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Norm DongCommissioner - Public Buildings ServicePublic Buildings Service (PBS)
FY 16-17: Agency Priority Goal
Negotiate leased office space at or below market rates
Priority Goal
Goal Overview
The mission of the U.S. General Service Administration’s Public Buildings Service (PBS) is to provide effective, mobile, sustainable workplace solutions for federal agencies at the best value and service for the American people. PBS is one of the largest and most diversified public real estate organizations in the world. At the end of FY15, its portfolio consisted of 374.1 million rentable square feet (RSF) in 8,792 active assets across the United States, in all 50 states, 6 U.S. territories, and the District of Columbia.
GSA is using the Lease Cost Relative to Market (LCRM) measure to demonstrate value for the American taxpayer. Under the LCRM methodology, the net present value (NPV) of the life-cycle costs of GSA leases in the fiscal year signed for office space in major markets will be compared to the NPV of a market lease. The market lease rate is based on GSA’s Bullseye report, which combines respected nationwide commercial real estate sources. This metric covers all off-airport office leases that are located in markets covered by these national real estate market information sources.
This metric covers 42 percent of GSA’s current lease inventory which accounts for 70 percent of the total annual lease rent and 63 percent of total square feet. GSA will count the number of transactions at or below market, with the goal of having at least 55 percent of transactions at or below market.
GSA compares its deals to market costs in order to ensure it is getting the best deal possible for the American taxpayers. While the final comparison to market for this measure is based on post-award rates, a preliminary comparison to market is also run prior to lease award, allowing GSA to continue negotiations if rates are not competitive. By negotiating a majority of lease transaction below market rates, GSA is providing cost savings to our customer agencies and the American taxpayer. By focusing on the number of transactions that are below market, GSA is demonstrating its commitment to negotiate the best deal possible in every lease transaction.
Strategies
GSA strives to be below market in every transaction. Every transaction is unique and when comparing the GSA transaction, with government lease standards and requirements that often aren’t typical in the commercial office market, to a commercial market average, beating the market by being below the market average can be difficult. Because GSA is measuring how often it beats the market, a target of 55 percent of transactions below market is an ambitious target.
GSA seeks to engage early with customers in the planning process, as early as 60 months from expiration but, no later than 36 months; expand the delineated areas to enhance competition; gain a full understanding of requirements early and perform robust market analysis. GSA can achieve this metric through understanding the assessment methodology, strong negotiation objectives supported by market analysis and due diligence, well-defined project planning that provides for early negotiations and positions of leverage, and skilled negotiation tactics.
Progress Update
In FY16, GSA completed 49% (260 out of 529) of lease transactions, covered by this priority goal, below market rates. This did not meet our stated goal of 55% due primarily to the challenges of meeting customer space requirements and market data variation in challenging markets. To address our performance issues, GSA focused on improving training for our workforce, internal controls, and policy.
In FY16, PBS achieved the first milestone of the newly implemented Lease Certification Program. PBS exceeded expectations with 98% of Lease Contracting Officers achieving the Level I certification, including completion of a Harvard Business School negotiations course. This program will strengthen our workforce and foster improved lease negotiations which should result in lower GSA rates.
PBS also implemented a new internal performance metric that promotes competition in its lease actions. This new metric analyzes the follow-on action for expiring leases to ensure PBS is promoting competition. As part of our strategic portfolio reviews, individual projects are scrutinized to ensure we are promoting competition, longer lease terms, and alignment with economic catalyst priorities.
PBS also issued new guidance to better leverage GSA’s financial strength and lease acquisition authority. This guidance instructs the leasing community to use longer term leases, where appropriate. Longer lease terms can translate into lower rental rates because they reduce risk and allow for better financing terms. The market research reports which support each individual transaction were improved to identify transactions where longer terms may be appropriate.
Next Steps
In FY17, PBS will continue to focus on achieving better market rates through improved negotiations, increased competition, longer term leases, and early upfront planning.
To address market data variation, GSA is proposing to change the APG acceptability threshold for market rate comparison for a lease project to be considered successful. If approved, it will allow a transaction that is no more than ten percent above market to be counted as successful.
We will implement Phases II and III of our Lease Certification Program. All warranted lease contracting officers will need to certify completion of substantial additional education. Required courses are intended to impart an advanced knowledge of Real Estate Finance and Marketing, Cost and Price analysis, Appraisal, Leadership and Emotional Intelligence which will provide a comprehensive skillset relevant to improving lease negotiations. (Q4)
PBS is also committed to increasing competition for its leases to spur lower rates for its customer agencies. PBS will continue to have in-depth strategic portfolio reviews in which individual projects are scrutinized to ensure we are promoting competition, longer lease terms, and alignment with economic catalyst priorities. (Q2)
PBS will also continue to focus on leveraging its 20-year lease acquisition authority to negotiate, where appropriate, longer lease terms and therefore obtain lower rates. Additionally PBS will improve upfront planning by implementing new processes and policies. Better early planning provides more negotiating leverage to achieve lower rates.
Contributing Programs & Other Factors
Customer agencies in space leased by PBS contribute to the success of this measure. By providing timely requirements with lease terms and delineated areas that encourage competition, they enable PBS to be in a position to negotiate the most favorable rates compared to market.
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