The table above lists the long term savings submitted by the House Committee on Transportation and Infrastructure on 3/8/12. Savings are calculated as the difference between the maximum rent originally requested by GSA and the maximum rent ultimately approved by the House. However, the savings represented for the Office of the Director of National Intelligence are measured as the difference between current rent and approved prospectus rent (both the GSA request and House approval were identical at $7,137,000).
In last week’s mark-up hearing, the House Transportation and Infrastructure Committee issued resolutions for 11 prospectuses most of which had been waiting for approval more than a year. In his committee remarks, Rep. Jeff Denham, who chairs the subcommittee that oversees GSA, stated: “Business as usual is over, and this Committee will be shrinking the size of federal real estate holdings unless there is a clear and well documented justification for growth. These prospectuses are real savings – real taxpayer dollars that won’t be spent on unneeded space”. In support of his comments the committee issued the table illustrated above which demonstrates $19 million in annual savings and $317 million over the term of the combined leases.
This House is actively scrutinizing every prospectus with the explicit goal of reducing the maximum rent GSA may pay in each case. The tool normally employed for this is a reduction in allowable space. The House is placing strict space utilization ratios on each prospectus. In this last batch of approvals the mandated utilization rates were as low as 75 usable square feet per person.
It is clear that Congress intends to shrink the size of the federal leased space footprint a further sign that new space requirements will be quite rare, at least through the November election.
In written testimony on March 7th before the House, Dr. Dorothy Robyn, Deputy Under Secretary of Defense, Installations and Environment, confirmed that DoD has embarked upon a formal initiative to review the Department’s anti-terrorism/force protection (ATFP) standards. These standards prescribe minimum requirements on DoD-occupied buildings that she said add as much as 9% to the cost of leased space and new construction. The ATFP standards include strict security design elements that for office buildings include a minimum 82′ standoff distance, a protected site perimeter, control of all parking, blast-resistant glazing and building structural design to avoid progressive collapse in the event of an explosive blast.
It has long been speculated that DoD was debating its own security standards and in the current budgetary environment the pressure to do so has intensified. To begin, the Budget Control Act mandates that DoD cut $487 billion of spending over the next 10 years. Second, DoD’s FY13 facilities sustainment and recapitalization budget is expected to be 22% ($3.86 billion) less than last year’s budget – clearly DoD will need to make do with existing leased inventory. Finally, DoD is proposing to implement two more rounds of BRAC. Though the BRAC process is meant to ultimately pay back, the near term costs to implement base closures and realignments will be measured in the billions of dollars.
Dr. Robyn noted that the rest of the federal government follows a different set of standards established by the Interagency Security Committee (ISC), a 21-agency group led by the Department of Homeland Security. The ISC standards provide for flexible security solutions depending upon factors such as the building’s size, location, mission criticality and symbolism.
DoD is now studying to what whether it can adopt the ISC security criteria for its own inventory. Were DoD to do so, it would have a dramatic, positive impact on the Northern Virginia office market which has long been the home to the U.S. defense superstructure. Past BRACs served to deplete DoD tenancy, especially the 2005 BRAC, but proximity to the Pentagon always attracted new DoD tenants into the market, often in leased space. However, the urban design prevalent throughout close-in Northern Virginia doesn’t allow for implementation of ATFP standards. This has long been a concern for area landlords – and DoD. Though we expect that DoD will always have certain needs for secure tenancy, a shift to the ISC standards for rank-and-file DoD operations would be a boon to private sector landlords, especially in Arlington and Alexandria, Virginia.
The House of Representatives, Transportation and Infrastructure Committee, convened this morning in a mark-up hearing to finally approve 11 prospectuses, nearly all of which have been languishing on the Hill for more than a year. In fact, our quick review of the last 78 lease prospectuses approved by this committee confirms that process is rarely quick.
Notwithstanding a small batch the 110th Congress railroaded through in just 35 days back in 2008, the House has pretty poor history of approving prospectuses quickly (the Senate reviews them as well but the House typically applies much more zealous oversight). Of course, Congressional approval is not meant to be a rubber stamp. The House will often ask questions about the agencies’ space requirements and GSA must provide the answers. This back and forth can go on for considerable lengths. But this round of prospectuses include several that are now the all-time record holders for lumbering approval. Seven of the eleven prospectuses approved in today’s batch were originally submitted to Congress in September 2010. Yes, that’s 545 days ago; and even that record will soon be broken because there are other prospectuses submitted at the same time which have yet to be approved.
The House has now adopted a much more activist posture in evaluation of these prospectuses. In the last batch of approvals issued September 8, 2011, the House added qualifications strictly enforcing tight space utilization resolutions and also requiring GSA to seek purchase options in each lease. This time the House went even further, compelling GSA and its tenant agencies to reduce their space requests. Rep. Jeff Denham, Chair of the House Subcommittee on Economic Development, Public Buildings and Emergency Management, openly questioned why GSA was presenting growing space needs at a time when the budgets for most agencies are flat or shrinking, and his committee has sought to scale back federal space needs.
