Brennan: u201cLos Angeles is the 10th largest market for GSA leases.u201d

LOS ANGELES—With as much as 1.5-million square feet of GSA or federal leases set to expire over the next two years, the GSA is launching AAAP, an online platform designed to ease the landlord application process for GSA tenants. AAAP has already been successful in Washington D.C., helping to pair government tenants with landlords who fit specific guidelines, and is positioned to do the same for L.A. landlords. Like many companies, the GSA is looking to consolidate its leased space and reduce per-person square footage, meaning many of these tenants will be looking to move to new locations. To find out about the program, the GSA landscape in L.A. and what GSA tenants want in an office space, we sat down with Joe Brennan, the managing director of JLL‘s government investor services group. Set the stage for the GSA leasing market in Los Angeles.

Brennan: Los Angeles is the 10th largest market for GSA leases, and the City of Los Angeles has 3.5 to 4 million square feet of leases. Over the next 2-and-a-half years, about 1.5 million square feet of those leases are rolling. In the world of commercial real estate, it is all about demand and how you capture that demand, and the GSA is the largest tenant in the country. The GSA is putting a program in place, the AAAP—which stands for Automated Advanced Acquisition Program—to help landlords capture these leases. What is the AAAP, and how will it help landlords?

Brennan: The AAAP program is an online vehicle for the landlord community to bid on federal work and to pursue federal leases. It allows you to submit a bid before the requirement even comes out. When the federal government has a requirement for your market, they can go to the AAAP program and look for the set of buildings that are compliant, and then go with the low bid. What that requires is education by the GSA, so that landlords know what to do. Then, you have to do the work and submit your property. Generally, it is for smaller leases than larger leases. Landlords have the opportunity to update the bid monthly. Why are there so many leases rolling over the next two years?

Brennan: Politics is the main driver. For example, there were a lot of leases struck when the stimulus hit, and you had growth across federal agencies. Those were leases that were struck five to 10 years ago. In the current market, Obamacare will drive some demand and the news about the VA will also probably drive some additional demand as well for new leases. In general, many companies are looking to consolidate, fitting the same amount of employees in a smaller space. Are government tenants looking to do the same?

Brennan: In this space you hear a lot about utilization rates. Especially in the last year-and-a-half, the government has been driving very hard to reduce those utilization rates per person by about 30%. That is the other side of why all of these leases are rolling. Traditionally, federal tenants renew most of the time, often staying in a space for 30 or 40 years. Now, when they go to reduce those utilization rates, the landlord loses their advantage because they are shrinking people down and redoing the whole space. That is an opportunity for other landlords to come in and bid. What are GSA tenants looking for in a space?

Brennan: There are really two things: the first threshold is compliance. When a federal tenant looks at a building, it has to fit in the box that they like. That may start off with location, because, frankly, a lot of these users just want tot be in the central employment area of the community. It also falls into categories like security and sustainability. It is mostly physical improvements. That is the first step. The next test is price. If you are compliant and you are the low bid, then you are in a good position to win the deal. How much less is a government tenant paying in rent?

Brennan: That can be a loaded question because most of the time, federal tenants will use their own lease document, and that is a federal contract. More often than not, that document will look for rents that are flat, as opposed to escalating rents. They also calculate their operating expenses differently—often they want everything full service. Generally they are paying the market rent, but they are also looking at good solid-B space.