Winstead Addresses Urban Land Institute
U.S. General Services Administration
Urban Land Institute's Real Estate Trends Conference
April 9, 2008
Thank you, Donna (Schaffer). It is a pleasure to join the leaders in our industry to share perspectives on the federal government’s civilian real estate program. I only add—as this story makes clear—not everyone agrees this is the most challenging topic.
I have the unique privilege and challenge to run one of the largest public real estate organizations in the world. A few facts suggest the breadth of our operation. Our portfolio consists of 352 million rentable square feet in more than 8,600 assets across the nation. These are the workplaces for over one million employees.
Currently, the percentage of owned-to-leased space is about 50-50. What’s notable is that leased space is growing at a significantly higher rate. Between 1967 and 2007, GSA-owned space remained relatively constant, while leased facilities grew from 46 million to 176 million rentable square feet.
During my tenure as PBS Commissioner, I’ve set certain goals and priorities for the service:
To improve project delivery, meeting customer needs on time and within budget.
To improve the leasing program under the newly created Office of Real Estate Acquisition utilizing the broker contract which I’ll talk about in more detail a little later on.
To aggressively explore alternative investment strategies that can assist in getting the critical funding we need to modernize the backlog of building in critical need of repair in our owned inventory.
And to strengthen and expand workplace delivery by providing comprehensive solutions to meeting customers’ workplace needs.
Regarding this last priority, we are doing this on a number of fronts with major customers including the Federal Judiciary, with its expanded courthouse program—including the Prettyman Annex for the DC District Courthouse dedicated last year. We’ve recently signed a MOU with them on ROI pricing for certain courthouse projects. We are working closely with the Department of Homeland Security’s Customs and Border Protection developing numerous Land Ports of Entry at our northern and southern borders. Another big national project is the FBI’s Field Office Program. This comprises 30-plus lease construction projects in 37 U.S. cities totaling approximately 73 million rentable square feet. For the IRS, we are working to modernize its tax service centers around the country with a master capital improvement plan. The total scope of this effort encompasses the renovation of 10 campuses encompassing 10 million square feet of space. This includes the innovative payment center in Kansas City, Missouri, half of which is programmed to shut down when processing slows down.
In terms of construction activity, we have over 200 major projects underway at a value of $12 billion. Our annual total balance sheet reflects about $8 billion of revenue, from which the capital funding dedicated to construction has averaged a relatively constant $1.5 billion for the past four years.
This budget includes money to address a growing backlog of repairs and alterations—currently estimated at $7 billion. In the President’s FY 09 funding request, for instance, $692 million of $1.3 billion for capital investment is set aside for major R&A projects. But this still isn’t enough and we are working with the administration and Congress on how we use alternative financing mechanisms.
I know our focus today is on the Washington metropolitan region. In this context, let me share what PBS is up to in what we call the National Capital Region. Here, we manage 96 million square feet of space, including 43 million square feet of owned space. We have over $4 billion of construction underway. Our leased facilities total 53 million square feet, representing 20 percent of the private office market and, in 2007, $1.6 billion in rent paid to private sector landlords. There is no doubt, we are a driving force in DC’s real estate market.
Several strategies distinguish our approach to asset management and leasing.
First, a few words on our GSA-owned portfolio. About 5 years ago, we implemented a private sector tiered strategy to evaluate properties. We rank our assets from performing to non-performing, using standard real estate financial measures. Those that are performing, we classify as core holdings; those that are non-performing, we triage to determine if they can become income producing.
In this analysis, about 74 percent of our assets have at least a 6 percent return on equity and 81 percent realize positive funds from operations. Underutilized and non-performing assets are designated for disposal and any sales proceeds are reinvested in the portfolio. In FY 05, this added $5.3 million to the Federal Buildings Fund (GSA’s internal bank, if you will); $51 million in FY06; and $83 million in FY07.
Perhaps of greater interest this afternoon is an overview of issues related to leasing.
In managing the leased portfolio, PBS focuses on five primary areas: reducing vacancy; managing customer requirements; analyzing market trends; lease acquisition; and lease administration.
