As the federal government shrinks, leasing opportunities grow.
HAVING GROWN consistently for a half century, the amount of space the federal government leases is now on the decline. Inventory data produced by the U.S. General Services Administration (GSA), the entity primarily charged with acquiring leases on behalf of many federal agencies, show that at year-end 2012 its leased space inventory peaked at 198.9 million rentable square feet (RSF) across the U.S. and its territories. Since then, GSA’s leased space inventory has declined by 7.2 million RSF. Although that’s only a 3.6 percent decline, it’s also the largest space reduction in 50 years. And it’s just the beginning.
Why is this happening? Faced with an ever-tightening federal budget — and the likelihood that this condition will persist regardless of the outcome of November’s presidential election — agencies must find ways to reduce spending. Over the past four years, the White House issued “Freeze the Footprint” and “Reduce the Footprint” policy directives ordering agencies to cut costs by reducing the amount of real estate they occupy. Congress has imposed its own space reductions through its authority to appropriate large leases.
Tactically, the agencies are attempting to comply with these mandates through workplace redesign. Hard-walled offices are out; open plan is in. Agencies are learning to embrace mobile work (i.e., work from home) policies. Many federal employees no longer “own” their workspace. Instead, they sign in for a workstation that they may use for the day or just an hour. The net result is substantially fewer square feet allocated per employee and consolidation into fewer locations.
All of these changes are making federal tenants less “sticky.” Before these space reduction efforts were initiated, federal lease renewals were commonplace, primarily because GSA adds relocation and replication costs onto competing bids when evaluating pricing. That “incumbent advantage” is now largely, if not entirely, eroded. In fact, renovation in place may be a disadvantage in instances where complex phasing and swing space are necessary.
That’s bad news for GSA’s current landlords but good news for those with empty buildings, especially since half of all GSA leases are due to expire in the next five years. Here are five key factors to consider when leasing to the federal government and, specifically, to the GSA:
1) Energy Star Certification. Less than half of all commercial buildings are tracking their Energy Star score, and far fewer are Energy Star certified. For owners who hope to lease to federal tenants, it’s time to embrace this program and work toward certification. The Energy Independence and Security Act requires federal agencies to give first preference to Energy Star certified buildings. (Buildings that don’t have the occupancy history to qualify for certification are given the opportunity to prove that they can achieve it soon after lease commencement.) In short, it’s the law, and there is no quicker way to disqualify your building from competition for federal leases than by failing to meet this standard.
2) Location. Any number of location criteria influence a federal tenant’s delineated area when searching for leased space. These include mission-driven requirements, political boundaries (congressional districts, county and state boundaries) and union rules. Yet one overriding principle of federal location decisions is that central business districts are preferred. This stems from a Carter-era executive order that states: “Except where such selection is otherwise prohibited, the process for meeting federal space needs in urban areas shall give first consideration to a centralized community business area and adjacent areas of similar character, including other specific areas which may be recommended by local officials.” In short, center city locations attract the most federal tenancy.
3) Price. Most government procurements are deemed “Lowest Priced Technically Acceptable” (LPTA). This term essentially means that once a building meets the basic technical requirements of the lease (location, ceiling heights, parking, etc.), everything else boils down to price. The concept confounds many private sector landlords, especially those with amenity-laden, architecturally interesting and supremely located buildings. The federal government applies no real qualitative consideration to its options. The LPTA selection process is a simple pass/fail analysis, after which the lowest price reigns supreme.
4) Building Efficiency. When commercial real estate professionals talk about “efficiency” these days, the term generally applies to energy efficiency. Energy efficiency is, indeed, important to federal tenants, as described above. But it’s the old-fashioned efficiency — the common area factor — that is especially critical when leasing space to GSA. This is because, even though GSA solicits rent pricing on a rentable square foot basis, it evaluates the true cost of those rent offers on a usable square foot basis (or, more technically, an ANSI/BOMA Office Area basis). Floorplate efficiency, therefore, can influence pricing competitiveness substantially.
5) Security. Security has evolved a lot since the Oklahoma City bombing in 1995, when standards were formalized for all federal buildings. Initially, standoff — the distance from the building face to the site’s defended perimeter — was the chief factor driving many location decisions, because it provides the best defense against explosives. Yet, the government has come to recognize that standoff is generally not feasible, especially in urban environments. Further, federal building occupants face many other threats, including active shooters, civil disturbance and release of hazardous materials, in addition to the more traditional robberies, larcenies and assaults. Even where standoff isn’t possible, buildings that can offer government control of the main lobby and parking areas are going to appeal to a broader swath of federal tenants, especially the judiciary, law enforcement, homeland security and defense users.
Federal leasing is highly regulated, and navigating the process successfully requires having the right product to attract federal tenancy. But the downsizing trend offers considerable opportunities for landlords who are able to meet the government’s fundamental needs.