GSA Tenant Agencies: Challenges and Opportunities in Reducing Costs of Leased Space
2167 Rayburn House Office BuildingSummary of Subject Matter
This is a hearing of the Subcommittee on Economic Development, Public Buildings, and Emergency Management.
Chairman Lou Barletta (R-PA)
July 30, 2014
First let me thank Commissioner Dong and our agency witnesses for being here today. Together your agencies occupy over half of GSA’s expiring leased inventory.
Today’s hearing is the second step in our committee’s GSA Leasing Initiative to save taxpayer dollars through right sizing federal real estate. Step one was our July 15 roundtable where GSA agreed to partner with our committee to improve office utilization, lock in low rental rates, and help agencies protect their employees from shrinking budgets.
The purpose of today’s hearing is threefold: to set expectations for what it will take to approve agency leases; to learn what challenges agencies face to shrink their footprint and use long-term leases to get the best prices; and to learn how Congress can help GSA and the agencies achieve this goal.
I believe we have a unique opportunity to work together and save a tremendous amount of taxpayer money. We have the same objective. The President wants to save money through real estate and so does Congress. And it’s not just me who sees this opportunity. Private sector tenants are taking advantage of the market and negotiating good long-term leases that cut their costs.
So, what are these conditions? Inventory turnover, low interest rates, and a buyer’s market. Let’s take a closer look at these conditions. Inventory turnover: almost 100 million square feet of GSA leases expire in five years. That is half of GSA’s leased inventory. It is also the size of 32 of the new World Trade Center buildings in New York. Low interest rates: financing costs are near historic lows. Literally billions of dollars of cheap and abundant capital are sitting on the sidelines waiting to help reshape the government’s leased inventory. A buyer’s market: vacancy rates are high and rental rates are low in almost every market GSA has a presence.
So what is the key to realizing this potential? Long-term leases of 10 years or more. Why is the length of the lease so important? At the most basic level, a longer lease lowers risk, lowers finance costs, and provides certainty for the landlord who can then offer lower rents. GSA pays a 20% premium for short-term leases of three years or less compared to longer leases.
But long-term leases do much more than lower rental rates. They allow the government and the building owner to spread out the upfront costs of moving or reconfiguring space to accommodate more people. You can’t do this with short-term leases. Comparing three recent examples of GSA leases, one three-year lease has a high rent and no concessions, while the two longer leases have lower rents and significant concessions. Unfortunately, a significant amount of GSA leases are for three years or less and that number is growing every year. There is clearly room for improving those numbers and saving taxpayer dollars.
I also believe this is a win-win opportunity for everyone involved. Agencies can get new office space that better meets their needs, lowers their rent, and allows them to protect their staff from budget cuts. The taxpayer gets significant savings, which the President and the Committee want.
In order to get these types of good deals, planning must start well in advance. In particular, prospectus level leases require significant time to develop and execute. Tenant agencies need to embrace the President’s savings goals and run competitive procurements to replace their leases.
Today, I hope to hear how GSA and its tenant agencies are going to replace 100 million square feet of expiring space with long-term deals that improve utilization rates and lower costs. That is a lot of leases, and today’s market opportunity is not going to last forever.
What are the challenges or obstacles that prevent agencies from moving or reducing their real estate footprint? As chairman of the Subcommittee, I am open to suggestions to simplify and speed up the leasing process so that taxpayers can benefit from this opportunity.
This Congress we have already saved a billion dollars by simply reducing the size of prospectus level lease replacements by up to 20%. Given the large number of expiring leases the opportunity for additional savings is even larger. For example, if the agencies before us today lower their lease replacement costs by 10% through a combination of space reductions and good long-term rates, we can save $3 billion dollars over the next 10 years.
That is a goal worth achieving, and I look forward to working with all of you to get it done.
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