We have done a good job of reducing vacancy. For the first time in four years, the vacancy rate has dropped to 1.1 percent. Some might consider this too low, except that it is balanced by an equally-sized owned portfolio. Exercising termination rights, backfilling vacant space and buying out lease contracts have generated improved efficiency.
Managing customer requirements concerns helping agencies improve efficiency and reduce costs by planning more effectively. Before leases expire, we contact agencies to discuss future space requirements. In situations where customers are uncertain about their needs, many request lease extensions. These, however, are problematic as they limit our ability to respond appropriately to market conditions and generate a heavy workload for our realty specialists.
To help avoid lease extensions, in FY07, we began an expanded analysis of these situations. In FY08, we will capture the driving forces behind these extensions. This information, in turn, will be used to develop best practices to mitigate the problem.
With respect to market analysis, PBS has devised an analytical “lease tiering” tool. This incorporates a comprehensive analysis of current market data and a forecast of future growth in rental rates—critical market intelligence that we use when negotiating lease contracts.
In the lease tiering analysis, we overlay the projected rental growth rates for markets nationwide with an urgency-ranked expiring lease inventory to prioritize our work and provide the appropriate and best guidance.
Complementing these strategies, several years ago, PBS made a business decision to contract for professional broker services to procure leases at no cost to the government. Known as the National Broker Contract, our goal was to strengthen and improve our overall leasing program, augment a decline in the realty workforce, and free up our real estate professionals to focus on customer requirements and strategic customer planning.
Three years ago, GSA selected four firms to provide services under the contract—Jones Lang LaSalle, CB Richard Ellis, Julien Studley, and Staubach. In the past fiscal year, we handled about 50 percent of leases nationwide through our brokers.
Initial results indicate that leases using our national brokers have come in 13 percent below the market midpoint, which exceeds our PBS goal of 8.75 percent below market. Importantly too, customers have benefited from nearly $7.4 million in rent credits associated with the government’s share of the commission.
While we have had some successes with the broker contract, there are issues to address. In this regard, we refine and enhance the contract and keep re-evaluating it as we move forward.
Under the newly created Office of Real Estate Acquisition, we are developing consistent enterprise-wide operations and improving communications with brokers and customers, while stressing both rents achieved and savings accrued.
We know we are facing challenges with our leasing program in the Washington metropolitan area. Chip Morris, who heads this new office, is working with senior leaders in PBS’s National Capital Region to address lease acquisition and administration problems. In that effort, they are stripping back the acquisition and administration processes to identify problems and choke points in the system. This analysis will help us do better in terms of timeliness and efficiency. One inherent problem is the sheer size of leases in our National Capital Region. This requires higher levels of review and approval for a larger percentage of actions.
We follow two basic paths in seeking new leased space. Projects over $2.5 million require Congressional approval. In the DC Metro Region, Congress authorized 5.5 million square feet of space in FY07 and another 1.5 million in FY08.
As you can see on the slide, among the large leases we are now pursuing are contracts for the Department of Agriculture, the Department of Health and Human Services, the Nuclear Regulatory Commission, and the National Institutes of Health.
In the Washington area, for smaller projects—ranging from 2000 square feet up to about 60,000 square feet—we rely on our Automated Advanced Acquisition Program. Under this program, we issue monthly requests for space in each of our three major political jurisdictions: DC, Northern Virginia and suburban Maryland. Offerors may update existing proposals and make new ones every month of the year. Once listed, our automated platform re-ranks the offers from lowest to highest cost space. Last year, we procured two million square feet of space using this system.
I also want to make a couple of points related to security and sustainability in our leasing program
Security is always a concern in federal facilities. Requirements for leased facilities and new lease procurements have not changed recently. GSA continues to follow the standards set out by the Interagency Security Council. Perhaps the most significant mandates for existing buildings are that windows be designed to offer effective blast protection and that air vents be located where they are not vulnerable to any attack, essentially away from and above the street. The maximum setback, unless requested by the tenant agency, is 50 feet, and in many cases, a 20 foot setback is sufficient depending on the risk level.
