space was laid out in typical government fashion, with a center corridor flanked by private offices. The renovation caused two workplace transformations: First, you can see in the photo that there are no walled offices anywhere. Even GSA’s Administrator and her senior staff all work in open plan workstations. Second, if you look just beyond the people sitting in the foreground you see that those many of those workstations aren’t traditional cubicles. They are benching stations to accommodate mobile workers who may check in for a day–or part of a day–of in-office work. In fact, at GSA’s headquarters, if everyone showed up for work on the same day there would not be enough desks for them. Now, that is tightsizing! GSA achieved space utilization of just 82 USF per person with its redesign, which marks the extreme end of the efficiency scale. Yet, implementation of telework is one of the primary techniques the government is using to whittle at its space needs.

This brings us to the other way the market is getting smaller: lease terms are shorter. Implementing a tighter–and increasingly mobile–work environment is difficult to plan, it requires a challenging cultural shift in most federal workplaces and it is expensive to build from scratch. These planning and funding challenges have overwhelmed GSA and their tenant agencies causing them to kick the can with short-term lease extensions.

GSA Lease Expirations

GSA Lease Expirations

Lease expirations have now piled up such that 25% of all GSA leases are expire this year and next, and half of all leases will expire in the next five years. So, logically, there are relatively few long-term leases that we can invest in.

Remaining Lease Term

Remaining Lease Term 1

This is especially evident when we go back and look at properties that are at least 85% leased by federal tenants. Of the 2,100 such buildings we track (comprising the entire GSA inventory and a portion of those other buildings leased under delegated or statutory authority) about 250 have 10 or more years of remaining lease term–this without regard for termination rights, which, generally speaking, exist in the vast majority of GSA leases.

Remaining Lease Term 2

Ignoring the smattering of really large leases in the first graph, we can zoom in a bit and also see that the bulk of federally leased buildings are 25,000 SF and smaller. If you are an investor that is interested in larger buildings with long-term leases, your investment possibilities become much more limited. There are only 157 properties that are at least 85% leased to the federal government, larger than 25,000 SF and have 10+ years of remaining lease term. Increase the property size to 50,000 SF and the number drops to 100. Move it to 75,000 SF and there are just 78 properties you can invest in. And so on.

This is a key observation because federal credit is worthless without substantial remaining lease term. Yet, this most crucial segment of the federally leased marketplace–long-term leased properties–is getting smaller.

Kicking the can among existing leases is a big part of the reason lease terms have generally grown shorter but another reason for the scarcity of long-term leased properties is that the build-to-suit pipeline has been reduced to a trickle.

Dwindling Pipeline

Dwindling Pipeline

The graph above shows the volume of federal leases in properties built or substantially renovated between 1990 and the present. The graph probably undercounts leasing volume in 1990s-era buildings where the tenants have since vacated and it probably also undercounts leasing in newer buildings that may occur in future years. Nonetheless, it is a pretty accurate representation of the trend.

Clearly, the volume of federal leases in new properties has fallen off dramatically. Among buildings built in the 2000s, GSA’s occupancy averages 6.8 MSF each year. Since 2010 that figure has dropped to 3.2 MSF. This is primarily due to a marked decline in build-to-suit activity. It is unfortunate because build-to-suits are the lifeblood of the federal investment sector. They yield generally longer lease terms than leases in existing buildings and the buildings themselves tend to be single-tenant and specialized, and they enjoy higher probability of renewal. Now they are disappearing and, without this pipeline of new long-term leased product to feed investors’ appetite for U.S.-backed credit, the market is feeling considerably smaller.

Federal Debt Held By the Public

Federal Debt

What is the root cause of this downsizing? For this austerity? It is in reaction to the growing U.S. national debt. The graph above, produced in August by the Congressional Budget Office (CBO), illustrates three things: 1) Debt has increased rapidly in recent years; 2) It is now the highest level since World War II, and; 3) Though it will decrease slightly in the near term, the long-term forecast is for continuous growth.

Today, the federal debt held by the public equals about 74% of GDP. In the short term that figure may decline slightly; however, over the next decade, CBO forecasts debt to rise to about 77% of GDP. From there the vector bends upward. In its long-term forecast published this Summer, CBO expects debt to eclipse the size of the economy in less than 25 years. And this forecast is the more optimistic of the two that CBO provides. The reasons for this dismal trend are unimpeachable structural factors including the aging workforce, increasing healthcare costs and rising net interest on the debt.

Maybe this doesn’t alarm you. Perhaps you are a faithful Keynesian who believes that more spending is the answer, even if it increases debt. There are many arguments for and against further spending and debt increases. Yet, none of it matters because, as long as there remains an influential contingent of fiscal hawks in Congress who view worsening debt as a threat to the nation, austerity measures will be imposed throughout government–including real estate leasing.

