Three Misleading Stats

It’s that time of year. Market reports are published, conferences held and presentations delivered. We are all talking about the market: “What happened last year?” and “What can we forecast for this next year and beyond?” Unfortunately, some of the answers can be misleading. Here are three stats that are often cited in fundamentally incorrect ways:

“GSA’s lease renewal rate is 94%”

GSA has analyzed fiscal year-end lease data every year for 11 years. The results are interesting, often quoted and almost always misused. GSA concludes that the lease turnover from year to year is between 94% and 97%. This figure is typically cited as the renewal rate. Wrong. It is the turnover rate. “Turnover” by GSA’s definition means “rollover”–the percentage of leases in existence one year that remained in existence in the same building the following year, without regard for whether they reached their lease expiration date. Less than 20% of GSA leases expire in any given year; therefore, turnover is going to automatically be above 80% unless the government terminates leases.

What investors really want to know is what the probability is that their government leases will renew upon lease expiration. That is a very different figure and, in fact, GSA reports on it as well. The renewal[1] rate over the last 11 years has varied from 71% to 84%.

Government investors (and lenders), do not despair if that figure seems disappointing.  We are certain that some tranches of the government property sector enjoy much higher renewal rates and we expect to prove that empirically later this year. In the meantime, when you hear of 94%+ renewal rates in market presentations, just nod and smile.

“There will be a huge wave of lease expirations in the next year”

Technically, this is true–because it always is. The reason is largely due to a phenomenon we call the “Bow Wave” whereby some portion of lease expirations are pushed forward into future years due to short term extensions, standstill agreements and holdovers.  At its peak (in 2010) we computed that more than 11 million square feet of lease expirations had rolled from one year to the next. So, yes, it seems like there is always a huge wave of expirations expected–many are the same expirations we faced last year.

All of that said, there genuinely should be a lot of lease expirations expected this year due to a mini-boom in federal leasing following 9/11, especially in the Washington, DC area.  Just be sure to recognize that the number of lease expirations in the “upcoming year” will always seem high.

“Office leasing activity has declined 96% from last year”

Recently, a sensational stat has entered the market presentations of government brokers and investors. It stems from a presentation given by Dr. Dennis Eisen at the National Federal Developers Association (NFDA) conference on October 23rd. At that conference Dr. Eisen unveiled his Government Real Estate Index, a rigorous study of every government contract award made over the past several years. His analysis of office lease awards noted that the volume fell 96%(!), from 2011 to 2012.  The drop-off was so striking that the stat immediately went viral. Even we profiled the surprising results of Dr. Eisen’s analysis here on this blog. Yet a month later, having waded even further into the government’s data quagmire, Dr. Eisen discovered some serious anomalies in the way lease awards are recorded in the Federal Procurement Data System. He concluded that the Index is hampered by the fact that the government’s individual contracting officers record lease award data inconsistently, entering monthly, quarterly or annual lease amounts in the same field–or entering no data at all.

We believe that there has, in fact, been a significant drop-off in leasing activity but not to the degree indicated by the Government Real Estate Index. The Index accurately reflects the trends produced by the government’s own data but that data is proven to be inconsistent. Until Dr. Eisen figures out his next move, look at the Index trend but don’t focus too much on specific figures.

[1] We use the term “renewal” in this article to describe any lease contract where the government tenant remains in a building. In fact, “renewal” by GSA’s definition describes the exercise of a pre-negotiated renewal option.  All other “renewals” are regarded by GSA as “lease extensions”, “succeeding leases” or “replacing leases”.