The net result: The square footage approved in the eleven prospectuses was more than 300,000 SF (11%) less than requested by GSA. By Denham’s calculation, the space reductions imposed by the House will save the American taxpayers $19.5 million in annual rent and a total of $317 million over the combined lease terms.
Real estate cost reductions are hard to argue with (assuming they are real reductions) and the issue receives bipartisan support. However, the landlord community desperately wishes that the feds could reach these decisions more efficiently. Prospectus leases, by definition, are the largest in GSA’s portfolio, often comprising entire buildings. Approval delays force these leases into holdover or short term extension placing tremendous and unfair financial burden on property investors and lenders. The delays also serve to limit the relocation options of the tenant agencies and one can argue that savings are ultimately diminished when agencies’ negotiating leverage is compromised.
Every now and again, you can expect from us a self-promotion interlude, and today is one of those days. The following is an excerpt from our corporate press release announcing Colliers’ ranking in the Lipsey annual real estate brand survey. The Government Solutions group is proud to be a member of Colliers’ dynamic global platform.
The Lipsey Co., the industry’s leading training consultancy, ranked Colliers among the top global brands in a new survey of more than 50,000 industry professionals. The 11th annual Lipsey survey, which ranked Colliers second overall for the third year in a row, was conducted among commercial property owners, investors, lenders, brokers and property managers around the globe.
“We’re very proud of our global ranking because it affirms our international leadership,” said Doug Frye, global president and CEO of Colliers International. “Ours is a tremendous global brand that embraces sustainability, thought leadership, and an excellent international management team. But, it all starts at the local level with quality people and exceptional client service.”
Frye added that Colliers International outpaced all of its key competitors in revenue growth in 2011 — up 37% globally — which was nearly double its competitors’ growth rate, he said.
The Lipsey Co. survey uses a combination of voting and focus groups to calculate the relative strength of commercial real estate brands among all categories in the industry, including brokerage services, real estate investment trusts (REITs), developers, property managers and data providers. For a copy of the 2012 Lipsey Survey results, click here.
Facing a projected budget deficit of more than $14 billion, the U.S. Postal Service (USPS) announced last month (on February 23) that it will slash the size of its mail processing network by almost half. Of the 264 plants (out of a total of 461 plants nationwide) on a closing review list, 223 will be consolidated “all or in part,” while 35 will remain open for now. Decisions about another six possible closings will be made pending further study.
How bad are things at the distressed self-funding federal agency—which is legally obligated to serve all Americans, regardless of where they live or work, at uniform price and quality? “With the dramatic decline in mail volume and the resulting excess capacity,” said Postmaster General Patrick Donohoe last fall, “maintaining a vast national infrastructure is no longer realistic.” The USPS lost $3.3 billion last quarter; total mail volume was down 6% from the same time period in 2010, which is typically the agency’s most profitable because it includes the winter holiday season. Earlier last month (on February 17), the agency released a new five-year business plan that aims to return the USPS to profitability by reducing its annual costs by more than $22 billion by 2016.
The just-announced closings and consolidations are expected to reduce operating costs by $2.6 billion annually and result in net savings of $2.1 billion. They also result in the loss of an estimated 35,000 jobs (with more job cuts to come, resulting in a total loss of about 155,000 jobs by 2016) and relaxed service standards for first-class and priority mail that will put an end to next-day deliveries and, eventually, Saturday deliveries.
Since 2006, the Postal Service has closed 186 facilities; in 2011 alone, it sold more than $140 million worth of post offices and other property. Last summer, the agency announced its plans to “right-size its expansive retail network” by studying approximately 3,700 retail offices that make up about 12% of its total retail outlets. Many of those facilities are expected to be closed; some will be replaced with “Village Post Offices” operated by local businesses such as pharmacies, grocery stores and other retailers, which would offer limited postal products and services.
What does all this mean for real estate? While the USPS is planning to continue to “dispose of” significant amounts of property, sometimes a disposition simply means that a lease is not renewed. The closing processing facilities are largely industrial/warehouse properties that may be suitable for continuing use as such, or for adaptive reuse, and many of the facilities—which total about 30 million square feet of space—may be sold to private investors. The closing retail facilities also include a number of structures that private investors may find attractive—some of which are of historic significance. As the Wall Street Journal reported last September 14th, “The U.S. Postal Service’s proposed sale of property … would transfer to private hands some historic public buildings filled with art that was intended to lift the spirits of Americans during the Depression.” Some 28 percent of the buildings owned by the USPS, the Journal noted, “are either on the National Register of Historic Places or eligible to be listed due to their historical significance.” And about 800 post offices contain murals and sculptures created between 1934 and 1943 through a federally funded arts program.
