EXCLUSIVE: GSA Real Estate Head Reflects On Accomplishments, Disappointments, The Future Of Federal Offices
Dan Mathews has spent the last three and a half years in charge of the largest real estate portfolio in the U.S.
As the head of the General Services Administration's Public Buildings Service, Mathews oversees the federal government's portfolio of owned and leased real estate that spans 376M SF across 9,600 buildings.
Mathews, a political appointee who will likely be replaced after President-elect Joe Biden takes office, spoke to Bisnow this week about the changes he has made to the GSA's real estate strategy and about the goals he wasn't able to accomplish that he hopes the next administration will prioritize.
A former congressional staffer for the House subcommittee that oversees the GSA, Mathews was appointed by President Donald Trump in July 2017. Mathews said his most significant accomplishment during his three and a half years as PBS commissioner was the money he saved taxpayers by changing the GSA's leasing strategy.
Roughly half of the agency's expenditures go to leases with private sector landlords, and Mathews said he was able to save about $4B over the life of the leases the GSA signed during his term.
"Where most of the savings were able to be achieved was through a better approach to the market," Mathews said. "We focused on long, firm-term leases when we knew we had requirements that were longer-term."
Before he arrived, Mathews said the GSA had a common practice of signing five-year leases. He said the GSA's lease terms now average over 10 years, giving the government better pricing and making the leases more valuable for landlords.
"That creates something of tremendous value for the market and for the government," Mathews said. "Our competition for those leases has gone through the roof, so we’re getting much better pricing and concessions."
The GSA tracks the pricing of its lease deals relative to the broader office market, and Mathews said it has made a substantial improvement. He said four years ago its deals averaged 4% below the midpoint of the market, and now they average 14% below market.
"That represents a huge cost avoidance, because we're getting better pricing," he said.
Mathews also said he was proud of the GSA's ability to respond to the coronavirus pandemic by pivoting parts of the federal workforce to remote work, keeping critical facilities open and keeping its ongoing construction projects on track.
"There was a lot of concern that our projects would stop and then they would go over budget, that we wouldn’t be able to keep facilities open that needed to be open," Mathews said. "We were able to manage all of that, and we aren’t seeing much budgetary impact because we were able to keep projects going, and we kept critical facilities open. And we did all of that while keeping our employees safe."
Mathews said he would have liked more time as PBS commissioner, because he had multiple goals that he wasn't able to accomplish during his three and a half years.
He said he had hoped to improve the GSA's ability to leverage private capital with deal structures such as ground leases and discounted purchase options.
"We very much had hoped that we would be able to have a greater use of public-private partnerships," Mathews said. "That would have required a different application of some budgetary scoring rules in the administration, and ultimately we were not able to get agreement within the administration as far as I would have hoped."
Mathews also said he was unable to get Congress to give the GSA full access to the money it needs to reinvest in its owned portfolio, a problem he said has spanned the last two administrations.
The rent the GSA collects from agencies in its owned portfolio goes into an account at the Treasury Department called the Federal Buildings Fund. Congress, for the last decade, has limited the GSA's ability to spend money from that fund to renovate its owned properties, Mathews said. He said the limitations have meant that $10B in collected rent has been unable to be reinvested into the portfolio.
"That's having a really profound negative effect on our ability to perform effectively with our owned portfolio," Mathews said. "Buildings get older every day, things break, you have to reinvest in those properties ... Our owned inventory is showing those strains."
He said this is the biggest challenge that the next administration's GSA leadership will need to address. If the Biden administration is also unable to get full access to the Federal Buildings Fund, he said the government's owned portfolio will no longer be sustainable.
"If that doesn’t happen, then there really aren’t that many choices that are available, that owned portfolio is going to have to shrink, because you can’t afford it with the access to capital that we have had for the last 10 years," Mathews said. "It is going to force, out of necessity, a further reduction of the owned portfolio, which means a greater portion of our portfolio will have to be in private leased facilities."
Mathews noted that a shift to more leased space is not necessarily a bad thing in today's market, given that high vacancy and tepid office demand gives tenants leverage to negotiate better deals.
"For office space in general, particularly right now in the markets were in, leasing is on sale," he said. "This is a buyer’s market."
When Trump came into office, the GSA had narrowed the search for a new FBI headquarters down to three locations in the D.C. suburbs. But the Trump administration canceled the search in July 2017, and in February 2018 it proposed a new plan to demolish and rebuild the headquarters on its current Pennsylvania Avenue site. That plan didn't receive the congressional approval necessary to move forward.
Mathews said there wasn't enough funding to execute the FBI headquarters relocation that the Obama administration had planned, in part because of a flawed strategy to exchange the Pennsylvania Avenue site with a developer that would build the suburban headquarters. Norman Dong, Mathews' predecessor as PBS commissioner, said on a Bisnow event last month that the exchange strategy overcomplicated the process.
"There was a massive shortfall between the expected value of the exchange, what Congress had appropriated and what a new headquarters would cost," Mathews said.
After the previous search was scrapped, Mathews said the FBI leadership drove the decision to pivot to a rebuild project on the existing site. He declined to comment on the involvement of Trump, who has publicly expressed interest in the project and said he thought the agency should stay on Pennsylvania Avenue.
"The new FBI leadership also wanted to take a look at the headquarters project since the previous procurement had collapsed, and they had some different ideas about location for some legitimate mission-related reasons," Mathews said. "Proximity to the Justice Department is probably one of the more significant ones."
The Trump administration has, in at least three instances, pushed relocations of federal agency functions away from the D.C. region to other parts of the country.
The U.S. Department of Agriculture in June 2019 announced plans to move two agencies from D.C. to the Kansas City region. The Department of the Interior in July 2019 revealed plans to move over 300 Bureau of Land Management jobs from D.C. to Colorado. And the FBI in August 2020 said it plans to move 1,500 employees and contractors to Alabama.
Mathews said these announcements don't represent a wholesale shift in strategy and are relatively small in the context of the full federal workforce. He also said the decisions came from the agencies themselves and not the GSA.
"They’re driven more by mission, and real estate is not driving those decisions," Mathews said. "It has more to do with the agencies, with the type of work they do and where their stakeholders are. If there are mission-related reasons for them to relocate, when they do go to less expensive markets, there could be a return on those investments on the real estate side."
As he looks ahead to the next administration, Mathews said the GSA will also need to think about the remote work trend brought on by the pandemic and how it will impact the government's real estate needs. He said the government had already been looking to cut the excess capacity in its real estate footprint, and the pandemic could spur a further reduction in its office needs.
"This massive experiment in telework that everyone’s doing with COVID is causing agencies to think differently about how to deliver their mission, and that has some significant impacts for federal real estate," Mathews said. "Because of what we’ve learned about how to operate with greater teleworking, I think there will be a continued downward pressure on the total square footage, and that will create opportunities to lower the total cost of federal real estate."