Is the GSA Star Destined to be a White Dwarf?

Hint: There are Viable Alternatives to Sale-Leasebacks and Fire Sales.

The Trump Administration’s plan to sell off or otherwise dispose of roughly 50% (or more) of GSA’s federally-owned building inventory is a draconian solution to a long-standing problem. The argument for this solution is that the Public Buildings Service lacks the necessary capital to repair or modernize the aging owned inventory, which has an outstanding backlog of deferred maintenance in the billions---money that GSA will not get via the conventional appropriations process, so the plan is to sell off much of the inventory and lease whatever is needed in the absence of those properties.  Is this a wise approach?  Let’s step back and look at this issue from a few perspectives, starting with a longitudinal one. 

PBS has perennially struggled with underfunding of repairs and replacements; GAO has catalogued this in many reports over the decades beginning in the 1980’s.  Soon after I began my career at GSA in the late 70’s, the PBS National Capital Region held a conference, the theme of which was: “Managing in an Era of Diminishing Resources”.  From the conference title alone, we can see that not much has changed in 45 years.  

Some 20 years later, (still 25 years ago) as the PBS Chief Asset Officer, I was privileged to lead a group that developed The Portfolio Restructuring Strategy, an approach that, acknowledging this chronic underfunding, recommended that PBS be strategic and judicious with its capital: only invest in the “core” owned portfolio (determined by an asset “tiering” process) and dispose of the rest.  Up until then, the GSA approach was to catalogue all deficiencies in all buildings, and then direct money to the worst-off. The Restructuring Strategy was like a battlefield triage approach: we can’t save them all, so let’s make sure we attend to the ones that can keep our enterprise going (which, incidentally, also meant doing the greatest lease cost avoidance since the core portfolio consists of fully-occupied buildings in strong rental-rate urban markets).  PBS has followed this approach only haltingly---as in by fits and starts--- over the succeeding decades.  

Part of the internal PBS resistance to the Restructuring Strategy was the mindset---decades in the making---that the buildings themselves are the client, not the end-user occupant agencies.  This sentiment is deeply embedded in the PBS ranks, not only among the historic preservation officers, but also the engineers and architects, the property managers, and even some asset managers.  It is an enduring view of many in PBS that their job is principally one of custodial management, although they’d characterize this in a far more noble light, as protectors and defenders of a well-maintained set of iconic owned buildings.  And the caretaker focus, for some, took precedence over client agency need for the properties. 

But to return to the Restructuring Strategy: what underpinned this triage approach was an important fact: that about 20% of the owned portfolio was responsible for about 80% of PBS Funds from Operations (FFO).   If the current Administration’s plan is to preen the owned building inventory of much of the non-core assets---the ones that are in poor condition, have high vacancy, and throw off anemic rental rates (because, in part, they are in low-cost markets), then that is exactly what the Portfolio Restructuring Strategy preached 25 years ago.  But selling now, into a down market, is not a sagacious move, even if in some cases, as with brutalist buildings constructed in the 60’s, the improvements likely should be razed and only the land value is at question. But land values are generally off as well when markets are challenged. More importantly, it is not wise to sell off the core assets---the properties that undergird the viability of PBS and the Federal Buildings Fund and which avoid the greatest amount of leasing cost.  And certainly it makes no sense to sell off new buildings, such as the Volpe Center in Cambridge, MA (construction was completed in 2023), yet that building appeared this past week in the list of assets GSA designated as “non-core” (before the entire list was quickly taken down.)

But there’s another perspective to examine as well.  A fundamental premise of the GAO reports, and GSA’s own reckoning of its building condition assessments, is that a long-cited National Academy of Sciences finding is correct: that a responsible owner should be reinvesting each year (on average) approximately 2 to 3 percent of the building’s value to keep it in good repair (exclusive of tenant improvements). GSA was never able to do this level of reinvestment. What I’ve found is that no one else does either.

During my 15 years in the private sector, from my own direct analysis and from discussions with industry peers, and review of industry literature (which assigns the lion’s share of CapEx to periodic tenant improvement refreshes), I’ve come to the conclusion that the rate of capital reinvestment among private sector corporate owners for base building systems and components is approximately .25% to .50% (one quarter to one half of one percent). This is roughly one tenth to one fifth of the National Academy of Sciences prescription.  This is not altogether surprising: private sector landlords maximize profits and to that end, only do the level of reinvestment needed to extend economic life and keep vital property components and systems in good working order.  Again, from my reconnaissance, the private sector reinvestment range is a small fraction of what the NAS calls for.  

With this understanding, a few questions present themselves: is the government attempting to hold itself to a reinvestment standard that no one else actually follows?  Are the PBS federally-owned buildings in such a decrepit state that they are either a threat to life/safety or uninhabitable in terms of simple creature comfort?  When looking at the sum total of repair and replacement needs (a deliberately exhaustive accounting of property deficiencies) there is a precipitous shortfall compared to available funding, but what is the difference between what is essential to do, vs. nice to have?  And let’s not forget that PBS has been spending regularly, year after year, hundreds of millions of dollars on elevator upgrades, fire suppression and alarm systems, HVAC and roof replacements, and other vital building systems maintenance items. Several PBS core portfolio office properties have, in fact, been modernized in whole or in large part.  What I’m suggesting is that perhaps the need to dispose is not as exigent as it might appear by merely looking at a facility condition index figure. 

But equally important: we hear talk of radical change to Government accounting rules: of jettisoning OMB Circular A-11 Appendix B, or at least a major rewrite.  In that vein, if this Administration wants to retool accounting treatments, then, rather than dispose of so many owned buildings, why not look at changing the rules so that the government can, without earning the moniker of “capital leases”, occasion reinvestment in its owned inventory without having to part with the buildings?  In other words, allow PBS to enter into long-term ground-lease/leaseback arrangements so that private sector capital is harnessed to modernize some of these facilities, but title remains with the government. ESPC’s---Energy Savings Performance Contracts---are in effect, this same approach, in a microcosm: using private sector capital for improvements to federal buildings that are financed over time.  

During my tenure in government, one of the most vexing aspects of the lease scoring rules was that they enabled private-sector capital formation (all collateralized by GSA’s firm term lease payments) but only for privately-owned properties.  If this Administration is unafraid to “move fast and break things” then perhaps they’ll revisit the wisdom of excluding  federally-owned properties from enjoying capital reinvestment, collateralized by a long-term government space lease.  That would truly be a game-changer, and it wouldn’t entail the fire-sale of federal building stock that, if retained, has the potential to save billions of dollars over time, through continued occupancy of federally-owned properties rather than privately leased real estate.  

Ron Kendall, Emeritus Chair of NFDA, is a former career federal civil servant. The views expressed in this article are his alone.  He can be reached at: [email protected]