When leasing is the practical answer to meeting federal space needs, the U.S. General Services Administration (GSA) comes in to identify and lease properties for government workers. This may include buildings, land, antenna sites, etc. With speculation rising about potential federal spending cuts under the incoming Trump administration, S&P Global Ratings looks at the characteristics of the GSA's external office lease portfolio, and reviews the U.S. commercial mortgage-backed securities (CMBS) market's exposure to it.

GSA External Office Lease Portfolio Characteristics

All told, as of October 2024, the GSA leased roughly 150 million sq. ft. of office space across nearly 7,000 individual leases, with a total cost of approximately $5.5 billion per annum. Over the last decade, the average space per lease remains in a tight range of about 21,000 sq. ft. (see chart 1).

Chart 1

GSA's external lease portfolio has been on a steady decline overall since 2015

GSA's external lease portfolio has been on a steady decline overall since 2015 (see table 1). Specifically, while the GSA leases space across the U.S., roughly 31% of their obligations are located across markets in Virginia, Maryland, and the District of Columbia, down from 34% in 2015, a compound annual growth rate of -2.17%. The GSA's U.S. footprint has declined at a slower rate of -1.13% during the same period, on a compound annual basis. For additional perspective, the GSA's U.S., and D.C./Virginia/Maryland leasing footprints have declined, 1.6%, and 2.12%, respectively, between 2019 and the present, while the GSA's D.C. footprint has declined at an even faster 3.41% rate since 2019.

Table 1

Terminable space - lease expirations and termination options

In a significant percentage of cases, GSA leases are structured with a termination option prior to the stated expiration date of the lease. Therefore, we can analyze the proportion of space that could conceivably be terminated or not renewed during the incoming administration's term (see table 2).

Table 2

Thus, we see that over half of the portfolio is available to "roll" through the end of 2028. In dollar terms, the figures are not much different; the cumulative expiring/terminable lease total through the end of 2028 is just under half (approx. 49%) of the current spend.

GSA commercial lease agreements with private lessors

Based on our understanding, the GSA generally enters into a lease obligation with a private real estate lessor, then in turn enter into an occupancy agreement with a government agency who intends on occupying the leased space. While the leases between the GSA and the private lessor may vary in terms, specifically relating to termination rights, the occupancy agreements with the agencies appear to generally provide the occupying agency the right to cancel the agreement with the GSA provided four months' notice, so long as the lease was not designated as non-cancellable by the GSA. While we are not able to quantify the cancellable exposure, it is worthwhile to consider given the below summary of the GSA's notable exposures across the CMBS universe.

U.S. CMBS Exposure

We conducted an analysis to find the U.S. CMBS market's exposure to GSA's external office lease portfolio. Our analysis included a review of loan- and property-level data sourced from Trepp, focusing on office loans across outstanding conduit, single-asset single-borrower (SASB), large loan, and commercial real estate collateral loan obligation (CRE CLO) transactions, and the underlying collateral tenants with respect to government agency leasing exposure. The data set was comprised of 704 transactions across conduit (495 transactions), SASB (140), large loan (17), and CRE CLO (52) (see table 3). In total, the data set included 3,947 unique office loans, of which, we've identified 169 loans, secured by 280 properties, with exposure to one or more government agencies as a top five tenant across the collateral properties. Of the 704 transactions, 142 have been identified as having exposure to government agency tenants, of which 45 are rated by S&P Global Ratings.

We focused on the following government agencies, along with a general GSA filter, to find the exposures: U.S. Postal Service, Department of Veterans Affairs, Internal Revenue Service, Customs and Border Patrol, Department of Agriculture, Department of Homeland Security, Food and Drug Administration, Drug Enforcement Agency, Federal Emergency Management Agency, and Federal Bureau of Investigation, among others.

Table 3 shows a breakdown of the GSA office loan exposure by transactions in our review.

Table 3

The GSA exposure across active CMBS loans secured partially or entirely by office collateral, as categorized by TREPP, appears to be limited in relative terms across the conduit fusion space, though transaction exposures do vary. We've observed a small number of SASB transactions with notable exposure to the continued performance of the external GSA leases, totaling $1.6 billion in outstanding principal balance (see table 4).

Table 4

Single-tenant GSA conduit exposure

We observed seven loans secured by six unique office properties across seven conduit transactions whose collateral is occupied by a single GSA tenant. In particular, the Loma Linda property is the most notable loan exposed to single-tenant GSA risk, leased entirely to the Department of Veterans Affairs through May 2036, currently securitized on a pari-passu basis across gs17gs7 and gs17gs8, accounting for 7.8% and 5.2% of their respective transaction balances (see table 5).

Table 5

Other conduit loans with GSA exposure

We observed 20 loans collateralized by properties leased to one or more GSA tenants that occupied greater than 25% of the net rentable area. The largest exposure across the sample is Constitution Center, currently securitized across five conduit transactions. The Constitution Center property, located at 400 7th Street Southwest, Washington, D.C., is leased to several tenants, including the FHFA and GSA, accounting for 938,550 sq. ft., roughly 66.6% of the net rentable area (see table 6).

Table 6

Worth Keeping An Eye On…

With many office markets grappling with higher vacancies, we believe this corner of the market is worth keeping an eye on, as potential spending cuts on leases could work to reduce demand and increase availability, exacerbating the challenges already facing the office sector.

The Washington D.C. office market stands out given its challenged market metrics--reporting vacancy and availability rates for 3-5 star office properties of 18.7%, and 22.2%, as of December 2024, according to CoStar--and its exposure to the GSA. The below excerpts from the GSA's fiscal year 2025 Congressional Justification for the Federal Buildings Fund document indicate increased likelihood of continued right-sizing of government-leased space, with the possibility of acceleration under the new administration.

• "The budget request proposes sound, cost-effective investments to address the growing backlog of critical building life-safety and infrastructure needs, enhance federal facilities climate posture and resiliency, reduce the costs of maintaining federally owned facilities, and reduce the government's reliance on costly leases. It also positions the GSA to respond to this historic opportunity to right-size the federal footprint, reduce long-term real estate costs, and meet future workspace needs of Federal agencies and the public they serve."
• "Modernizing federally owned facilities will enable GSA to consolidate and reduce the federal government's heavy reliance on space leased from private lessors, which will provide cost avoidance many times over."
• "GSA and occupant agency alignment around the opportunity to transform GSA's current real estate portfolio into one that is high performing, more efficient, and physically smaller than today's portfolio has never been better, with the opportunity to generate substantial savings to the taxpayers. Increased workplace flexibility, taken together with the fact that approximately 80 million rentable square feet of leased space is expiring in the next five years, illustrate how this budget request and others in the near future will determine the makeup, condition, size, and functionality of tomorrow's portfolio of properties."

We will continue to monitor the incoming Administration's rollout of its policies and the impact on rated CMBS transactions.