GSA Lease Terms Are Poised For Growth
The lease procurements underway since 2015 are poised to yield longer-term lease contracts as those procurements are completed and the leases commence.
WASHINGTON, DC–Recently, pre-solicitation notices posted to the Federal Business Opportunities website (FBO) have been indicating GSA’s desire to enter into longer lease contracts. FBO notices advertise GSA’s requirements for upcoming procurements, including the length of lease term that the government is willing to execute. Therefore, these FBO notices are a good leading indicator of future leasing activity. We analyzed more than 2,000 of these pre-solicitation notices from 2011 to the present and found that the lease procurements underway since 2015 are poised to yield longer-term lease contracts as those procurements are completed and the leases commence.
Prior to 2015, the average total term sought in new GSA lease contracts averaged no more than 11.3 years; the non-cancelable (“firm”) term averaged no better than 6.9 years. Since then, total lease term has risen to 13.8 years and firm term has increased to 9.3 years. This overall improvement of 2.5 and 2.4 years, respectively, is a clear indication of GSA’s desire for longer leases. The trend is welcome because long-term leases are the lifeblood of the federal property investment market.
We had predicted this would occur, largely because many new federal leases incorporate workplace reconfiguration, which leads GSA to agree to longer leases to access landlord-paid tenant improvements and security features. Further, through various legislative efforts and hearings, Congress has been strongly encouraging GSA to enter into long-term leases to strike better rental deals.
It is also probably not surprising that GSA is more willing to enter into long-term contracts for larger leases (though all leases, even small ones, seem to be trending longer). This is indicated in the data by the fact that weighting the trend by lease RSF indicates an even greater increase in lease term.
It is important to note that lease terms are growing longer among new leases but existing leases continue to be plagued by a high incidence of short-term extensions and holdovers. Because of this, the remaining term in GSA’s lease inventory has been getting somewhat shorter. However, going forward we expect these tenancies will increasingly convert to long-term lease contracts, whether as renewals or new leases in alternate buildings.
Long-term transactions should yield economic benefits for the federal government. Further, they might enable GSA to make headway on its workload. Currently, the agency lacks the capacity to manage the backlog of leases that expire each year. This is exacerbated by the fact that most expirations are kicked along, requiring repeated attention. Executing longer leases will allow GSA to focus more strategically on its remaining inventory, and it will provide investors with more opportunity to enjoy the credit benefits created by long-term United States of America leased assets.
This study is a follow-up to one we produced in April 2017, which you can read here.
Kurt Stout leads the Colliers Government Solutions national practice group, overseeing its platform services including leasing, investment sales, property management and project management.