The predominant federal leasing trend since the Great Recession is that the GSA-leased space inventory is shrinking. Though this overall inventory reduction has been occurring at a relatively moderate pace, the number of long-term leased properties has fallen much more rapidly, as we’ve reported previously. The decline is because GSA is still entering into many short-term extensions as agencies engage in workplace reconfiguration. At the same time, fiscal austerity has curtailed the number of new lease-constructs, traditionally the properties with the longest leases.
Despite these trends, the number of long-term leased federal assets appears poised again for growth because GSA has recently begun pursuing more long-term leases. For investors, this is welcome news because the net effect of this change is stabilization in the availability of long-term GSA-leased assets.
The graph above updates the one we produced here back in September 2016. It shows the number of buildings in each time period that meet all of the following criteria: i) >=15,000 RSF building size; ii) >=85% leased by GSA, and; iii) >=10 years of remaining lease term. From January 2013 to March 2017, the availability of these long-term leased assets declined by 57 buildings, a 26% reduction. Since March 2017, the number of assets has stabilized.
Going forward, we see the possibility for growth. The simple math is this: there are only 17.7 MSF of buildings right now in the GSA lease inventory that meet the above criteria. Over the next three years, 2.3 MSF of these will annually drop to less than 10 years remaining term. Meanwhile, new procurements indicate roughly 8 MSF of new annual demand for 10+ year leases. Though we can’t be certain of the timing of these new leases, there is clear evidence that growth can be expected in the inventory of properties with 10+ years of remaining term.
It’s good news for both GSA and the private sector. Longer leases enable more capital to enter federal sector investment, and the risk-adjusted return on that capital should pass through in the form of lower cost rents to GSA.