GSA Agencies Poised to Stay in Place

By the end of 2023, more than half of the General Services Administration’s 25.5 million square feet of leased real estate in Washington, D.C. will expire.

reprints


By the end of 2023, more than half of the General Services Administration’s 25.5 million square feet of leased real estate in Washington, D.C., will expire. But, because of rising rents and the inability of developers to deliver new office space for under the $50-per-square-foot cap in the District of Columbia set by the federal government, most of these GSA agencies will need to remain in place.

SEE ALSO: What’s Happening in Las Vegas?

Over the past few years, the GSA has been priced out of the East End and central business district submarkets, according to a December report from Cushman & Wakefield that covers GSA leasing trends and the impact of the rental cap. The GSA has been forced to either renew in place or relocate to emerging markets where new construction has given them efficiency, in both footprint and energy, and space below the $50 rent cap, the report said. (In addition to the $50 cap in D.C., the cap in NoVA is $39 and $36 in Maryland.)

Nate Edwards, C&W’s senior director of research for the Washington, D.C. Metro, told Commercial Observer that one of the solutions is to move agencies to owned spaces.

“The government has proven to be very slow to execute these directives and while the strategy hasn’t shifted, there is a lack of clarity and confidence in the broader D.C. real estate community as to how and when this will happen in a more meaningful way,” he said. “The fact that they cannot likely execute is good for private lessors to GSA.”

Edwards noted this bodes well for incumbent GSA landlords and existing Class B assets that meet GSA leasing regulations, citing TSA’s upcoming move from Pentagon City to a new 600,000-square-foot building in Springfield, Va.; USAID consolidating out of SW D.C. and Crystal City to new construction at 500 D Street SW; and FCC moving from the Portals in SW D.C. to new construction at 45 L Street in NoMA.

The Office of Management and Budget has mandated GSA to shrink the overall federal real estate footprint through consolidation, eliminating multiple leases and reducing office space. Consolidating large lease requirements into new space had been a notable strategy for agencies such as the Department of Justice and the Transportation Security Administration, among others, the C&W report noted. 

In 2009, on the heels of the financial crisis, the U.S. government encouraged GSA spending with $5.5 billion of funding to renovate existing federal buildings and build new federal offices, courthouses and land ports across the nation, as CO reported. The move resulted in a major expansion in federal leasing throughout Washington, D.C. and NoMa (named for its location north of Massachusetts Avenue.)

But Congress soon believed that the GSA leased and owned too much space and by 2013, the Freeze the Footprint policy was passed. This led government agencies to give back vacant space or consolidate into existing federally owned buildings, while signing a lot of short-term lease extensions or renewals.

In those ensuing years, NoMa, Capitol Riverfront and Southwest attracted GSA tenants as these neighborhoods allowed federal agencies to both reduce their footprint by 20 to 30 percent and offer rents well below GSA’s cap price point. 

“Moving agencies within the D.C. market to lower cost submarkets—NoMA, Riverfront, Southwest, Springfield, Loudoun County, Prince George’s County—often was made possible through the leasing of new construction,” Edwards said. “Moving forward, with construction costs rising exponentially, this strategy is likely coming to an end until the GSA can raise the prospectus rent cap well above current levels.”  

That has changed the strategy in the near-term, with Edwards noting that the federal government is now looking to backfill what were formally GSA spaces with other agencies or segments of agencies that had been in the space previously, due to pricing pressures. Call it a government game of musical chairs.

This has been demonstrated over the last two years by numerous leases, including the dual move of the Peace Corps and Center on Budget and Policy Priorities to 1275 1st Street, NE in NoMA; the Pension Benefit Guaranty Corporation’s expected move to old FCC space in Southwest; and the Department of Justice backfilling 601 D Street after previously relocating to 150 M Street, NE in NoMA.

“The DOJ had uprooted the agency and consolidated to a large project in NoMa, but subsequently, has backfilled the previous space,” Edwards said. “From this and these other deals, we think it’s pretty clear that the government is comfortable with space they previously occupied. It obviously checks the boxes from a regulatory standpoint and the pricing is all in place.”

Another thing that’s being considered by some is moving agencies that have been formerly housed in the D.C. metro region and moving them to lower-priced markets, according to Edwards. For instance, the Bureau of Land Management has announced its move to the state of Colorado.

Edwards said there are other agencies that are being talked about—especially those in the agriculture segment—that are talking about following a similar path. But there’s nothing concrete at this time.

“The theme long-term is that several of the strategies that the GSA is implementing have proven very difficult to get across and adopted in a wide manner, such as moving back to owned space and moving agencies out of the National Capitol region,” Edwards said. “The new construction strategy is largely off the table.”

Therefore, the two strategies he believes will be good for the government and the real estate market going forward are the backfills to previous space and more renewals in place.

“The long-term outlook for the GSA as it relates to private ownership of commercial real estate in our market looks better today,” Edwards said. “If you are an incumbent landlord today, the lack of options in the marketplace would lead to a higher renewal probability.”