The Energy Independence and Security Act of 2007 (EISA) established new energy-related requirements and standards for federal buildings and for the agencies that oversee them. Specifically, it required GSA to establish an Office of Federal High-Performance Green Buildings to coordinate green building information and activities within GSA and with other federal agencies. Since then, GSA has set the ambitious goal of becoming carbon neutral by 2030. To reach that goal—with the help of funding from the 2009 American Recovery and Reinvestment Act (ARRA)—the agency is investing a whopping $4.5 billion in existing buildings, with much of that money going toward making the structures more energy efficient. In addition, GSA is focusing its new construction efforts on high-performance green buildings.
Now that GSA is about five years into the timeline, it seems useful to look at what the agency has done and learned from these efforts. Writing in the June issue of Building Operating Management, Rita Tatum offers a review of GSA’s efforts to date in the following eight areas:
1. High-Performance Exteriors. Tatum cites GSA’s modernization of the Edith Green–Wendell Wyatt Federal Building in Portland, Oregon—which we profiled here last week—as an example of how the agency is using new types of shading systems to minimize solar heat gain, restricting the ratio of glazing to overall wall area, using light reflectors to increase daylighting, optimizing thermal efficiency with triple-glazed windows, and installing advanced, optically enhanced light systems that adapt to available daylight. GSA is using additional high-performance exterior elements in other projects; these include building envelope upgrades that target both thermal and moisture problems, cool roof technology that minimizes energy use, and vegetative roofing.
2. High-Performance HVAC Systems. GSA is installing geothermal ground wells at the Bishop Henry Whipple Federal Building in Fort Snelling, Minn., and chilled beam technology for cooling at the U.S. Courthouse in Bakersfield, Calif. In Chicago, the agency is installing modern HVAC systems that use occupancy and carbon dioxide sensors in three federal buildings.
3. Smarter Lighting. The agency is exploring a variety of ways to increase lighting energy efficiency. Rather than just relamping with more efficient lamps and ballasts, it is installing new fixtures (including more task lighting), often in new locations and with some personal controls. It has found that daylighting controls should be integrated into lighting solutions around building perimeters. And it has discovered that it can increase the amount of light an area gets from a constant amount of energy by increasing ceiling, wall, and floor reflectances.
4. Building Controls and “Smart Meters.” By connecting smart meters to building automation systems and creating building operating models, GSA has been able to reduce energy use as well as track usage and ensure that these energy savings persist. The agency therefore has made these systems a key element of major renovation projects.
5. Sustainable Facilities Tool. One goal of GSA’s sustainability effort is to share what it has learned. Its free, online Sustainable Facilities Tool gives facility managers a way to identify and prioritize cost-effective green building strategies for their own properties.
6. Solar Power Savings. Renewable energy is another major focus of GSA investment. The agency has installed 35 acres of ground-, roof- and carport-mounted photovoltaic panels that have been tied into the existing electrical distribution system at the Denver Federal Center in Lakewood, Colo., to provide more than 15% of the campus’s electricity. It also has installed rooftop solar panels at the Bean Federal Center in Indianapolis, where some of these panels are serving as a solar laboratory at which GSA and Sandia National Laboratory are researching four different types of solar panels to determine which are most effective in the Midwest.
7. Green Proving Ground. This program uses GSA’s massive real estate portfolio to evaluate the viability of emerging sustainable building technologies. Its first results assess wireless sensor technology in data centers, and have shown a potential to save $61 million annually if the technology were to be applied across GSA’s entire portfolio. The program currently is evaluating five other technologies; results are expected this summer.
8. Performance Contracting. Last December, President Obama announced a major commitment to creating new energy savings via energy service performance contracts (ESPCs) at federal facilities. On March 22, GSA announced the Deep Retrofit Challenge, in which it asked energy service companies to provide the maximum energy performance savings possible for each of 30 existing buildings using ESPCs.
