The Government, The Market and The Government Market
Chad Knibbe, CCIM and Bethany Babcock
Known for its massive size and massive debt the U.S. Government is also the nation’s largest tenant. With more than 168 million square feet of leased space, the U.S. government is in the unique position to dictate its own leasing terms. With the creation of their own unique prospecting process for space and a lease unlike any other in the industry, the U.S Government is granted sway in the market due to its size as well as excellent credit ratings. Many landlords feel that because of this, they are at the mercy of their powerful tenant, residing to accepting the terms and the demands of their G.S.A (General Services Administration) representative. However, there are two things that alter that dynamic: the bureaucracy that accompanies any organization of this size and the Freedom of Information Act signed in 1966 by President Lyndon B. Johnson and most recently amended in 2007.
While the slow moving Government may be satisfied in dictating its own leasing terms and processes to accommodate their own sluggish pace, the reality is that this removes them from the normal market. The problem with distancing themselves from dynamic markets and entering a stagnant process-based market is that it substantially limits the number of would-be landlords to those who are willing to learn an entirely new set of rules surrounded by one tenant. In doing so, the Government has eliminated a significant share of the players and thus significantly reduced the competitive environment of leased space. The same holds true for government contracted build-to-suits as well as most other real estate related government contracts on state and municipal levels.
I can offer my personal experience as evidence of this. As a former property manager, the first government lease I worked on was for the State of Texas. I was contacted by the State procurement office because they had received no bids and needed someone to bid or they would be forced to remain in their existing space which none of the occupants wanted nor did the price merit they remain. Since the company I worked for already leased to other State tenants the state agency hoped we would understand the process and be willing to bid. No one in the company was familiar with the process as all of the current government tenants in the building, had been inherited with the purchase of the property. The leasing representative continued to call and told me that she would walk me through the lengthy paper work process. When the paper work was complete, and the bid was submitted, we heard back quickly that we had been awarded the contract. Once familiar with the process I began to bid on several municipal, state, and federal leases, each with their own entirely different processes. We were awarded the vast majority of the leases we pursued. This was in no way due to a special negotiating ability or skill. Instead, it was glaringly obvious I was one of very few players in a leasing market created by the government. It was easy to see that their intent in creating their own market had and would continue to work against them as the competition was limited and bidders sought to seek compensation for the cumbersome processes and subsequent tedious management of a government tenant.
The second component of government negotiations that gives landlords more control is the Freedom of Information Act and several similar acts for the state and municipal governments. These acts allow landlords to know nearly everything about the very limited competition including what lease rate, terms, and amenities are offered to the government. In fact the only thing that a prospective bidder wouldn’t know is who else is bidding and at what price. Although it is fairly easy to identify who else is likely to be bidding by identifying other government landlords in the area. You are then able to see what they are currently charging their other government tenants and come up with a reasonable estimate of where they might bid. Of course, nothing is stopping a new player from entering the market except lack of awareness of the opportunity and red tape.
All of this leads to an environment where the government ends up paying the highest price possible with the least amount of options (I imagine this is the opposite of what was intended). The Nation’s largest tenant also becomes the Nations least powerful when viewed in this context. All other players benefit from the competitive market. If this seems unreasonable consider that the average asking rents for office space in San Antonio are about $17.76 per square foot (LoopNet). The average rents the GSA pays for office space in San Antonio exceeds $20 psf, more than 12% higher than the average. The difference is even greater considering $17.76 is asking rent and effective rents are most likely much lower. The GSA reports that it renews 81% of its leases and stays in their current location over 25 years on average (see below) so these rental figures should be reversed. Unfortunately for tax payers this serves as evidence of what happens when the Government decides its size merits a market all its own.
Each government entity has its own unique process. For more information about leasing to the Federal Government here is a link to an informative article written by two GSA representatives in the CCIM magazine. http://cire.epubxpress.com/link/CIRE/2011/mar-apr/34?s=0
While the slow moving Government may be satisfied in dictating its own leasing terms and processes to accommodate their own sluggish pace, the reality is that this removes them from the normal market. The problem with distancing themselves from dynamic markets and entering a stagnant process-based market is that it substantially limits the number of would-be landlords to those who are willing to learn an entirely new set of rules surrounded by one tenant. In doing so, the Government has eliminated a significant share of the players and thus significantly reduced the competitive environment of leased space. The same holds true for government contracted build-to-suits as well as most other real estate related government contracts on state and municipal levels.
I can offer my personal experience as evidence of this. As a former property manager, the first government lease I worked on was for the State of Texas. I was contacted by the State procurement office because they had received no bids and needed someone to bid or they would be forced to remain in their existing space which none of the occupants wanted nor did the price merit they remain. Since the company I worked for already leased to other State tenants the state agency hoped we would understand the process and be willing to bid. No one in the company was familiar with the process as all of the current government tenants in the building, had been inherited with the purchase of the property. The leasing representative continued to call and told me that she would walk me through the lengthy paper work process. When the paper work was complete, and the bid was submitted, we heard back quickly that we had been awarded the contract. Once familiar with the process I began to bid on several municipal, state, and federal leases, each with their own entirely different processes. We were awarded the vast majority of the leases we pursued. This was in no way due to a special negotiating ability or skill. Instead, it was glaringly obvious I was one of very few players in a leasing market created by the government. It was easy to see that their intent in creating their own market had and would continue to work against them as the competition was limited and bidders sought to seek compensation for the cumbersome processes and subsequent tedious management of a government tenant.
The second component of government negotiations that gives landlords more control is the Freedom of Information Act and several similar acts for the state and municipal governments. These acts allow landlords to know nearly everything about the very limited competition including what lease rate, terms, and amenities are offered to the government. In fact the only thing that a prospective bidder wouldn’t know is who else is bidding and at what price. Although it is fairly easy to identify who else is likely to be bidding by identifying other government landlords in the area. You are then able to see what they are currently charging their other government tenants and come up with a reasonable estimate of where they might bid. Of course, nothing is stopping a new player from entering the market except lack of awareness of the opportunity and red tape.
All of this leads to an environment where the government ends up paying the highest price possible with the least amount of options (I imagine this is the opposite of what was intended). The Nation’s largest tenant also becomes the Nations least powerful when viewed in this context. All other players benefit from the competitive market. If this seems unreasonable consider that the average asking rents for office space in San Antonio are about $17.76 per square foot (LoopNet). The average rents the GSA pays for office space in San Antonio exceeds $20 psf, more than 12% higher than the average. The difference is even greater considering $17.76 is asking rent and effective rents are most likely much lower. The GSA reports that it renews 81% of its leases and stays in their current location over 25 years on average (see below) so these rental figures should be reversed. Unfortunately for tax payers this serves as evidence of what happens when the Government decides its size merits a market all its own.
Each government entity has its own unique process. For more information about leasing to the Federal Government here is a link to an informative article written by two GSA representatives in the CCIM magazine. http://cire.epubxpress.com/link/CIRE/2011/mar-apr/34?s=0