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Sign of the times: shorter leases

Sep. 9, 2012 - 02:52PM   |  
By ANDY MEDICI   |   Comments
Short-term leases are becoming more typical, according to the GSA.
Short-term leases are becoming more typical, according to the GSA. (Getty Images)

The General Services Administration is hoping to extend its 15-year lease for a 142,000-square-foot building in Lakewood, Colo., for the Interior Department — but only guarantees it will remain there for two years, according to the lease prospectus.

GSA is also proposing a new 10-year, 70,000-square-foot lease for the Treasury Department in Washington, D.C. — but reserves the right to cancel the lease after five years.

Shorter-term leases are becoming more typical, according to data from GSA, which serves as the leasing agent for most federal agencies.

The average term for a GSA-leased building was 8.2 years in fiscal 2011, less than half of the 16.7-year term in 2010. It is the lowest average in the 10 years GSA has tracked the data.

The number of leases GSA decided not to renew jumped from 6 percent in fiscal 2010 to 12 percent in fiscal 2011, the highest percentage since 2002.

Experts cite tighter budgets and uncertainty over future funding in the face of sequestration, the automatic budget cuts slated to take effect Jan. 2, as reasons for the shorter leases.

Agencies “are cash strapped and don’t know long they will remain that way,” said Kurt Stout, executive vice president for government solutions at real estate firm Colliers International. “They are struggling to commit.”

While GSA used to be interested in 10-year terms for its leases, it now is more interested in flexibility and shorter commitments, said Chris Roth, international director for real estate company Jones Lang LaSalle.

However, shorter lease terms could be counterproductive, as landlords hoping for a good return on their property may end up charging GSA more, Roth said.

“The agencies that struggle and have a lot of budget uncertainty that opt for shorter terms will end up paying more for their real estate,” Roth said.

Stout said GSA is not taking advantage of significant vacancies in the leasing market. It should be leveraging its clout by locking in longer-term leases at the lower rates building owners are willing to accept in the current market, he said.

The lack of construction funding also has led to fewer “lease-construct” projects — where agencies have a facility built for them in exchange for a usually decades-long lease to remain in the property, Stout said.

Congress slashed GSA construction projects from $894 million in 2010 to $82 million in 2011 and to $50 million in 2012.

GSA leasing activity is slowing overall. In fiscal 2010, leased space increased 3.8 percent — from 184.4 million to 191.4 million square feet. That increase slowed to 0.7 percent in 2011 — to 192.7 million square feet.

GSA did not respond to questions by press time.

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