Is GSA’s goal of becoming carbon neutral by 2030 a realistic one? A sidebar to Tatum’s article notes that a study released last August by Pacific Northwest National Laboratory “suggests that GSA is making progress toward its energy-related mandates.” The study, which examined 22 GSA facilities, found that they used 25% less energy, had 19% lower aggregate operating costs and produced 34% fewer carbon dioxide emissions—while also reaping a 27% higher occupancy satisfaction status—than the average U.S. commercial building.
What does it all mean for landlords? GSA is deeply committed to sustainable design and the agency’s goals are driven by law. It is a certainty that this is not a fad but, rather a paradigm shift, one where the federal government is committed to leadership role. Even if the Executive Office switches from Democrat to Republican we can expect this trend to continue, especially as the primary legislation driving the government’s energy efficiency goals is borne of EISA, a Bush-era Act. Democrats and Republicans are surprisingly bi-partisan on this issue, though Republicans approach sustainability from the standpoint of energy independence—making America safer by reducing our reliance on oil-producing nations—while Democrats approach it more from an environmentalist point of view. In either case, the GSA’s long-run trend will be to continually raise the bar on the energy efficiency requirements of its facilities, ultimately to the disadvantage of older buildings that have not been upgraded.
Which federal agency’s mission is to “Advance freedom for the benefit of the American people and the international community by helping to build and sustain a more democratic, secure, and prosperous world composed of well-governed states that respond to the needs of their people, reduce widespread poverty, and act responsibly within the international system”? The U.S. Department of State, commonly referred to as the State Department, was the first federal executive department to be established, in 1789. (That September, President George Washington appointed Thomas Jefferson to be the first U.S. Secretary of State.)
The State Department has been headquartered since 1947 in the Harry S. Truman Building at 2201 C Street, N.W., a few blocks from the White House, in the Foggy Bottom neighborhood. The department operates the nation’s diplomatic missions abroad and is responsible for implementing U.S. foreign policy and diplomacy efforts. Its core activities are to promote and protect the interests of American citizens by “1) Promoting peace and stability in regions of vital interest; 2) Creating jobs at home by opening markets abroad; 3) Helping developing nations establish investment and export opportunities; and 4) Bringing nations together and forging partnerships to address global problems, such as terrorism, the spread of communicable diseases, cross-border pollution, humanitarian crises, nuclear smuggling, and narcotics trafficking.” It had a FY2012 discretionary budget of $53.4 billion. The department’s many thousands of employees—who include foreign service officers and specialists, civil service professionals and foreign nationals—work at more than 265 locations in more than 170 countries, as well as at additional locations throughout the United States. In this country alone, about 5,000 professional, technical and administrative employees compile and analyze reports from overseas, provide logistical support to overseas posts, communicate with the American public, formulate and oversee the budget, issue passports and travel warnings, and more.
Since the early the 20th century, the State Department has invested in building and maintaining a large network of diplomatic missions, embassies and consulates. The first wave of overseas construction began with the creation of the department’s Foreign Service Buildings Commission in 1926. Today, the department’s Bureau of Overseas Buildings Operations (OBO) directs a worldwide building program and, in concert with other State Department bureaus, foreign affairs agencies and Congress, “sets worldwide priorities for the design, construction, acquisition, maintenance, use, and sale of real properties and the use of sales proceeds.” Overseas construction in the current century has featured an increasing focus on security and sustainability. Since 1999, OBO has completed 89 new diplomatic facilities and, as of April 2012, has an additional 43 projects in the design and construction pipeline. Many of these facilities incorporate state-of-the-art security elements as well as features that conserve energy, water, and other resources; some have achieved or are being reviewed for LEED certification.
Most of State’s headquarters and related functions are located in the Foggy Bottom area of Washington, DC and directly across the Potomac River in the Rosslyn area of Arlington, Virginia. State has a Memorandum of Understanding (MOU) with the U.S. General Services Administration, allowing them to focus their occupancy on these two submarkets so that functions may be clustered near the Truman Building. In the District of Columbia, this effectively exempts the State Department from the requirement to search the entire CEA for office space.