GSA continues to set the example for sustainability in its facilities. As legislated in the Energy Security and Independence Act of 2007, we recently established an Office of Federal High-Performance Green Buildings. Its mission is to bring together federal agencies and industry to advance sustainable design and energy conservation in federal facilities. GSA aims for LEED Silver—the US Green Building Council’s rating system—for new lease construction over 10,000 square feet.
In December 2007, PBS issued Green Lease Policies and Procedures for Lease Acquisition. This document is applicable to all types of lease procurements. It confirms and updates many sustainability requirements in place since 2000. The big change (prescribed in the Energy Independence and Security Act of 2007) is that, beginning in 2010, leased buildings must have earned an Energy STAR designation in the most recent year of operation. Congress gave the government three years to share this requirement with the real estate industry so there is time to prepare assets to be competitive. Other requirements incorporate criteria used in LEED Certification for Commercial Interiors related to such areas as indoor air quality, recycling and construction waste management, and leases sited near public transportation and amenities.
Finally, I would like to offer some comments on market trends. What we are seeing in several markets is a “tale of two cities” phenomenon where urban core areas are experiencing steady growth and stability, while outer suburban markets are exhibiting signs of slowing.
In the metropolitan DC core (DC, close-in Virginia and close-in Maryland), for example, economic and real estate market conditions are stable and relatively healthy. Beyond the Beltway, on the other hand, there are indications of economic sluggishness and tenant cautiousness resulting in an imbalance between supply and demand.
Metropolitan Washington continues to benefit from a strong federal government presence and the multiplier effect that each federal dollar spent generates. As I mentioned earlier, in the DC market, GSA leases about one fifth of the commercial infrastructure with a total lease contract value of $18.8 billion. Typically, about 10 percent of our leases in the DC area expire every year. On average, we are in the market for about 5 million square feet of space in any given year.
Overall, this metro area enjoys healthier vacancy rates, positive net absorption levels and stronger rent growth than most other metro areas. Many analysts/economists believe that, although growth may slow somewhat over the next year, this area will be resilient.
Indeed, much is happening here. I would like to close with some of the recent projects that we’ve completed or are working on in the area.
A big effort in the next few years is addressing the needs of the Defense Department as it begins to implement the latest round of closing as part of BRAC or the Base Realignment process. This involves 5 million square feet of DoD-occupied GSA-leased space in Northern Virginia and potential new leases in the Franconia Warehouse Depot. Again, we have begun our analysis and can say that our highest priority is making this transition as smooth as possible.
In 2004 in DC, GSA announced the selection of Forest City Washington, Inc. as the developer for a 42-acre mixed-use project on the banks of the Anacostia River in Washington. Over the next 15 years or so, this development team will build an entire new neighborhood in DC's near Southeast, only one mile from the National Capitol. It will include almost 1.8 million square feet of office space, 2,800 residential units both for rent and for sale, 400,000 square feet of retail, and a 5.5 acre waterfront park, all taking advantage of the ballpark and our recently opened headquarters for the Department of Transportation as anchors.
At the intersection of Florida and New York Avenues NE, in an area with abandoned warehouses and vacant lots north of Union Station, GSA just completed a new headquarters for ATF. This is a symbolic gateway for a major route leading to downtown.
Immediately south of the ATF headquarters, is a major new lease for the Department of Justice and a proposed headquarters for the Equal Employment Opportunity Commission. This will generate three contiguous blocks containing more than one million square feet of federally occupied space.
In another part of the city, we are finishing our master plan to create a new headquarters for the Department of Homeland Security on St. Elizabeths West Campus in Southeast DC, across the Anacostia River. This is a $3 billion project, with up to a 4.5 million square foot of new and renovated historic space. It is generating a lot of excitement and is a tremendous opportunity to jumpstart the revitalization of this area of the city.
Finally, the same can be said of our 3 million square foot campus for the Food & Drug Administration at the White Oak Federal Research Center in Silver Spring. It will consist of 15 office and laboratory buildings at a cost of just over $1 billion dollars. It is scheduled for completion by 2012.
Our work at GSA is important, especially in these challenging economic times. It is also innovative and exciting. We are a leader in the real estate industry in general and certainly in the National Capital Region. We have a talented, hard-working and dedicated staff. And I am pleased, this afternoon, to profile our business and give you a sense of where we are headed. Thank you.