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Is It Better for the Government to Lease or Own?

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As part of its prevailing real estate strategy, the federal government is eschewing leases in favor of ownership to boost savings and efficiency. This approach aims to simplify a decision process that is complex for both public and private entities.

Simple return-on-investment calculations will often show it is less costly over the long run for agencies to own real estate than to lease it. In many cases, owning an asset specific to an agency's unique requirements may be the most efficient real estate solution.

But an optimal real estate strategy includes both owned and leased assets. Look at the private sector, where it is standard practice for companies with multiple locations to diversify assets across their real estate portfolios. This is a prudent approach.

For the federal government, individual asset-based decisions should fit within a broad portfolio strategy. A new white paper by JLL Public Institutions Group, a commercial real estate services firm, suggests five key considerations for any agency making real estate acquisition decisions:

  1. Relocation strategy options and flexible workplace solutions. The combination of constantly emerging technologies and the implementation of workplace strategies by the General Services Administration introduce opportunities to shrink the federal footprint and reduce operating costs. Agencies can take advantage of these opportunities through the nimble nature of leased properties, which can be more easily scaled than owned facilities.
  2. Vulnerability to shifts in market conditions and government missions. Leasing helps mitigate the risk of changing marketplace conditions. If a public service outgrows its relevance in a specific location, or if the agency providing a service needs to expand, it is much simpler and less costly to modify space across a leased portfolio than an owned one. Federal agencies should consider mirroring space decisions in the private sector, where corporations own key facilities that are less likely to change, such as headquarters campuses, and lease most regional and all satellite offices in locations that are more likely to experience changes.
  3. Incompatibility among some agencies or departments. Some people believe that the government should build more and larger facilities that house an ever greater number of agencies and employees at fewer locations. This strategy does not take into account the complications of consolidating government agencies with incompatible requirements. For instance, one agency requiring high levels of security need space that functions differently from an agency that requires public interaction.
  4. Additional occupancy responsibilities that come with ownership. The financial disparity in owning versus leasing is greatly reduced by the management and maintenance required to extend the life of a building. The administrative burdens that come with building ownership are handled by government staff and third-party service providers. In a lease, these services are administered by a landlord. In addition, the government assumes the effort and the risks associated with the cost, procurement and provision of facilities services.
  5. Value by leveraging longer-term lease requirements. Average federal renewal rates reveal that the government remains in place longer than private sector tenants. Longer occupancy leases of 10 years or more can capture some of the economics of the landlord’s reduced cost of capital as equity builds. Long-term leases will most certainly drive reduced lease rates, or beneficial concessions such as move costs or additional tenant improvement dollars, for federal agencies.

GSA’s portfolio is split approximately 50-50 between owned and leased space, a balance that is the result of multiple individual decisions and not just a top-down directive. The financial stewardship of GSA’s real estate assets, one of the largest portfolios in the world, is best served by a long-term strategy that balances the federal government’s capital costs and maximizes its flexibility.

These guidelines also apply to state and local municipalities, which are also working to create overarching portfolio strategies to make optimal real estate decisions.

Kevin Wayer and Barry Scribner are co-presidents of JLL Public Institutions Group, which specializes in commercial real estate services and investment management.

(Image via Basileus/Shutterstock.com)

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