It is well-documented that since Freeze The Footprint began in 2012, the GSA and its tenant agencies have been actively pursuing consolidation and downsizing in order to meet these requirements. The question is – how has this dynamic impacted the investment market for GSA and other Federal-leased properties during the past 4+ years?
The table below compares year-end (December) GSA Lease Inventory statistics from 2011 to 2015, along with year-to-date (August) statistics for 2016. The red line in the chart between 2011 and 2012 is placed there to represent the end of the build-to-suit construction boom along with the start of the Freeze the Footprint mandate.
2011 to 2012 shows the peak of the GSA leased square footage inventory that resulted from the post-Oklahoma City bombing / 9/11 construction boom. From there the dynamics of the past 4+ years play out:
- Since Year-End 2012, GSA has decreased the total number of leases by 7%, but square footage has only decreased by 4% – which illustrates how GSA has been managing their square footage primarily through consolidation.
- Average remaining lease terms increased as new construction projects came online, peaking in 2013, and decreasing since then.
- Although there has been only a 3% decrease in the average remaining lease term from 2012 to YTD 2016, the average remaining FIRM term for the GSA lease portfolio shortened by over 13%.
- Comparing the various tranches of remaining lease term on the right side of the chart, the number of leases with 3 to 10 years of remaining firm term has decreased significantly, while leases with less than 3 years of firm term or no firm term have decreased minimally.
- This illustrates the proliferation of short term extensions and holdovers as GSA struggles to manage its leased portfolio, along with the lack of manpower to address all of these expiring leases.
So what effect has this had on the sales side?
The following table and graph shows GSA and federal-leased sales from 2012 through July 2016 that are taken from our Colliers Government Solutions database. These sales only represent properties in which the GSA/Federal agency is the primary or 100% tenant in the building (at least 75% occupant), and exclude sales within the Washington, D.C. core.
The highlights from the table and graph are:
- 2012 shows the beginning of the end of new build-to-suit projects trading in the market – the peak in terms of average remaining lease term and firm term of deals trading.
- The drop in volume from 2012 to 2013 shows less new build-to-suit product trading, which lowered the average remaining lease term of deals trading, and correspondingly, increasing the average cap rate.
- From 2013 to 2014, volume picks back up as more sellers take advantage of decreasing cap rates for the same average remaining lease terms.
- Since 2014, volume is constant, but average deal size decreases and average remaining lease term drops dramatically as the market chases smaller deals with shorter lease terms, at slightly lower cap rates overall. In addition, buyers show a willingness to take on more “risk” in terms of shorter lease terms with the perception that renewal probabilities are higher as the lack of new construction persists.
In our view, as long as interest rates remain low, and this dynamic within the Federal-leased property inventory continues to play out, cap rates for properties with medium-term leases will continue to trend downward – making it an ideal time for owners of these properties to sell.