The Bow Wave

Ever wonder why each time you see a graph of GSA lease expirations, it seems like the expirations volume in the upcoming year is the largest ever?  Well, there’s a logical, and unfortunate, reason for it: GSA has struggled to keep up with its leasing activity causing it to increasingly engage in short-term extensions and outright holdovers.  We call it the Bow Wave – that volume of leases that gets pushed forward from year to year as GSA attempts to plow through its annual workload.  Over most of the last several years the Bow Wave has been growing, but recently a curious thing is happening: It is receding.

To get a sense of the magnitude of the issue we ran a pretty simple calculation.  GSA issues lease data each month, so we took a set of data issued at the start of each year and we calculated the volume of lease expirations scheduled for the following year.  Then, a year later, at the start of that “following” year, we’d re-tally the expirations data for that year and measure the difference.  For example, at the start of 2007 GSA’s data indicated that there would be 18.3 million square feet of GSA leases expiring the following year in 2008.  A year later, at the start of 2008,  GSA’s lease expiration data now recorded 27.4 million square feet of lease expirations expected in that year.  So, in just one year’s time the anticipated lease expirations for 2008 increased from 18.3 million square feet to 27.4 million square feet, a 9.1 million square foot increase.

Yes, there are things that could partially account for this.  It’s possible that GSA may have good reason to execute a one-year lease or extension here and there (around the year 2010 there may have been some one-year Census leases, for example).  Maybe GSA issued termination notices that were recorded in the expirations data.  Maybe they renegotiated some leases early and the revised expirations were recorded.  Maybe there are data anomalies that could also account for some of the differential.

All of these things could contribute to some degree but there are a lot of property owners and brokers reading this right now who have personal knowledge of what was mostly happening: GSA simply could not keep up with the volume, and the problem has been growing.  Until recently.

In this past year the “Bow Wave” has receded.  Sure, there is still a huge volume of leases that are rolling from one year to the next, but it appears that there is real improvement.  We believe that is that is because GSA is now focusing hard on eliminating holdovers and, in the process, they are trying to plan ahead in order to avoid the need for short term extensions (in most cases a short term extension is simply viewed as a contractual holdover from the landlord’s perspective).

A big reason for the recent improvement is likely because GSA’s National Capital Region, home to the highest concentration of federal leases in the U.S., has begun to buckle down.  On the first Thursday of each month every lease executions Team Leader and every Contracting Officer with a lease in holdover must sit before senior management and explain why the lease is in holdover and what they are doing to resolve it.  The scrutiny is intense, repetitive and unrelenting.  GSA has even begun tracking holdover as a specific metric that is issued publicly, and in reviewing that metric it appears there really is progress being made.

In truth, this problem isn’t always in GSA’s control.  The tenant agencies are often unresponsive, delaying GSA’s leasing process.  The landlords can be obstinate too.  At the prospectus level, Congress has been slow to authorize procurements, especially in recent years.  Place the blame where you will, it’s still the GSA that ultimately wields its sovereign rights so the government can remain in occupancy as long as it likes, often creating situations that can be incredibly difficult for landlords and lenders.  It’s encouraging to see that GSA now appears to be making progress towards relieving that – though there is a long, long way to go.