Investors and lenders frequently ask how often GSA exercises its termination rights. It’s a necessary question because roughly 75% of GSA leases contain some form of cancelation clause–typically a rolling right to terminate. The trepidation caused by these cancelable leases has been fueled in recent years by suspicions that GSA’s shrinking lease inventory, and related consolidation activities, could cause the federal government to more often utilize its termination rights.
To relieve our investor and lender colleagues of this anxiety, we studied terminations of leases 15,000 RSF and larger during the 5-year period from 2012 through 2016 (see methodology notes at the end of this article). The results demonstrate that GSA rarely exercises its termination rights, especially for those leases in newer or build-to-suit facilities. We also found that there is no trend–so far, at least–towards a greater frequency of terminations.
During this 5-year study period, never more than four leases were terminated in a given month, and in some months none. If we look at all leases terminated each year versus the number of leases that were eligible for termination, the data indicates an average annual termination rate of 2.82% over the 5-year study period.
This annual termination rate feels suitably low but it looms a lot larger when computing the exposure over a multi-year soft term. Yet, when we peer under the hood it is apparent that the vast majority of lease terminations were probably anticipated and possibly planned for. In many instances the Government had previously extended for a short term (less than five years) prior to terminating–typically negotiating substantial soft term–signaling its intention to vacate. In other instances, such as BRAC-related realignments or relocations into new or renovated federal space, the writing was on the wall years before the moving trucks arrived.
In any case, not all types of buildings experience terminations equally. Leases in newer buildings (built since 2000) were terminated at an average annual rate of 2.15%. Notably, terminations in lease-construct buildings (i.e. build-to-suits) were almost nonexistent. Over the 5-year study period we observed only three lease terminations in this tranche of properties. One of these buildings was taken by eminent domain to build the California High-Speed Rail, thus forcing the federal tenant to find alternate quarters.
The key takeaway is that terminations are rare and, when they occur, they are generally anticipated. An alert management team should be able to spot potential lease terminations well in advance of the actual event. With proper due diligence, there is a very low likelihood of being surprised by a near-term termination, though it is more difficult to see well into the future.
Methodology: We analyzed monthly lease data from GSA to determine when leases disappeared from the data during the cancelable lease term at least three months prior to lease expiration. Our analysis is limited to leases that are >=15,000 RSF. From this we removed leases that appear “terminated” because they were superseded in the same property. We also removed short term/temporary leases (ex. Census leases) that were originally executed with less than 3 years of firm term and less than 5 years of total term.