BRAC, DEMOCRATS, AND SECURITY STANDARDS
We thought it was time for a federal update—we intend to pay more attention to this field. So we've turned to Kurt Stout ofGrubb & Ellis, who's long immersed himself in it: first as head of Washington-Baltimore research for 12 years, then starting in 2002 as a broker. (12 months laterGWCAR named him Rookie of the Year.) Today he has a national practice representing agencies such as FDIC and the Postal Service, as well as landlords such as Beacon, Brookfield Properties, andWashington Real Estate Investment Trust. Originally from Springfield, Illinois, he moved to DC in first grade when his mom got a job working in the social secretary's office at the Nixon White House. And, we're delighted to say, Grubb is a Bisnow sponsor. We took the picture above the other day at one of Kurt's favorite haunts, Primi Piatti.
What's the current status of BRAC?
I think the only politically correct answer is that it is "in progress."?Unless amended, it's a law that has to be implemented by September 2011. But it's hugely ambitious: 23,000 DoD employees need to move out of leased space in Northern Virginia, mainly Arlington, and they'll be relocating to military bases. The problem is that the buildings to house them haven't been constructed, so there is a ton of work to be done in a very short period.
Rumsfeld's departure doesn't change things?
He was the architect of this BRAC round, and with his departure some are thinking that maybe scope will be reduced. It's all speculation. And the real driver is DoD security standards. Arlington has weathered past BRACs, because DoD has always found good reason to grow near the Pentagon. But the new security standards make it impossible for DoD to occupy buildings in an urban environment.?So, unless the security standards change, vacancies will occur. All BRAC did was speed up the process.
How's a Democratic Congress going to affect the leasing market?
In the near term, you won't see a lot of change.?Large leases require prospectus approval which is a process that usually takes at least 18 months.?So the large transactions you'll see over the course of this year have their roots in the prior Congress. That said, the fastest growing agencies since 9/11 have been DoD, FBI, DHS and the intelligence community.?These agencies spend lots of procurement dollars so federal contractors have grown in tandem in their space needs.?The vast majority of this growth has been in Northern Virginia. Now that procurement spending in these areas is expected to slow, so will the growth of the Northern Virginia market.
How about Maryland?
That's the flip side. We're expecting increased funding for biotech and bioterrorism solutions, and these could definitely mean a boost to suburban Maryland. On the whole, though, the feds are still operating with a deficit budget, so substantial net growth among rank-and-file agencies is unlikely.
Is the federal government generally viewed as a good tenant? Do they pay their bills on time?
Absolutely.?Heck, they even use direct deposit. This is definitely in contrast to the private sector, where high profile firms like Enron and MCI can go from blue chip to bankrupt in the course of a lease term. And not only does Uncle Sam provide unbeatable credit, but once they move in, the government usually doesn't leave.
But they run competitions?
Yes, each time a lease expires. But the incumbent landlord usually has a big advantage because the GSA adds onto the other bids the cost of moving and building out new space.?This so-called "relocation and replication" advantage creates an inertia that is really attractive to government-leased property owners.? But tenancy-for-life isn't guaranteed, and there are some new regulations changing the playing field.
New regulations such as?
There are many, but probably the most significant are the security standards which were enacted in 2005 that are now being implemented. All government leases larger than roughly 150,000 square feet must provide for features like blast resistant window film, magnetometers and x-ray machines in the lobby, controlled parking, and dedicated HVAC systems for the lobby, mailroom and loading docks. DoD has its own security standards which are even more stringent because, in addition to everything above, they also require that the building have a minimum 82' setback, that the property perimeter be controlled, and that the building structure be designed to prevent progressive collapse.
What does this mean for property owners?
Actually, in a multi-tenant building, it can be difficult, if not impossible, to institute these standards, if for no other reason than the other private-sector tenants won't put up with it. Also, the financial implications of these costs need to be anticipated early on: They could be large enough to trump the "relocation and replication" advantage in bidding competition.
Any big transactions around here expected in '07?
Yes, DoJ has a substantial consolidation program in the works. It's considering the old DoT building that will be undergoing radical renovation. The government's procurement process makes it difficult to do build-to-suits, and there are not a lot of large standing buildings in a city with single digit vacancy rates that can accommodate transactions that size. So that's why they have their eye on it. Peace Corps and the Department of Agriculture are also planning consolidations.