So, if debt is the real driver of the austerity that is negatively impacting the federal property market, how will property investors find relief? There are five ways the market can begin growing again. These are discussed in the next article.

The Federally Leased Property Market is Pretty Small

The following is an excerpt from a presentation I gave at the National Federal Development Association conference earlier this month in Washington, D.C. The presentation covered three themes: 1) The size of the federally leased property market is small; 2) It is getting smaller, and; 3) There are five factors that could return the market to future growth. This article provides an overview of the first part of that presentation. Part two can be found here and part three will be posted soon.

U.S. Commercial and Investment Inventory (88 BSF)

US Commercial and Investment Inventory

To get a sense of how small the federally leased property niche is, let’s start by imagining that this rectangle represents the entire 88 BSF commercial and investment property market in the United States. This includes all types of properties including office, industrial, retail, multifamily, mixed-use, etc.

Government Occupied Inventory (6 BSF)

Govt Portion

The government occupied portion of the national property inventory is estimated to be roughly 7%, or a little more than 6 BSF (this is, admittedly a pretty rough estimate).

Federal Inventory (3 BSF)

Federal Portion

Federal property investors don’t care much about properties leased by states, counties and municipalities. If I peel those off, we are left with the federal property inventory, which is estimated to be a bit more than 3 BSF.  I derive this by taking the 2.8 BSF catalogued by the Federal Real Property Profile and then I add a factor for agencies that report doesn’t track–most notably the U.S. Postal Service. Among the real estate the FRPP doesn’t fully capture is the fast-growing cadre of spooky projects occupied by the intelligence community, so it’s possible I undercount the federal inventory slightly, but this is close enough.

Federal Leased Inventory (400 MSF)

Federally Leased Portion

Most federal property is owned, but investors really only care about that portion of the inventory that is leased. I put that figure at about 400 million square feet. Yet, not all federal leased space is of much interest to property investors. So, let’s drill into this 400 MSF leased inventory to get a better sense of the leased inventory composition…

Inventory by Lessee Agency


Leases By Agency

About half of federal leases are with the U.S. General Services Administration (GSA). GSA is familiar to us because its enabling legislation, the Federal Property and Administrative Services Act of 1949, includes broad authorities to provide real property services to federal agencies. As a result, most of the “rank and file” federal leases we see in the U.S. are leased by GSA and subleased to federal agencies. This is enabled by the Federal Buildings Fund, the revolving fund that enables the federal government to enter into multi-year lease contracts without violating the Antideficiency Act.

Without the Federal Buildings Fund or some special appropriations, leases would need to be structured as a series of one-year obligations–either a one-year base lease with multiple one-year options or, conversely, a lease with annual termination rights. This “one year” structure is pretty typical of many lease contracts executed by the Department of Defense through its primary real property agencies, the U.S. Army Corps of Engineers and the Naval Facilities Engineering Command (NAVFAC). Often there are compelling reasons to invest in these properties, but, by and large, the cancelable lease structure is not very palatable. Further, many DoD leases are more exotic structures for military housing, lodging and so forth.  We can assume, therefore, that only a portion of DoD leases are attractive to the typical federal property investor.

The U.S. Postal Service (USPS) is a different story. USPS leases roughly 93 million square feet of property in the United States; yet, that comprises roughly 24,000 properties. So, the median size of a USPS-leased property is well under 10,000 SF, making them not particularly attractive to most government property investors.

USPS is the largest independent agency from a real property perspective, but there are dozens of others. Most independent agencies use GSA to acquire leases on their behalf, yet some utilize statutory authority to execute leases directly. Examples of these agencies include the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and the Export-Import Bank of the United States. Some of these agencies don’t sign their leases as the “United States of America” making credit due diligence a bit more complex.

Finally, there are a number of leases executed under delegation of contracting authority from GSA. In this instance certain agencies are granted the authority to execute contracts on behalf of the United States of America, yet GSA must approve that delegation.

Delegated leases are similar to those signed by GSA itself except that there is often good reason GSA delegated its leasing authority. Many delegated leases are used to acquire facilities that are remote or for very special purposes. Examples include cotton classing labs, weather monitoring stations, hospitals, dock facilities and park ranger stations. Some of these properties are attractive to investors and some aren’t. On the whole, probably about 2/3 of all federal leases are going to attract the interest of the traditional federal property investor.

Leases in Properties That Are Predominantly Federally Leased

Leases By Pct Federally Leased

The federal property sector gets even smaller when we consider that many federal leases are located in multi-tenanted buildings. Federal property investors are focused only on those properties that are single-tenant or primarily leased by federal agencies. Of the 2/3 of investment-worthy properties described above, only 58% of those are buildings that are fully or primarily leased by federal tenants.