State has a number of large active real estate requirements. Early this year it executed a 457,000 square foot consolidation lease at 600 19th Street, NW in Washington, DC. It also has a number of substantial leases soon to expire in Rosslyn. In that market, in particular, State faces a significant challenge because it occupies two buildings which now rank among the most expensive in Northern Virginia.
The decision to start writing a blog is a bit like dipping your toe in the water, knowing it’s cold yet forcing yourself to jump in anyway. As it turns out, it’s not so bad once you get used to it. In fact, once you warm up to blogging it can be pretty enjoyable.
When we started this blog at the beginning of the year, we were privately concerned that we wouldn’t be able to sustain it. The problem wasn’t a lack of ideas (we have a running list of about 160 article ideas currently) but instead it was our concern that we just wouldn’t be able to devote the effort. Our team is engaged in dozens of government lease and sale transactions all across the U.S. Where would we find the time?
Well we found the time and we think it has been well spent. To quote the iconic self-help guru Ben Sweetland: “We cannot hold a torch to lighten another’s path without brightening our own.” Writing for Capitol Markets was conceived as an effort to share our experience with the rest of the industry but, unexpectedly, it has improved our own knowledge of the government sector too.
Mostly, we’ve appreciated the kind feedback we’ve received from many of you. It has encouraged us to now write almost every day. We’ve covered a broad range of topics this year and here are a few of them we thought we’d share again:
- Our very first article profiled the State Department’s 457,000 RSF consolidation lease at 600 19th Street, NW in Washington, DC. We expected to write about many more transactions but, frankly, it’s been a slow year for big, notable deals. We do plan to gear our focus more towards transactions-related news in the future because we are all deal-junkies at our core.
- The GSA Las Vegas Scandal led to the firing and resignation of GSA’s senior leadership and provided lots of fodder for our blog. We tried to avoid getting caught up in the hype but we did devote several articles covering hearings hosted by the House and Senate.
Capitol Markets is a key part of our team’s effort to engage with you. We invite your comments, emails and phone calls, and we look forwarded to announcing our 200th blog post someday soon!
GSA’s lease selection process has made it a perpetual pioneer – pushing it to the fringe submarkets where office space is more generally available in abundant cheap supply. In the early 1990s the “fringe” was the East End, an area that thrives today but was once home to the city’s “red light” district. In the 2000s that fringe is even further east in the NoMA (North of Massachusetts Avenue) and Navy Yard submarkets. In fact, over the past few years about a million square feet of federal tenancy has shifted from the downtown core submarkets and into these eastern reaches of the city.
There are really two factors driving this change. The first is that the GSA has adopted a policy that it will include the entire Central Employment Area (CEA) in every lease competition. That means that a building in the nascent Navy Yard district competes equally with the vibrant, amenity-rich CBD. GSA’s qualitative analysis of buildings and locations is simply a pass-fail approach. If a building meets the basic technical requirements of the lease then it competes against other buildings purely on price. Lowest price wins. This type of evaluation is called lowest price technically acceptable and it is the predominant means by which GSA procures office space. Given the tremendous rent delta between core and fringe submarkets in the CEA, the incumbent building’s “relocation and replication” cost advantage is often overwhelmed and federal tenants are finding themselves (reluctantly) moving.
The second reason is more worrisome in the long run: Landlords may simply tell the government to get packin’.
When GSA manages large procurements (even renewals) it must first get approval from Congress. The approval comes in the form of a prospectus that, among other things, specifies the maximum rent GSA may pay to lease its space. GSA, with OMB oversight, establishes the maximum rent and Congress then approves it. The problem is that these prospectus rents have only increased $7.00 in eleven years, substantially less even than CPI growth.
To illustrate this problem we created the graph shown above. The red line shows the average asking rent trend for Class A buildings located in the CBD and East End submarkets. The blue line shows the trend for the maximum prospectus rent approved each year by Congress.
