“It’s Really Expensive To Be Poor”

“It’s really expensive to be poor.” This was the comment from Dr. Dorothy Robyn, the GSA’s Public Buildings Commissioner, at yesterday’s Federal Real Property Association conference in Washington, DC. How true! GSA’s inability to adequately fund improvements to its real estate assets is costing it money on both sides of the ledger–revenue and operating costs.

GSA is an independent agency of the Executive Branch established to act as the “landlord”  to the federal government. The agency leases more than 190 million square feet on behalf of federal agencies and it owns more than 160 million square feet. Dr. Robyn noted that the owned inventory is aging and deferred maintenance is a perennial problem in federal buildings. With limited capital available to invest in improvements to its owned inventory, Dr. Robyn lamented that the government cannot make the investments required to save money down the road. There is no shortage of high-ROI projects available but there is an acute shortage of funds to pay for them.

The struggle will continue until GSA develops a thoughtful long-term capital plan and communicates it successfully to Congress, which in each of the last two fiscal years has restricted GSA’s obligational authority by almost $1 billion. In fact, this is the topic of a GAO report published last June entitled “Federal Buildings Fund: Improved Transparency and Long-term Plan Needed to Clarify Capital Funding Priorities”. The report concludes that “more transparency through a comprehensive long-term capital plan would allow for more informed decision making by GSA and Congress among competing priorities.” GAO’s (possibly overly-optimistic) view is that if GSA can better communicate its needs then Congress will release the funds to execute them.

If you really want a practical bellweather for leasing demand, look to the Federal Buildings Fund and Congress’ provision of obligational authority to GSA. Here’s why: Without sufficient operations and maintenance funding for its owned facilities the cost of operating these facilities will increase. The condition of these facilities is bound to decline as well, impacting the rental rates GSA can charge agencies for space and ultimately creating a downward spiral. Without the ability to improve its owned space (through increasingly expensive lump-sum expenditures) GSA will turn to leased space. So, as long as the Federal Buildings Fund is restricted we can expect continued reliance on leased space, which is typically newer and more efficient.

Private sector landlords should be encouraged–except that the Federal Buildings Fund is pretty flush right now. As of FY 2012 the fund contained a $2.24 billion surplus and that amount is anticipated to double by the end of FY 2013. If GSA can get its hands on that money it can make the needed repairs and capital investments to the owned inventory which then would siphon demand away from the leased inventory. A classic example of this is the Stimulus-funded renovations to GSA’s headquarters that has improved efficiency dramatically and will pull tenants from private sector buildings in Washington, D.C.’s NoMA district and Virginia’s Crystal City.

At the FRPA conference, landlords were encouraged to hear Dr. Robyn say that “I don’t bring the same prejudices against leased space as some people do.” Yet, she also notes that there is a role for leased and owned property in the federal portfolio and, as the Federal Building Fund is supported primarily by revenues from the owned inventory, GSA must mind the store.* Thus, Dr. Robyn’s observation that “being poor” ultimately increases the government’s real estate costs. For the landlord community, a poor federal government is likely to be leasing space.

* GSA receives an overage fee on top of rent payments by federal agencies in private-sector leased space so, theoretically, leased space should not be a net cost to the Federal Buildings Fund. It is meant to be revenue neutral.