Although it’s not clear how many historically significant post offices will be sold, some sales already have been completed. More than a year ago, the Postal Service sold Palm Beach, Florida’s historic post office, which closed last June, to real estate investor Jeff Greene for $3.7 million. Greene, who plans to house his company’s offices in the Mediterranean-style building, will keep the building’s New Deal–era murals through a loan agreement with the USPS. (The USPS maintains ownership of all artwork when it sells buildings, and told the Journal that it “takes great pains to move them to a local library or other public venue or work out a loan deal with the new owner.”)
No new sales will take place in the near future, since the USPS—in response to congressional pressure—has put in place a freeze on all closings of plants and post offices until May 15. But Postal Service spokesman Sue Brennan said last week that “right now, the plan is to move forward after the moratorium ends” and added that the agency’s goal is to complete the process within 12 to 18 months.
One of GSA’s unique challenges is that it must adapt its leases to accommodate a vast array of laws, executive orders, federal regulations and other agencies’ policies. That’s a hard thing to do and it’s made more difficult by the fact that GSA isn’t always an active participant in the creation of these laws and regulations. More often they find themselves very nearly at the bottom of the hill, down which these edicts flow. And, at the absolute bottom of the hill are the landlords.
Such has been the case with the government’s Energy Star policy. The Energy Independence and Security Act of 2007 (EISA), included a clause which read: “…no Federal agency shall enter into a contract to lease space in a building that has not earned the Energy Star label in the most recent year.” On the face of it this appears as progressive government leadership in sustainable design, except that the law has a fatal defect: A brand new existing office building–even one with a LEED rating–isn’t qualified to receive an Energy Star label because the certification requires at least 50% occupancy for a minimum of 12 consecutive months. So, in effect, a new existing building is ineligible to lease space to federal tenants (unless no other competing buildings have an Energy Star label).
Obviously, this was an unintended consequence of the law but GSA dutifully implemented new leasing policy that it knew was flawed. Since then, the playing field for winning government leases has been set on a steep slant. Incumbent lessors (who are exempt from the Energy Star provision) have held a decided competitive advantage, generally renewing their tenants and often at inflated rents due to limited competition. Energy Star labeled buildings have reigned supreme in new lease procurements knowing that their competition is substantially diminished.
The original Energy Star policy took effect December 19, 2010 yet GSA continued working to figure out how to comply with EISA and also craft leasing policy that is rational. Last September, largely unnoticed by the real estate community, GSA introduced a revised approach that is dramatically improved. This policy has recently begun to find its way into new leases and it will qualify many more buildings to compete for federal tenants.
The primary innovation is that GSA’s new Energy Star policy no longer requires buildings to be certified if they experienced insufficient occupancy to do so in the year prior to GSA’s due date for final lease proposals. The new lease clauses merely require property owners to demonstrate that they can achieve the Energy Star label within 18 months of GSA’s occupancy, so long as their buildings conform to one of these eligibility profiles:
- Buildings that had an Energy Star label in the past but lost it due to insufficient occupancy.
- Newly built buildings that used Energy Star’s Target Finder tool and either achieved the “Designed to Earn the Energy Star” certification or received an unofficial score of 75 or higher (subject to Target Finder’s usage instructions, including energy modeling) prior to issuing GSA a final lease proposal.
- Existing buildings that demonstrate, through the use of energy modeling or past utility and occupancy data input into Energy Star’s Portfolio Manager tool or Target Finder, that they can receive an unofficial score of 75 or higher.
Is this new policy perfect? No. EISA’s explicitly stated requirements still beget awkward policy. It’s unlikely that this issue can be fully resolved without Congress amending its legislation, but we don’t count on that happening any time soon. In the meantime, landlords will need to position their buildings precisely to meet the new leasing guidelines.
Each year, the House and Senate authorize each federal agency, department, or program to spend a specific amount of money, and the President signs the bill into law. But this money may not be spent until Congress also has explicitly appropriated it for a given purpose. An agency may, for example, be authorized to spend $4 billion on a specific program, but it cannot actually spend that money until the funds are appropriated for that program.
An authorizing act is one that establishes a federal agency or program and the terms and conditions under which it operates, and authorizes the enactment of appropriations for that agency or program. An authorization for a discretionary spending program is only a “license” to enact an appropriation—not an actual appropriation. Because many agencies and programs have only temporary authorizations that must be renewed annually or every few years, action on appropriations measures sometimes is delayed by Congress’s failure to enact the necessary authorizing or reauthorizing legislation.
An appropriations act is one that gives federal agencies the legal authority to incur obligations and the Treasury Department authority to make payments. An agency may spend no more than the amount appropriated to it, and the standard appropriation is for a single fiscal year, although Congress sometimes makes multiyear appropriations.
Jumping the gun by assuming that authorized funds will be appropriated can get an agency into trouble. The SEC, for example, found itself in hot water in July 2010, when it signed a new lease based on the understanding that—because Congress had authorized a doubling of its budget—it would need additional space for as many as 800 new employees. Congress later failed to appropriate the funds, and the agency had to pull out of the lease agreement.