We have written a lot on this blog about how the GSA-leased property market is getting smaller, a trend we expect to continue easily for the next few years. Yes, one day this trend may reverse itself but there are really only a few ways that might happen, and none of them seem likely right now (and some we would not wish for). Ultimately, the investment community will need to adjust to the fact that a half-century of consistent inventory growth began to fall back in 2012 and austerity is the “new normal”.
The GSA lease inventory reached its all-time peak size in December 2012. In that month, GSA leased 198.9 million rentable square feet (RSF) across the United States and its territories. Since then, the leased space inventory has declined by 6.7 million RSF to 192.2 million RSF in March of this year (the most recent data available). It’s really not a substantial decline–just 3.4%–but it has only just begun.
GSA is driving this reduction largely through improvements in space utilization. Our team of federal leasing specialists sees this every day in virtually every transaction we work on. In fact, there is a lot of street-level evidence that the pace of downsizing will accelerate based upon lease transactions that are in procurement or recently signed.
None of this is a surprise. The early indicators date back to 2011, well before the market peak, when fiscal conservatives took control of the House of Representatives and began exerting their control of prospectus leases to force cost reductions. Prospectus-level leases, while relatively few in number (a little more than 200 at any given time), comprise roughly 1/3 of the leased square footage in GSA’s inventory. So, Congress alone has the power to make meaningful cuts to the leased space inventory. Yet, OMB removed any doubt about the direction the market was headed when it issued formal guidance to all executive agencies to freeze the size of their civilian real property inventories and, ultimately, reduce costs.
The challenge for the feds is that their workforce has not changed much since the early 1970s. So, though there is a lot of pressure from Congress to reduce the size of the federal workforce, it is unlikely that the agencies will accomplish much of a decrease in headcount. The answer instead has been to transform the workplace to embrace mobile work (i.e. work from home) and reduce the square footage allocated per person in new office designs. Often, these efforts to reduce have also resulted in consolidation into fewer locations.
On the consolidation front, Washington, DC has been especially impacted. There is almost 100 MSF of leased and owned property in the National Capital Region, providing lots of opportunities to consolidate offices. There are many instances of this happening in recently completed and in-progress transactions that are not yet reflected in the inventory reduction stats. One such example is last year’s 839,000 RSF Department of Justice lease of Constitution Square 3 and 4. By the time DOJ fully occupies these new buildings in 2018 they will have vacated four downtown buildings, yielding a net space reduction of more than 200,000 RSF.
The DOJ deal also underscores the fact that not only is GSA’s leased square footage getting smaller but also the number of leases. The count of GSA leases has also declined steadily since year-end 2012. There were 8,872 GSA leases nationally in December 2012 and by March 2016 that number was reduced to 8,279 leases–a decline of 6.7%. The decline in the number of leases is happening at twice the rate of square footage reduction, which suggests that consolidation is a big factor in shrinking the government’s footprint. As anecdotal evidence, our team is working on a downtown Washington, DC building where we have agreed to terminate three GSA leases so that the tenant agencies can be consolidated into other existing leased locations (a fourth tenant consolidated last year upon the natural expiration of its lease).
There is a silver lining to all of this. Though the leased inventory is clearly getting smaller, lease terms are likely to grow longer. This is because workplace transformations require capital, which necessitates long-term lease contracts. Having engaged heavily in short-term leasing over the past several years creating a pile-up of near-term lease expirations, we can expect GSA to more often execute long-term contracts going forward. Don’t expect a watershed change–GSA lacks the leasing capacity to tackle its entire backlog at once. Yet, in the long run we anticipate a shift towards long-term leasing and, ultimately, a stabler federal leasing environment.