The Government Real Estate Index (and its surprising results)

This chart of the Government Real Estate Index is provided courtesy of its creator, Dr. Dennis Eisen.

At last week’s National Federal Development Association conference, Dr. Dennis Eisen presented his new Government Real Estate Index, which he bills as the “Dow Jones Index for Government Real Estate”. Dr. Eisen, one of the true students of government real estate, has mined federal contracts databases to develop his index in four categories:  Architecture, Construction, Alterations and Leasing. All four indexes provide empirical data to support the trends we’ve all sensed: government activity is on the wane. Yet, nowhere is the decline so stark as in the federal leasing trend. The chart above illustrates that trend from FY2000 to FY2012.

So, what are we looking at? Dennis has aggregated the value (total rent to be paid over the term) of every lease contract awarded over the past 12 years. The awards typically include a substantial volume of traditional office leases but they also comprise all other types of real estate leases (including air traffic control towers, housing, conference facilities and even fuel depots – among a long list).

Tracking the trend from 2000 we see it spike substantially in 2003 and 2004. Dennis notes that this is primarily due to massive privatization of military housing, which is recorded as leases. We would also note that there is likely some contribution from DHS and defense and law enforcement leases in the wake of 9/11 (DHS was created in November, 2002).

Looking further along the trend we note the substantial rise in federal lease awards beginning in 2005, due in part to a wave of build-to-suit construction (yielding larger, long-term lease contracts) and then further through the recession due to Stimulus spending.

Yet, the most remarkable feature of the trend occurs in the most recent year where leasing awards quite literally drop off the cliff. Looking within the data, the most significant contributor to the free fall is the near extinction of new office lease awards.  In FY2011 Q2 office awards totaled $1.2 billion and by FY2012 Q2 that figure had dropped to $46 million.  In Dennis’ words, “the GSA is suffering from paralysis”. As we’ve pointed out in past articles, this paralysis is due to the ongoing series of continuing budget resolutions, the prospect of sequestration, increasingly strict space utilization standards and, of course, election year politics. Obviously, it can’t continue. Mathematically, it can’t continue. The Great Unknown is whether the Government Real Estate Index is signaling pent-up demand or the beginning of a prolonged market correction.

UPDATE: Dr. Eisen has since discovered that government contracting officers with various agencies enter lease information differently in the contract awards database.  Therefore, the actual dollar amounts of the awards shouldn’t be taken too literally; but, Dr. Eisen contends that the relative amounts are reliable and that the Government Real Estate Index reliably illustrates the overall leasing trend.