Federal Fortitude

It’s not easy being the United States’ largest public real estate organization and space user. Nor is it easy to serve such an entity. But the General Services Administration’s Public Buildings Service is striving to make its processes for service providers and landlords smoother and its space more cost efficient.That is no small task. The GSA oversees 352 million square feet of workspace that houses more than 1 million federal employees in 2,100 communities. About half is owned and half leased, some within multi-tenant buildings and some as a single occupant. Properties include office, industrial, laboratory and courthouse properties and other types of space. The GSA’s primary objective is to provide quality, affordable facilities and services to its federal-agency customers at the best possible value to the taxpayer. But regional, portfolio and staffing challenges abound.The GSA’s Public Buildings Service today has four major goals, according to commissioner David Winstead: improving the cost and speed of project delivery and design, making its leasing program more efficient, increasing rent savings and strengthening customer service. Among its cost-savings efforts is a significant green strategy. The service is also four years into a massive five-year brokerage-outsourcing program and is considering whether to renew it.For federal agencies and vendor-partners, the biggest challenge has been coordinating services among its 11 regional offices, each of which has been operating independently with its own executives and business practices. Historically, customers that needed service across more than one region often encountered different procedures. “It was 11 good ways for us, but it wasn’t good for the customer,” acknowledged deputy commissioner & COO Tony Costa.Some of the organization’s initiatives have been in place for as long as four years, and significant results are starting to show. For example, it streamlined approaches, including training, tools and executive titles so that federal agencies and vendor-partners encounter the same processes in each office. The organization also created the Real Estate National Accounts Program, which groups federal agencies into like segments; for instance, its defense segment contains agencies like the Department of Homeland Security and Department of Defense, and the law enforcement segment incorporates the Department of Justice, Drug Enforcement Administration and FBI, according to Martha Benson, assistant commissioner of national customer services management for the Public Buildings Service. These managers know the agencies they serve in and out. “As we get better with lessons learned, we’re able to get things done faster and with more consistency,” she said.These adjustments have helped the FBI upgrade its space to Interagency Security Committee standards now that its mission’s increased focus on intelligence has made the agency more vulnerable. Both national and regional account managers are also helping the FBI open 35 field offices across the United States in an expansion effort expected to last through 2015. And the new program has aided the Department of Veterans Affairs as soldiers return from the Middle East. The department’s claims examiner staff, for example, has grown by 3,700 people.For all the perks, consistency among regional offices does present downsides, pointed out Jones Lang LaSalle Inc. senior vice president Robert Peck, who served as Public Buildings Service commissioner for five years under President Bill Clinton. Many within the service would rather operate in a way that, works best for their markets. Peck suggested that along with rules and processes, enough flexibility to manage whatever situations arise should also exist.Best of Both Worlds: Owning & LeasingMost organizations have made cost efficiency a priority, but the GSA does operate under some unique circumstances. The organization relies on revenue from leases and from sales of non-performing assets to support the Federal Building Fund, which subsidizes the GSA’s giant inventory. At the same time, Congress must approve any transaction valued at more than approximately $2.6 million.The organization is converting its owned properties into a self-sustained portfolio, reinvesting funds into performing assets rather than poorly performing ones. In 2002, it began a major effort to weed out non- essential inventory, dividing its owned buildings into three tiers: highest performers, revenue producers that need reinvestment and non- performing assets. The organization has sold more than 200 properties to date.Three years ago, Congress gave the organization permission to reinvest disposition proceeds in the Federal Building Fund. It has since returned more than $139 million to the fund. “Being able to have these reinvestment dollars also helps with our need to cover new construction,” said Cathy Kronopolus, assistant commissioner for real property asset management. She added that building new assets generally proves cheaper than leasing space within a non-GSA-owned building.The GSA also aims to refine its leasing program to gain efficiency and achieve higher rent savings, Winstead said. Internal staffing has proved a problem. Many experienced staff members are retiring, and hiring and training new talent takes time, noted Joseph Delogu, managing director for Jones Lang LaSalle’s Washington, D.C., office. To alleviate the manpower shortage while also creating more regional consistency, the GSA four years ago instituted its National Broker Contract, identifying a number of private-sector commercial real estate brokerage firms as outsource partners, including Studley Inc., Jones Lang LaSalle, The Staubach Co. and Trammell Crow Co.The partnerships have already helped the organization achieve rental rates as low as 9 percent below market value, savings