Real-property solution on high risk list no one wants to try

Since the Government Accountability Office put federal real property on its high-risk list released a little over a month ago, there have been a number of reactions proposed by lawmakers. But according to two government real estate experts, the answer may be something the government has so far been loath to try: long-term leases.

“I know that we’re trying to consolidate, we’re trying to come up with a master plan, but in every case, the government — our taxpayers — are going to pay less in federally leased real estate if they can commit to a long-term. It’s what we call out there a ‘buyer’s market,’” Lucy Kitchin, senior VP at real estate firm Jones Lang Lasalle, told the Federal Drive with Tom Temin.

The federal government could take advantage of a number of vacancies in Washington, D.C. areas like NoMa and Rosslyn in Arlington, Virginia, she said, while getting great rates and concessions if they’d be willing to commit to 10 or even 15-year leases.

The idea that this could help get federal real-property off of the high risk list might not make much sense at first glance, as GAO specifically mentioned an over-reliance on leasing properties as one of the things that got the real estate portfolio on the high risk list in the first place.

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But according to Kitchin, the reactionary nature of government and the desire to remain flexible are the main problems with federal leasing.

“What they’ve been doing, because of the specter of consolidation out there, is they’ve only been committing to short-term extensions, which garners a pretty significant premium,” she said. “So they’re paying a lot more for that flexibility, [and] when … it comes time for that extension to expire, they just do another extension.”

This is exactly what’s been happening with the Homeland Security Department for more than a decade, she said.

“Government real estate is actually typically reactive, so what we did in 2003 was take all the space we could get, whether it was in Virginia, Washington D.C. on Nebraska Avenue and we just leased as much space as possible to respond to the mission that was given to the Department of Homeland Security. So it starts out very reactive,” Kitchin said.

Eventually, the government began to call for consolidation to improve coordination, and developed a strategic plan. This wound up revolving around the vacant St. Elizabeths campus on the other side of the Anacostia.

“That’s just incredibly complicated, because, like I’m alluding to earlier, the upfront costs aren’t politically popular,” Kitchin said. “So it’s great in theory, but in practice, the business of the Department of Homeland Security has to go on, and it’s increasingly important because of cyber. So I would say the easiest way to think about it is government real estate consumption is typically reactive at first, and then becomes a bit more strategic after.”

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Kitchin explained that upfront costs include more than just purchase price; long-vacant buildings like the St. Elizabeths campus can cost a great deal of money to bring up to modern standards, and even more to bring leases in.

Joe Brennan, director of government investor services at JLL, said that on the other hand, leasing can free government from those responsibilities.

“When you lease space, you get flexibility,” he said. “You get the ability to grow, to shrink, to upgrade your space, to have somebody else run it for you. The government is very well suited to lease space and flourishes in that environment. I also believe that the government struggles as an owner.”

He said that government is the largest tenant in the market, which gives it a great deal of power.

“If they produce leases that are financeable, which is what drives the real estate market, they could command incredibly flexible and great deals for the taxpayer,” he said.

But Kitchin pointed out that there are plenty of federal employees at the Office of Management and Budget and lawmakers with misguided ideas about buying and owning property.

“The challenge with the federal government is that ownership is forever,” Brennan said. “When they own these buildings, they never dispose of them, or very rarely dispose of them.”