As illustrated in the graph below, the average age of buildings leased by GSA has hovered at or around 15 years through the 2000s. Yet, recently that figure has been trending older. The GSA leased inventory is aging. But why?
There are probably two primary drivers propelling this trend. The first is that GSA’s leasing corps has been leaning heavily on extensions, especially beginning in the latter half of the 2000s. According to a study we did of this a couple years ago, GSA reached the point where it was extending almost half of its leases short term (i.e. three years or less). Logically, these buildings are aging as the lease extensions wear on and statistically this is affecting the average age of the inventory on the whole.
The second driver is simply because there are very few new properties being built. This is especially true in the past few years as the pipeline of “lease-construct” (i.e. build-to-suit) projects has slowed to a trickle. Lease-construct projects are generally long-term (15 – 20-year) leased properties so they do much to counterbalance the remaining inventory of hundreds of buildings that are relentlessly aging year by year.
None of this should lead us to conclude that the leased inventory is hurtling towards obsolescence. The typical federal tenant offices in relatively modern buildings by most standards. That’s certainly true as compared to GSA’s owned buildings, which are almost 50 years old, on average, often further worn by years of deferred maintenance.
GSA’s aging leased (and owned) real property inventory is the logical by-product of federal austerity, the consequence of budgetary tightening applied in a largely futile effort to stem rising debt. This austerity has frozen many tenants in place as they plan and position for inevitable downsizing. These same budget pressures have also led to a prohibition against lease-constructs.
We expect the problem of extensions to ultimately taper. Agencies will eventually execute their workplace reconfigurations and, in many cases, relocate in the process–generally to newer buildings. So, the aging trend may begin to level off but unless the feds return to a robust build-to-suit program it seems unlikely to reverse itself.
The paradigm has shifted. The average GSA leased building today is 24% older than the average building in 2010. Property investors will need to come to grips with this as they evaluate future assets.
Note: For those of you wondering if the median or weighted average trends paint a rosier picture, they don’t. The age of the federal inventory, weighted by building RSF, largely mirrors the trend shown at top. Looking at median age, the aging trend is more pronounced.