that it passes on to federal-agency tenants, Winstead said. In addition, it takes one-third to one-half of a contract broker’s commission—compensated for by the volume of transactions and thus commissions—and usually passes it through to the occupant in the form of concessions like tenant-improvement allowances and free rent, Peck noted.Using the National Broker Contract effectively entailed a learning curve, according to Chip Morris, assistant commissioner for real estate acquisition. Neil Levy, executive managing director of Studley’s Washington, D.C., office, noted, for example, the current shortage of GSA brokers needed to transact certain types of leases in house. Given that the GSA is no longer set up to handle all its leases, Morris expects the organization to decide by year-end to renew the contract system beyond its 2009 expiration. “We’re depending on the National Broker Contract,” he acknowledged. “It helps to supplement our own staff and address our growing workload.”It is also too early to tell how the Jones Lang LaSalle-Staubach merger, announced in June, would impact the broker contract, which has already experienced two major mergers: Jones Lang LaSalle and Spaulding & Slye in 2005, and Trammell Crow Co. and CB Richard Ellis Inc. in 2006. Many brokers expect that the contract slots will open up for competition again in 2009.Despite the benefits for all parties, the contract program has not alleviated the buildup of leases for which the GSA does not negotiate renewals before the existing lease expires. These holdover leases haunt landlords because the Constitution allows the government to condemn a property for public use if the two sides cannot come to an agreement, explained CB Richard Ellis executive vice president Tim Hutchens, who heads the firm’s federal government services group. According to Theo Bell, senior vice president of UGL Equis’ government practice group, however, the government will only condemn a lease if it has no other alternative and the landlord is trying to oust it, a rare occurrence.Still, the situation is not ideal. “(The Public Buildings Service) is having a harder time getting leases done on time, and hundreds of leases are in holdover,” Delogu said, citing the staffing challenges. The organization has
also enacted process-related changes that require additional leasing-procedure reviews, slowing lease acceptances further. “This buildup is recent,” he continued. “There used to be a high sense of accountability for holdovers, but now it is a black eye.” Morris stated that the organization aims to have 3 percent of its leases or less in holdover and that it has increased the number of lease extensions to allow time to negotiate with landlords.The backup is the greatest in Washington, D.C., where the GSA leases 53 million square feet. Kurt Stout, a senior vice president in Grubb & Ellis Co.’s local office, stated that almost every lease that has expired there in the past few years is still in holdover. “It’s a huge source of frustration (for owners),” he observed. “When you’re in an investment market without resolution, it’s very difficult to underwrite an asset.” Delogu cited one investor that had to pay off a loan while a holdover tenant was occupying three-quarters of the building. The owner ultimately had to fill the loan void with equity.And Bell expects to see an increase in the number of holdovers as more supervisors become involved in procurement and leasing while in-house specialists are brought up to speed.Thus, BOMA International in June testified before the House of Representatives’ Subcommittee on Economic Development, Public Buildings and Emergency Management, suggesting that government leases include a rent-escalation provision to encourage the GSA to eliminate holdovers, especially as Base Realignment and Closure relocations and their anticipated delays will concern commercial landlords in the coming years.This problem aside, Stout believes the National Broker Contract is working as well as it could. And Bell pointed to the security that landlords enjoy, especially in a tanking economy: “The government as a tenant is not going out of business or filing for Chapter 7 bankruptcy. … It’s good for the rent.” Still, in robust times, government tenants may prove too much of a good thing. “When the economy is strong, the government is the least flexible tenant,” Bell noted. If the economy grows, the landlord may decide the lease is not as good as originally thought, but “you then find yourself locked in for a long period of time.”Bell also predicted that as Congress begins to hold agencies and their contractors more accountable, an increase in conflicts of interest between landlord and tenant reps working for the same brokerage firm could also occur. Morris, however, maintains that the GSA’s vetting process and its focus on equitable distribution of work among contract members should keep conflicts in check.In the meantime, the organization has quite an agenda ahead. In addition to the possibility of adding new players to the National Broker Contract program next year, the GSA expects the first new security standards since 2005. And only time will tell how the presidential election will affect federal space requirements. Additionally, the GSA expects to complete six development projects totaling 3.6 million gross square feet by the end of the year, and it has another 30.4 million square feet planned for 2009 and beyond.The new construction offers opportunities to introduce more green measures, as well. GSA initiatives have already resulted in a large inventory of LEED- and Energy Star-certified buildings, and the agency plans stricter measures for upcoming years (see “Red, White & Green” on page 23).It seems the Public Buildings Service will be busy in the coming years.—Reach Amanda Marsh, office editor, at amanda.marsh@nielsen.com.