Longer-Term GSA Leases May Increase Property Values

The Trump administration appointed Dan Matthews as the Commissioner of the GSA’s Public Building Services in August of 2017 and Emily Murphy as the new Administrator of the General Services Administration in September of 2017.  Both have a wealth of experience working inside or with the GSA in their prior respective roles.  In the roughly six months since taking over, they have each made various statements indicating a focus on driving down costs and eliminating underutilized space in the GSA’s owned and leased portfolios.  One of the cost-cutting strategies they have consistently mentioned is for the GSA to sign longer-term leases with landlords given that the GSA tenant agencies tend to stay in one location for extended periods of time (24 years on average, according to Matthews and Murphy). 

For tenants, the advantage of longer-term leases (10+ years) is that landlords tend to be more willing and able to charge lower rents for these leases compared to shorter leases.  This is because landlords generally feel more certainty with a longer-term lease, will be able to amortize leasing and tenant improvement costs over a longer period of time, and in many cases will be able to achieve better financing terms with lenders. These factors generally contribute to an increase in the value of the property for the owner (as long as the benefits are not more than offset by the lower rents). 

As a manager of many GSA-leased assets, we have seen a number of initiatives pushed by the GSA that have failed to come to fruition over the years.  However, anecdotally it appears to us, based upon some recent lease transactions, that the longer-term lease initiative may be getting some traction.  We believe GSA tenants’ willingness to execute longer-term leases is a positive trend for GSA property owners. Whether this trend is temporary, confined to specific GSA regions, or sustainable remains to be seen. 

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.