There are few investors of GSA-leased properties who have not engaged in hand-wringing over renewal rents, even when buying properties years in advance of the lease expiration date. Normally when presented with the question of whether the future rent is likely to increase, my response is to simply look at market rents on the whole. If they are rising then there is a good chance your renewal rent will too. One might also observe that many GSA leases are structured with levelized (non-escalating) base rents. So, if market rents increase even modestly through the term of the GSA lease, the renewal rate is bound to be higher than the previous rate. Yet, the normal laws of logic and market physics don’t always apply to GSA leasing–primarily because it is usually a “Lowest Price Technically Acceptable” procurement process that is heavily influenced by competition, delineated search area, changing mission needs of the agency, emerging legislative mandates and so forth.
It is impossible to capture all of this nuance in a single analysis but we thought it would be instructive to simply look at the renewals and see what happened. We analyzed every “single tenant” GSA property in the United States that was at least 85% occupied with a GSA lease expiring between 2005 and 2015. We also decided not to look at anything smaller than 5,000 RSF of leased space. Finally, we did not evaluate lease extensions–only renewal leases. These filters yielded 271 properties that we could look at to determine how the rental rate changed from the last month of the expiring previous lease to the first month of the new renewal lease.
The results are shown in the graph above. Every circle represents a property plotted such that the final rent of the expired previous lease is shown on the horizontal axis and the new renewal rent is shown on the vertical axis. The 45 degree trend line illustrates where the renewal rent and previous rent are exactly equal. Any properties above that line (shown in green) experienced higher renewal rents. Properties below the trend line (shown in red) experienced lower renewal rents. The red and green is shaded to reflect the percentage increase or decrease from the previous rent.
What does this tell us?
- Renewal rents tend to increase. Of the 271 properties we analyzed, 206 enjoyed higher rents upon renewal (rents in another 14 properties did not change at all).
- Renewal rent increases were nearly universal where the previous rent was less than $20.00/RSF.
- As the previous rent became larger, the renewal rents were more erratic. Logically this makes sense because larger rents receive more scrutiny–and in some instances the previous rents may have been inflated due to amortization of TI and shell improvements.
- When renewal rents increased, they did so by an average of 29.07% (22.03% median). When they decreased the average was -12.96% (-10.36% median). Across the entire 271 property set, rents increased by an average of 19.66% (14.97% median).
On the whole, this is good news for investors–especially portfolio investors hoping to maintain or increase yield. In a future article we’ll look at the factor that has much greater impact on capitalized value: renewal term.
Anticipating one final question: We did not empirically study what happened in those instances where rent decreased during the previous lease term due to de-amortization of the tenant improvement component. Yet, anecdotally, our review of the data indicates that the subsequent renewal rent had little correlation. Renewal rents appeared to rise or fall in those instances about as they did across the entire sample.