Agencies Pay Lip Service to the Virtues of Long-Term Leases

Witnesses 7-30-14 House Hearing
Senior realty officers from GSA and six federal agencies face congressional members to address leasing challenges.

On July 30th the House Transportation and Infrastructure Committee hosted a subcommittee hearing entitled: “GSA Tenant Agencies: Challenges and Opportunities in Reducing Costs of Leased Space”. The assembled witnesses included Norman Dong, the Commissioner of GSA’s Public Buildings Service, along with senior real property officers from several Departments including Defense, State, Justice, Homeland Security, Health and Human Services, and the Social Security Administration.

Subcommittee Chairman Rep. Lou Barletta (R-PA) opened the hearing with the observation that 50% of GSA’s leases are due to expire in the next five years. He also noted that real estate conditions across much of the U.S. present a tenant’s market (that is certainly true in much of the Washington, D.C. area, where the federal government maintains its largest presence). The conclusion, therefore, is that market conditions are ripe for GSA to strike attractive lease deals and, with 100 MSF of leases due to expire in the next few years, GSA can achieve cost reduction quickly.

In his opening statement, Barletta also noted that the government gets the best rates when it obligates itself to long-term leases: “Why is the length of the lease so important?  At the most basic level, a longer lease lowers risk, lowers finance costs, and provides certainty for the landlord who can then offer lower rents. GSA pays a 20% premium for short-term leases of three years or less compared to longer leases.” He went on to note that “long-term leases do much more than lower rental rates. They allow the government and the building owner to spread out the upfront costs of moving or reconfiguring space to accommodate more people. You can’t do this with short-term leases.”

With all of these realty executives assembled at the witness table, Barletta went down the line and challenged each with two questions:

1. “Will you work with our committee to seize this opportunity, replace these leases on time and achieve the President’s savings goal?”

2. “Will you commit to [addressing] your long-term lease requirements with leases that are at least 10 years?”

The witnesses universally recognized that the only acceptable answer to each question was “yes”, so that’s how they responded. Yet, that answer can charitably be regarded as aspirational. As a practical matter, agencies are not obligating themselves to long-term leases–in fact, quite the opposite. In the three weeks following this hearing, GSA posted 28 new lease requirements to its FedBizOpps website. Only four of those allowed more than five years of firm term.

Though they may see the same long-term leasing benefits as Barletta, the agencies’ facilities plans are in flux as they attempt to comply with various cost reduction and space utilization mandates, leading GSA to be reluctant to enter into long-term lease contracts on their behalf. This is because most of GSA’s Occupancy Agreements (essentially subleases) with the tenant agencies are written such that the agencies can terminate at any time with 120 days notice, leaving GSA paying rent on empty space. GSA’s default response has been to approach lessors for short-term extensions. In fact, when we looked recently at GSA leases that expired in the previous 12 months we found that nearly half were extended for no more than three years (often with cancellation rights).

So, despite pressure from Congress to execute longer leases to take advantage of the current tenant’s market, GSA remains unable to expedite because it must rely on the tenant agencies to first sort out their facilities plans. It also seems that GSA is unwilling to expedite due to its own inflexible policies. This was evident in testimony from GSA Commissioner Dong who expressed his intent to host open competitions to achieve the “best value for the taxpayer” and also his desire to engage agencies three years prior to lease expirations. The problem, of course, is that GSA doesn’t have the luxury of early planning. The lease expirations have already piled up.

Rather than adapt to reality, the federal government is increasingly exercising its sovereign might to simply squat in place–without penalty and without any agreement to ultimately extend long-term. This can be frustrating to the lessors but I would expect it to distress Barletta as well since, as the government engages in its stoic and glacial process, the market pendulum nationally is swinging back to the landlord’s favor.

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