‘Nobody Seems To Know’: Landlords Concerned Government Could Miss Next Rent Payment Amid Shutdown
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The government shutdown, now the longest in U.S. history, has some office owners worried their federal tenants might not make the next rent payment on time, potentially hurting their bottom line and creating lasting damage to the idea that the government is a stable tenant.
The General Services Administration, which makes the government's rent payments in arrears after the end of the month, has yet to give landlords a definitive answer on whether they will be able to pay January's rent amid the government's funding lapse. The GSA put a message on its website to landlords Jan. 11 seeking to address concerns it has heard.
"GSA ... is aware of concerns from the Lessor community regarding GSA's ability to make timely rent payments," the message said. "GSA is diligently exploring all available options to ensure its rental obligations are met in a timely manner."
That message does not appear to have inspired confidence in landlords of government-leased buildings and the brokers who represent them.
"There certainly is concern out there in the lessor community," Cushman & Wakefield Vice Chairman Darian LeBlanc said. "There doesn't appear to be clarity one way or the other about the January rent cycle, whether those wires will be received or not. Nobody seems to know."
Colliers Executive Vice President of Government Solutions Kurt Stout said he has also heard concern from landlords, and he expects it will worsen if the shutdown extends for multiple months. Given the public nature of the shutdown, he said building owners are having to answer questions from their lenders and other partners about what it means for government rent payments, and they don't have a clear answer.
"We're all left to speculate," Stout said. "But the reason the speculation is difficult is because this takes us deep into the budget machine in the government to understand what might happen, and I'm not entirely convinced the people at GSA have fully figured it out."
StonebridgeCarras Managing Principal Doug Firstenberg, whose company leased four building's in NoMa's Constitution Square complex to government agencies, said he has not received any clarity on the upcoming rent payment. StonebridgeCarras sold the buildings but still manages them on behalf of the new owners.
"We've been doing lots of digging and investigating as best we can, and the reality is we don't know if the government is going to be able to pay the rents that are due in early February," Firstenberg said.
Landlords and building managers still must meet their obligations on a property, Firstenberg said, such as real estate taxes and debt payments, whether or not they receive the rent payment from the government. This could pose a problem for some landlords, but Firstenberg said Constitution Square should be able to weather the storm.
"The good news is the capitalization of our buildings is extraordinarily strong, so we're in the enviable position of being able to address it," Firstenberg said. "But it doesn't make it any less painful that you may have to carry your own building when you have a long-term lease to the government and they don't pay the rent."
Many of the real estate owners with the largest GSA lease portfolios are public REITs, including JBG Smith, Easterly Government Properties and Office Properties Income Trust, the company formed by the recent merger of Government Properties Income Trust and Select Income REIT.
Green Street Advisors analyst Danny Ismail, who leads the firm's office sector, said the list of REITs with meaningful federal government exposure is small, and those companies haven't seen any noticeable changes in their stock price during the shutdown. But he said a missed rent payment could present a problem.
"If a REIT had meaningful exposure to the GSA and had large debt obligations to service, a delayed rent payment might be an issue," Ismail wrote in an email. "It doesn’t appear that’s the case for the vast majority of office REITs in our coverage list. It could be problematic for other owners of these properties if they were highly levered."
RBC Capital Markets analyst Michael Carroll, who covers Easterly and other REITs, said he is not concerned about the potential of one missed rent payment, because it would most likely be paid back with interest. But if the shutdown negotiations, which have made little, if any, progress, continue into March and beyond, he foresees serious problems.
"I don't think the risk is high, especially right now," Carroll said. "If the shutdown lasts a lot longer than anyone expects, in theory there could be risks down the road, but it's unclear how many months that would take, and it seems like an unlikely scenario."
Not all government landlords are large public corporations with billion-dollar balance sheets. Many smaller companies and investors own GSA-leased buildings and could be at risk, LeBlanc said.
"For some owners, one month of lack of payment could be problematic," LeBlanc said. "Every lessor that does business with the government is not a huge, deep-pocketed insurance company or REIT or private equity company. You have some smaller organizations and mom-and-pops that rely on the rent they collect monthly to meet the obligations they have."
A potentially larger problem if the government delays one or more rent payments, LeBlanc said, is damage to the perception of government-leased office buildings as the most stable type of office investments.
"Nobody is going to like it, because the one clear and compelling reason by investors to invest in buildings that are leased to the government is because the government is like clockwork when it comes to paying their bills," LeBlanc said. "The perception is leases with the government are the equivalent of government bonds or treasuries. If the government defaults on obligations, it may cause people to view that differently."
In addition to potentially delaying rent payments on existing leases, the shutdown could also push back any new lease commitments or searches the government planned to initiate.
One of the largest searches underway is for a new 1.3M SF headquarters for the Securities and Exchange Commission, which is currently housed in an office complex near Union Station. But there are dozens of smaller searches at various stages of the process in D.C. and throughout the country.
"I think any procurements that are being formulated or developed would be delayed, and any ongoing projects to the degree they require input from the government could be delayed," Stout said.
Brokers who represent the government in searches for new space continue to work, and due dates for bids on outstanding solicitations have not been pushed back. But GSA officers still often have to address questions during a process, and LeBlanc said they have been getting harder and harder to reach.
"There's been a definite drop in the pace at which the GSA has been addressing these projects," LeBlanc said. "More and more contracting officers have gone on furlough. If this continues, we'll certainly see a slowdown in the pace at which leasing business gets done in the National Capital Region and across the U.S."
The furloughs of GSA contracting officers did not begin immediately when the government shut down Dec. 21, LeBlanc said. But over the last two weeks, GSA furloughs have ramped up, he said, and now many officials are not able to participate in ongoing deals.
"Everybody's saying the same thing," LeBlanc said. "They're saying, 'Listen, we're furloughed. We can't field phone calls or respond to emails. We're not allowed to, so you're going to have to hang in there with us.'"