Federal Leased Inventory Attractive to Investors (170 MSF)

Federally Leased Niche

So, if we accept that only about 2/3 of federal leases fit the profile for typical investor interest, and that a little more than half of those are in properties fully or mostly leased by the federal government, then the remaining inventory is @170 MSF–less than 0.2% of the property market. It’s a very small sandbox.

So, why do we bother? Why suffer the aggravation of dealing with the federal tenants? Why deal with the unusual construct of federal leases? The reason, of course, is the credit. U.S. credit (despite Standard & Poor’s 2011 downgrade) is arguably the best in the world.

There is a tremendous amount of capital in search of this credit but, as described above, a relatively small number of properties to invest in. This is one reason why pricing for federally leased properties remains so dear.

Unfortunately, the inventory of federal properties is shrinking, as we’ll see in the next part of this presentation.

New Sustainability Rules Impacting Investors & Managers Leasing to the Federal Government

Colliers Federal Sustainability Mandates

The following is a guest post written by Mark Miller, the head of Colliers’ national Energy & Sustainability team. To learn more about Colliers’ Energy and Sustainability services, click here.

The Federal Government is taking aggressive steps to reduce greenhouse gas emissions and drive sustainability in its owned and leased real estate portfolio. Two new initiatives taken in the Spring of 2015 include a new law titled “The Energy Efficiency Improvement Act of 2015” and an Executive Order – “Planning for Federal Sustainability in the Next Decade”– are sure to change the landscape for those involved in leasing space to the Federal Government. The following are abbreviated highlights relevant to property investors and managers.

The Energy Efficiency Improvement Act of 2015

This bill requires the General Services Administration (GSA) to: (1) develop and publish model leasing provisions to encourage building owners and tenants to use greater cost-effective energy efficiency and water efficiency measures in commercial buildings, and (2) develop policies and practices to implement the measures for the realty services provided by the GSA to agencies.

The Environmental Protection Agency (EPA) must develop a voluntary Tenant Star program within the Energy Star program to recognize tenants in commercial buildings that voluntarily achieve high levels of energy efficiency. The EPA may develop a voluntary program to recognize commercial building owners and tenants that use high-performance energy efficiency measures in the design and construction of leased spaces.

The Environmental Protection Agency (EPA) must develop a voluntary Tenant Star program within the Energy Star program to recognize tenants in commercial buildings that voluntarily achieve high levels of energy efficiency. The EPA may develop a voluntary program to recognize commercial building owners and tenants that use high-performance energy efficiency measures in the design and construction of leased spaces. A federal agency leasing space in a building without an Energy Star label must include in its lease provisions requirements that the space’s energy efficiency be measured against a nationally-recognized benchmark. The agency must also meet certain energy consumption disclosure requirements.

Executive Order 13693 – Planning for Federal Sustainability in the Next Decade

The Executive Order establishes Sustainability goals for each agency including reducing energy intensity by 2.5% and water use efficiency by 2% annually through FY 2025. Requires increasing percentages of renewable electric energy and thermal energy from alternative/clean sources by up to 30% by 2025. Beginning June 2016 implement Guiding Principles for Federal Leadership in High Performance and Sustainable Buildings 15% goal by 2025 and annual progress to 100% conformance. Identify a percentage of existing buildings for “Net-Zero Energy” and all new buildings to be “Net-Zero Energy” by 2020 and where feasible, water or waste net-zero by 2030.

In all new lease solicitations over 10,000 RSF: 1) Criteria for energy efficiency is required as a performance specification or as a sources selection evaluation factor 2) The building lessor will be required to disclose carbon emissions or energy consumption by the agency for that portion of the building occupied by the agency via sub-metering or pro-rated occupancy data. 3) Reporting building energy in FY 2016 as part of scope 3 greenhouse gas emissions will be required for newly solicited leases over 10,000 rentable sf 4) The planning of new buildings or leases must include cost-effective strategies to optimize sustainable space usage and consideration of existing community transportation planning & infrastructure including access to public transit.

Recommended Actions and Response

  • Maintain Energy Star Portfolio Manager Benchmarking
  • Utilize Optimized Lighting & HVAC Equipment Occupancy-Based Scheduling
  • Execute the Colliers REMS Sustainability Checklist
  • Perform Energy Audits & Periodic Retro-Commissioning
  • Leverage Utility Incentives & Tax Credits to Improve Cost Effectiveness
  • Implement Building Data Analytics System to Continuously Optimize Buildings
  • Utilize PACE to Fund Energy Improvements Off Balance Sheet

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.