| GSA Faces Challenges and Opportunities in Current Economic Recession |
 The economic recession is presenting the U.S. General Services Administration (GSA) with both challenges and opportunities in the leasing and development of office space, according to a representative for the Urban Land Institute (ULI). ULI Senior Vice President Dean Schwanke recently testified on the potential for GSA leasing and building activity during a hearing held by the U.S. House of Representatives Subcommittee on Economic Development, Public Buildings, and Emergency Management. The subcommittee is part of the U.S. House Committee on Transportation and Infrastructure. A possible obstacle for GSA in the current economic environment relates to the frozen credit markets, which likely will affect activity related to new development, Schwanke said. “Because of the lack of financing, it will be more difficult for developers to develop new buildings to meet specific GSA standards and requirements, although GSA is certainly a strong credit tenant for any proposed development deal. Also, the lack of new speculative buildings – which tend to be green and more energy efficient – will inhibit GSA’s ability to find the most technically advanced space of this type.” However, the economy has created advantageous circumstances for GSA within the existing building category, Schwanke explained. The availability and variety of office space is increasing as costs are decreasing, creating prime opportunities for GSA to rent premium space at relatively low prices. This year and 2010 "will certainly be a tenants market,” he said. “Rents and occupancy costs will decline or stabilize at attractive levels for several years, resulting in good times for leasing new space, or renewing and renegotiating leases on favorable terms.” He pointed out that in addition to leasing, attractive acquisition opportunities will present themselves in a transaction market in which there are distressed sellers and few buyers, giving GSA a competitive advantage. “GSA could potentially acquire high-quality, well-located office buildings for its own use at greatly reduced prices,” Schwanke said. As part of its acquisition activities, GSA could strengthen its role as a catalyst for the upgrading of older buildings to meet new standards for green buildings and energy efficiency, Schwanke said. “Retrofitting existing buildings to be green and energy efficient will move forward, as owners seek to make their buildings more competitive. They are looking for advantages in a difficult market that is increasingly demanding green building space.” Schwanke’s projections for GSA activity were based largely on an ongoing analysis of the commercial real estate market conducted by ULI as part of its Emerging Trends in Real Estate® publication series, co-published each year with PricewaterhouseCoopers. The latest research shows that declines in the commercial real estate sector as still in the early stages, and this sector “will likely see recessionary conditions well into 2010 and beyond,” Schwanke observed. A lack of liquidity in the financial sector is particularly severe for the commercial real estate sector, because it is a capital-intensive industry that relies on mortgages and debt to finance both development and ownership of properties, he noted. The financial crisis has “greatly reduced the appetite” of lenders and investors for any type of real estate lending, Schwanke added. “In general, the market faces continued downside risk in an extremely unsettled economic environment characterized by a global financial crisis, severe world recession, declining property values and fundamentals, and a crisis of confidence on the part of consumers, lenders, and investors. Because commercial real estate has been relatively late to enter the recession and typically lags the rest of the economy, any recovery will occur well after the housing sector and broader economy begin to recover.” |
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