The Government’s Big Real Estate Opportunity
Property should be a means to an end, and not an end unto itself.
Last year, the U.S. General Services Administration selected the Massachusetts Institute of Technology to redevelop the Volpe Transportation Center in Cambridge, Massachusetts. The development community had shown significant interest in the Volpe site, a sprawling campus of aging Federal buildings and abundant surface parking on 14 acres in the heart of Kendall Square. Recognizing how its low-density occupancy fell far short of highest and best use of this site, the government capitalized on its development potential by exchanging 11 acres to the highest bidder and consolidating its future occupancy on the three acres that will remain under federal control. With a deal that will ultimately yield $750 million in value, the Volpe example illustrates how the federal government can manage its real property portfolio with an eye towards unlocking its potential value. It also demonstrates the benefits of bringing the private market perspective to inform the federal portfolio management strategy.
Historically, the creative thinking reflected with the Volpe example seems to be the exception to the rule. There has been a general reluctance to shed vacant and underutilized federal properties for a variety of reasons—speculation about a future potential need, optimism about future funding to modernize these buildings, or the lack of a strong incentive to dispose of the asset. Moreover, if a facility was “in use,” the default was to keep it in the portfolio, regardless of its development potential, capital repair needs, or other options to meet an agency space requirement. Only in the absence of a program need would officials consider an asset’s disposition—a portfolio strategy often driven by the need to get rid of the junk in a yard sale fashion.
Instead of clearing out the junk, federal leaders can realize far greater benefit by engaging in a deeper analysis to identify those assets with strong underlying commercial value. They can then unlock that value in partnership with the private sector. Volpe is an excellent example of this principle, and there are others. There are properties in high-value markets with excess acreage that could be re-positioned to capitalize on the development potential. There are properties where the tenant agency derives no mission-related benefit of being on that high-value site. There are properties with such enormous capital repair needs where disposition of the asset makes the most economic sense for the government. What has been missing is a thoughtful evaluation of most productive use of federal property, consideration of other options to meet agency space requirements, and a willingness to do something different with the property when the economic benefits are compelling.
In the federal context, real estate should be a means to an end, and not an end unto itself. Those of us who have worked on the government side of real estate sometimes become too enamored with the size and complexity of the portfolio, focusing on the number of assets or the amount of square footage under our control. When we see this happening, we need to step back and ask what we are ultimately trying to achieve. Portfolio managers should recognize that their mandate is not to own real estate for the sake of owning real estate, but to support tenant agencies in fulfilling their program mission. Understanding this broader objective would allow for a more thorough consideration of options to meet the agency space requirement and would result in more effective property management.
The Federal Assets Sale and Transfer Act (FASTA) was enacted last December to help re-think how the government manages its real estate. By emphasizing the sale or redevelopment of underutilized high commercial value assets to obtain the highest and best value for the taxpayer, it compels the Federal government to look beyond the simple question of whether a property is in use, and consider instead its highest and best use in a commercial setting versus its more limited utility to the Government. Given the current mandate to reduce government spending, FASTA calls for a more thoughtful and strategic approach to unlock the underlying value in the federal real estate portfolio.
Numerous attempts in recent years to identify high-value properties for disposition have fallen far short of expectations. Our disappointment with these results comes from having asked the wrong question at the outset. The question should not be is a specific property is being used? but rather what is the most productive use of the property?
These lackluster results also reflect an overly-narrow perspective being brought to bear on the problem. Years of internal dialogue and debate about identifying properties for potential disposition have not translated into sufficient action. Alone, those responsible for managing the federal real estate portfolio do not have the depth of expertise to determine the most productive use for the thousands and thousands of real property assets. What has been missing is input and perspective from the private sector—local developers who have first-hand understanding of the market. Without more meaningful engagement with the private sector, the government will continue to struggle in managing its real property portfolio.
FASTA requires the government to release data on all government property by December. This increased transparency on federal real property holdings is long overdue. As the government finally pulls back the curtain to reveal its holdings, it should provide a more meaningful platform for the market to weigh in on the development potential of these assets. Doing so will help unlock the underlying value of these assets and refocus the discussion on what matters most—supporting agencies missions.
Norman Dong is a managing director at FD Stonewater and is the former commissioner of the U.S. General Services Administration, Public Buildings Service.