GSA’s effort toward execution of long-term leases has been a popular topic among investors. Going back to the earliest days of this blog, we observed that the remaining term of GSA leases was dwindling. When GSA began to embrace long-term leases as a means to achieve better rents, we chronicled the agency’s efforts to execute longer-term lease contracts (both here and here). Long-term leases are an important metric to watch because they create core assets that attract capital to the sector. For several years, the number of long-term GSA-leased properties were growing more scarce, but we’ve now seen that trend stabilize. It’s happening at a time of general uncertainty, when capital is increasingly eager to find safe harbor investments such as government-leased real estate.
To touch base on this trend, we return to a leading indicator of lease term: our long-running analysis of GSA’s pre-solicitation notices. Let’s start with a primer for the uninitiated. Each time GSA engages in a lease procurement, whether that procurement is likely to result in a new lease or a renewal, it posts a public notice describing the basic terms of the procurement including the anticipated lease term and any termination rights.
Colliers has analyzed more than 2,600 of these notices posted over the past decade and we use this analysis to forecast where the leasing market is headed. Depending on the circumstances of each anticipated lease, the pre-solicitation notice may be published months or years ahead of the actual lease execution, making pre-solicitation notices a clear leading indicator of market direction.
What we can tell you from our latest analysis is that long-term leasing is still prevalent, though the trend towards longer-term contracts (as measured through mid-year 2020) appears to be tailing off.
Despite the slight downturn in the average lease terms proposed for GSA’s upcoming leases, when weighted by square footage new lease terms are still trending longer.
Because prospectuses cause planning for large leases to begin earlier, the weighted trends (orange lines) may lag a bit and the simple average trends (blue lines) could be a somewhat more reliable indicator of direction. In any case, long-term leases are more common now than at any time in memory. As a percentage of all leases, the number of long-term contracts has grown, including the firm (non-cancelable) portion of those contracts. The graphs below focus on firm term, though the trends for overall lease term (regardless of termination rights) is similar.
In 2018 we began seeing a substantial shift in the number of new lease requirements featuring long-term, 10- to 20-year non-cancelable leases, though we can trace the trend back even a few years before that. Clearly, leases ten years or longer are currently far more prevalent as a percentage of the total. But what about in the aggregate?
The news here is good too because we can clearly see that long-term lease procurements are increasing in overall numbers. Remarkably, the most dramatic growth has been among leases with 15- to 20-year firm terms, a rare occurrence just a few years ago, especially among second-generation leases.
This trend towards long-term contracts–especially non-cancelable ones–is creating opportunities for investors. Though continued inventory square footage reduction is tamping down the overall level of investment opportunity, the share of long-term leased assets is poised to grow.
A quick note on methodology: Colliers’ analysis only includes pre-solicitation notices requiring at least 5,000 ABOA SF and at least five years of total lease term. Canceled procurements are excluded. Where notices were updated and reposted, we selected only the most recent notice in our analysis. In the early years of this analysis we excluded general AAAP procurements but, as AAAP is now generally employed for specifically identified requirements, we include these. Only GSA procurements are included, excluding agency leases intended for execution using delegated or statutory authority.