Over 7M SF Of GSA Lease Expirations This Year Create Opportunities For Vacant Buildings

The federal government occupies more than a third of all the real estate in D.C., and it has a massive pipeline of incoming lease expirations that could help landlords fill the District's record-high amount of vacant space.

The General Services Administration has 7.5M SF of D.C.-area lease expirations this year, and another 7.7M SF in 2021, according to a Cushman & Wakefield report, meaning the agency needs to execute renewal or relocation deals for more than half of its leased footprint in the coming years. 

Rising construction costs make it unlikely the GSA will pursue new development for agencies with lease expirations, experts say, and the government's cap on rent prices limits the options for existing space it will be able to pursue. 

"The most important thing for the GSA in 2020 is for them to actually get out in front of their expiring leases, particularly as it relates to larger leases in the inventory that are going to be expiring in 2020 and into the first half of 2021, and their ability to address those in a timely way," said Cushman & Wakefield Vice Chairman Darian LeBlanc, a top government leasing broker. 

GSA Public Buildings Service Commissioner Dan Mathews, speaking at a November Bisnow event, said the expiring leases will be the agency's main focus this year, and it will look to execute deals with longer terms to get better pricing for the government. 

"Next year we have a number of really large leases that are either in procurement or will be going to procurement," Mathews said. "There are a lot of leases expiring over the next few years. What’s really going to be different than in [the] past is we’re going long-term."

Below is a list of some of the GSA's major lease expirations in the coming years, according to Cushman & Wakefield and publicly available prospectus filings. 

• The State Department's 390K SF lease at 2025 E St. NW expires June 30. 
• The Social Security Administration has two leases in Falls Church and Alexandria totaling 366K SF with expirations in 2019 and 2022. 
• The Department of Education's 290K SF lease at 550 12th St. NW expires this year. 
• The Small Business Administration's 270K SF lease at 409 Third St. SW expires in November. 
• The Department of Veterans Affairs is seeking 217K SF to replace three separate leases at 1800 G St. NW, with expirations from 2019 to 2027. 
• The Department of Justice's 180K SF lease at 375 E St. NW expires in April 2021. 
• The Department of Health and Human Services is seeking 172K SF, with a 2021 lease expiration at 200 C St. SW. 
• Many of the GSA's large upcoming D.C. lease expirations are expected to lead to renewals, because there are limited options for large enough blocks of space with a rental rate that fits under the government's cap of $50/SF. 

"I think we’ll see the government renewing at a much more frequent pace than they have at any time in the last decade," LeBlanc said. 

A lack of large options exists despite the D.C. market struggling with office vacancy at record highs. Cushman & Wakefield Vice President of Research Nate Edwards, who authored the firm's GSA Leasing report, said there is a gap between the rents most downtown landlords hope to achieve and what the government is willing to pay. 

"There is a pretty significant disconnect between the amount of leases rolling and the options that are existing or under construction," Edwards said. 

Edwards did identify a handful of buildings that could accomodate GSA requirements, many of them being former GSA-occupied properties that the government recently vacated in submarkets outside the downtown core. The options include three buildings in Southwest D.C., two in NoMa, two in the East End and one in Capitol Riverfront.

"The majority of these leases will likely be looking to more value options going forward," Edwards said. "That’s pretty good news for existing landlords that lease space to GSA. We’ve seen the government start to backfill recently vacated, prior-occupied GSA space as well as the Class-B market in parts of town, many of which have seen vacancy increase."

Many office buildings in those Class-B markets have lost private sector tenants to newer Class-A and trophy assets, and Edwards said the GSA needing to rent affordable space should help improve those markets. Landlords deciding between significant renovations to compete for Class-A tenants or maintaining a building's value to vie for a government agency may want to consider the latter, Edwards said. 

"Going after these upcoming GSA expirations is probably a pretty good strategy," Edwards said. "It’s looking better today than it has in a long time."

While landlords of existing Class-B buildings may have an advantage, owners of developments sites looking to land GSA build-to-suit deals may have a tough time, Edwards said, because construction has become too expensive to accommodate federal budgets. 

"The real change we think we see as we look forward in the GSA world is that the new construction options that have provided relief for large government requirements are really no longer going to be in as much play as they have been in past years because of rising construction costs," Edwards said.

The only way the federal government can make new construction a viable option again, Edwards said, is to increase its rent caps. He thinks the government will likely realize that increasing its rent caps is a necessity to retain its leverage in the market, and he expects the GSA to do so incrementally. 

Mathews said at the November Bisnow event that he still thinks new construction is possible for the GSA. It has signed at least two new construction leases in recent years, the Transportation Security Administration's 625K SF headquarters in Springfield and the U.S. Citizenship and Immigration Services' 525K SF deal in Prince George's County. 

But Mathews said he is not sure how long new construction will remain an option, and he said increasing rent caps is on the table. 

"At some point if [new construction] is no longer possible, Congress would probably react," Mathews said. "The value proposition we have is consolidation, and that often requires a large block of space, so Congress may respond with raising caps if that becomes necessary."