You can pretty clearly see that prospectus rents and market rents traveled roughly in tandem from 2001-2005 and then market rents spiked, leaving the prospectus rents behind. Even as the nation lapsed into recession and asking rents began to level off, so did the prospectus trend. So, overall, the gap has widened every year.
What’s worse is that delta is really much wider than it looks because the prospectus rent is a flat rent and the market rent represents only the base year of an escalating lease structure. Therefore, for the market and prospectus trends to be in sync, the prospectus (blue) line should actually be above the market (red) line.
The current rent gap is substantial and this is where the prognosis for federal tenancy downtown looks grim, because we are just about at the “point of indifference” for many property owners. We are just about at the point at which the landlords ask GSA to leave because they can re-tenant their buildings at higher rents (and capitalize those higher rents to achieve greater value on the asset sale). Frankly, if the market weren’t so sluggish – if there were any real net demand – we would be at that point now.
Instead, for now, GSA survives by either moving to the low-cost fringe or by renewing under a bare bones lease structure that includes little in the way of capital contributions from property owners – whatever is required to make the deal work.
**This subject is deeply nuanced and in blog form we can’t hope to cover it in depth. We enjoy discussing it, so please leave your comments here or contact us directly if you’d like to explore further.
A while back we studied the national lease expirations trend and we were interested to see how the volume of expirations tends to “step” down about every five years. The big step occurs after 10 years of remaining term because leases longer than that are typically reserved for build-to-suits, especially that class of leases with terms longer than 15 years. Looking again at that chart we wondered if there was any difference in rents for leases of different length. I think most people’s instincts would be to guess that rents tend to be higher for short-term leases than long-term ones. But, as you can see above, the data shows the opposite result. Before jumping to any quick conclusions, hold on. As it turns out, there are some pretty simple explanations for why this occurs. We find them interesting, nonetheless.
First, some background on our methodology: We utilized data from GSA’s leased inventory, yet we eliminated all leases smaller than 3,000 RSF. The reason is that these accommodate a preponderance of atypical uses – generally parking leases and airport-related TSA leases. Though the overall impact of these on our aggregate expirations is fairly small, the rents are a mixed-bag. We wanted to focus on the meatier, more traditional inventory of leases 3,000 RSF and larger. Our graph shows the RSF of those leases expiring nationally in any given year. The longest running leases in GSA’s inventory extend 20 years, so our graph ends at 2032.
The rent trend illustrates the current rent paid for leases expiring in each year. If we had it, we would have used the initial base rent for each lease instead of the current rent but, well, that would have taken a lot more work and these figures are close enough to prove our point. The important thing to remember is that the trend shows the rent that is currently being paid for leases expiring over the next 20 years.
So now the reasons why rents skew higher for longer term leases:
1. Almost all of the longest leases are build-to-suits. Several of these are FBI build-to-suits. Though all build-to-suits tend to run significantly more expensive than existing buildings, the FBI prototype is a technical building with a large site to accommodate security standoff distances and, therefore, it is even pricier.
2. There are remarkably few long-term warehouse leases to pull the average rent downward. Many of the longest warehouse leases in the federal inventory have historically been signed by the National Archives and Records Administration (NARA) using its delegated authority; therefore, these leases aren’t recorded in the GSA’s inventory (which is what we are studying here).
3. The first two observations explain the data bias that leads to higher rents for longer term leases. However, the fundamental reason they skew higher is that most GSA rents are flat. It is a quirk of GSA’s leasing process that flat rents are most often executed. In fact, GSA’s Form 1364 (its pricing offer form) is formatted with a flat rent offer in mind. Since private-sector leases tend to escalate, the equivalent flat GSA rent is typically higher in the initial year (and lower in the final year). The longer the length of the lease, the higher that “equalized” GSA rent becomes.
Now, as there are many GSA Realty Specialists who read this blog, I am not suggesting that there is any economic benefit to signing short-term leases. As relates to build-to-suits, short-term leases aren’t feasible and, for the rest of the inventory, long-term leases will generally generate lower costs over the entire contract and they allow for TI and capital costs to be spread out. More importantly, they lock in the rental rate providing a hedge against market rents which – in the long run – almost universally increase.
On that last point, we note that the graph’s dotted trend line illustrates the relationship between current rent and lease term. The slope of that line is equivalent to a 1.6% annual increase, significantly less than the average rate of CPI inflation over the past 20 years (2.5%).
To explore the trends for yourself, move your mouse over the graph above to see the data that’s behind it.
The American Recovery and Reinvestment Act (ARRA), signed by President Obama on February 13, 2009, called for major new construction and the energy-efficient modernization of federal office buildings, courthouses and land ports across the country. This article—which profiles the $139 million modernization project now underway at the Edith Green–Wendell Wyatt Federal Building at 1220 SE Third Avenue in downtown Portland, Oregon—is the first in a series in which we’ll look at some of the projects funded by these stimulus dollars.
Designed by Skidmore, Owings and Merrill and opened in 1975, the 18-story, 372,461-square-foot Edith Green–Wendell Wyatt Federal Building was named in honor of former Oregon U.S. Representatives Edith Green (a Democrat) and Wendell Wyatt (a Republican), both of whom left Congress the year the building opened. But by the early part of this century, the structure had become dated and badly needed upgrading.
GSA originally commissioned a renovation of the rather nondescript concrete and steel high rise in 2005, but then lost funding for it. The project was put on hold for several years until the agency received stimulus funding in 2009. GSA ramped up the modernization process in mid-2010 by moving all of the 1,240 federal employees then working in the structure to 323,000 square feet of leased space in four other Portland buildings. Construction began that December.
The modernization project, which is being managed by the Howard S. Wright Companies in collaboration with SERA Architects (both of Portland) and Bainbridge Island, Washington–based Cutler Anderson Architects, aims to achieve LEED Platinum certification for its use of cutting-edge sustainable design and technology. Although the original plans included what would have been North America’s largest “living wall,” with 250-foot vegetated “fins” that would have shaded the building’s west facade, GSA later deemed that element too risky and too expensive. Instead, that facade is being covered with a series of long, aluminum “reeds” resembling giant icicles—which will themselves provide shading, and eventually will become vegetated, as dense plantings at the plaza level climb the reeds. Other green features include the following:
- A rooftop solar array that will offset up to 6% of the building’s energy consumption;
- Advanced, optically enhanced lighting systems that automatically adjust to the amount of daylight available, which are expected to result in a 40% reduction in energy use for lighting;
- Low-flow fixtures and reuse of rainwater for toilets, urinals and irrigation, which are expected to result in a 65% reduction in potable water consumption; and
- State-of-the-art elevators that regenerate power as they descend.
These features will make the building one of the most energy efficient in the agency’s portfolio. Other elements of the modernization process include recladding the structure with blast-resistant, energy-efficient curtainwall; incorporating security upgrades to meet post-9/11 standards; adding new rentable area; and additional features that will improve the work environment for federal employees. When the project is completed next year, its largest occupants will be the U.S. Forest Service, the Bureau of Land Management and the Internal Revenue Service.
To see a cool time lapse video of the renovation, see below.
As we reported yesterday, the federal government—the biggest property owner in the United States—is now in the process of disposing of billions of dollars worth of properties that it no longer needs. While the disposal process is well underway—GSA disposed of 88 vacant or underused properties in FY2010 and 2011—some 12,000 domestic federal properties remain on the market, and more will be added as they are identified.
Where are these properties located? The interactive map below, prepared by OMB, presents a sampling of about 14,000 buildings and structures currently designated as excess. These range from sheds to underutilized office buildings and empty warehouses. Not all of them are on the market; many will be disposed of through demolition or transfers, but others are available for sale to private sector buyers.