[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
            THE SERIOUS COMMERCIAL REAL ESTATE CREDIT CRUNCH 
                AND THE GENERAL SERVICES ADMINISTRATION: 
             LEASING AND BUILDING DURING AN ECONOMIC CRISIS 

=======================================================================

                                (111-16)

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
    ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND EMERGENCY MANAGEMENT

                                 OF THE

                              COMMITTEE ON
                   TRANSPORTATION AND INFRASTRUCTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 2009

                               __________

                       Printed for the use of the
             Committee on Transportation and Infrastructure

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48-328 PDF                       WASHINGTON : 2009 

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             COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE

                 JAMES L. OBERSTAR, Minnesota, Chairman

NICK J. RAHALL, II, West Virginia,   JOHN L. MICA, Florida
Vice Chair                           DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon             THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois          HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of   JOHN J. DUNCAN, Jr., Tennessee
Columbia                             VERNON J. EHLERS, Michigan
JERROLD NADLER, New York             FRANK A. LoBIONDO, New Jersey
CORRINE BROWN, Florida               JERRY MORAN, Kansas
BOB FILNER, California               GARY G. MILLER, California
EDDIE BERNICE JOHNSON, Texas         HENRY E. BROWN, Jr., South 
GENE TAYLOR, Mississippi             Carolina
ELIJAH E. CUMMINGS, Maryland         TIMOTHY V. JOHNSON, Illinois
ELLEN O. TAUSCHER, California        TODD RUSSELL PLATTS, Pennsylvania
LEONARD L. BOSWELL, Iowa             SAM GRAVES, Missouri
TIM HOLDEN, Pennsylvania             BILL SHUSTER, Pennsylvania
BRIAN BAIRD, Washington              JOHN BOOZMAN, Arkansas
RICK LARSEN, Washington              SHELLEY MOORE CAPITO, West 
MICHAEL E. CAPUANO, Massachusetts    Virginia
TIMOTHY H. BISHOP, New York          JIM GERLACH, Pennsylvania
MICHAEL H. MICHAUD, Maine            MARIO DIAZ-BALART, Florida
RUSS CARNAHAN, Missouri              CHARLES W. DENT, Pennsylvania
GRACE F. NAPOLITANO, California      CONNIE MACK, Florida
DANIEL LIPINSKI, Illinois            LYNN A WESTMORELAND, Georgia
MAZIE K. HIRONO, Hawaii              JEAN SCHMIDT, Ohio
JASON ALTMIRE, Pennsylvania          CANDICE S. MILLER, Michigan
TIMOTHY J. WALZ, Minnesota           MARY FALLIN, Oklahoma
HEATH SHULER, North Carolina         VERN BUCHANAN, Florida
MICHAEL A. ARCURI, New York          ROBERT E. LATTA, Ohio
HARRY E. MITCHELL, Arizona           BRETT GUTHRIE, Kentucky
CHRISTOPHER P. CARNEY, Pennsylvania  ANH ``JOSEPH'' CAO, Louisiana
JOHN J. HALL, New York               AARON SCHOCK, Illinois
STEVE KAGEN, Wisconsin               PETE OLSON, Texas
STEVE COHEN, Tennessee
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
DONNA F. EDWARDS, Maryland
SOLOMON P. ORTIZ, Texas
PHIL HARE, Illinois
JOHN A. BOCCIERI, Ohio
MARK H. SCHAUER, Michigan
BETSY MARKEY, Colorado
PARKER GRIFFITH, Alabama
MICHAEL E. McMAHON, New York
THOMAS S. P. PERRIELLO, Virginia
DINA TITUS, Nevada
HARRY TEAGUE, New Mexico

                                  (ii)

  


 Subcommittee on Economic Development, Public Buildings, and Emergency 
                               Management

           ELEANOR HOLMES NORTON, District of Columbia, Chair

BETSY MARKEY, Colorado               MARIO DIAZ-BALART, Florida
MICHAEL H. MICHAUD, Maine            TIMOTHY V. JOHNSON, Illinois
HEATH SHULER, North Carolina         SAM GRAVES, Missouri
PARKER GRIFFITH, Alabama             SHELLEY MOORE CAPITO, West 
RUSS CARNAHAN, Missouri              Virginia
TIMOTHY J. WALZ, Minnesota           MARY FALLIN, Oklahoma
MICHAEL A. ARCURI, New York          BRETT GUTHRIE, Kentucky
CHRISTOPHER P. CARNEY,               ANH ``JOSEPH'' CAO, Louisiana
Pennsylvania, Vice Chair             PETE OLSON, Texas
DONNA F. EDWARDS, Maryland
THOMAS S. P. PERRIELLO, Virginia
JAMES L. OBERSTAR, Minnesota
  (Ex Officio)

                                 (iii)











                                CONTENTS

                                                                   Page

Summary of Subject Matter........................................    vi

                               TESTIMONY

Morris, Samuel, Assistant Commissioner, Office of Real Estate 
  Acquisition, Public Building Service, General Services 
  Administration.................................................     5
Purtell, Richard, Chair and Chief Elected Officer, BOMA 
  International..................................................    26
Schear, Mitchell, D.C. Downtown Business Improvement District....    26
Schwanke, Dean, Senior Vice President, The Urban Land Institute..    26

          PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS

Carnahan, Hon. Russ, of Missouri.................................    40

               PREPARED STATEMENTS SUBMITTED BY WITNESSES

Morris, Samuel...................................................    41
Purtell, Richard.................................................    63
Schear, Mitchell.................................................    71
Schwanke, Dean...................................................    80

                       SUBMISSIONS FOR THE RECORD

Morris, Samuel, Assistant Commissioner, Office of Real Estate 
  Acquisition, Public Building Service, General Services 
  Administration, responses to questions from the Subcommittee...    44
Purtell, Richard, Chair and Chief Elected Officer, BOMA 
  International, responses to questions from the Subcommittee....    69
Schear, Mitchell, D.C. Downtown Business Improvement District, 
  responses to questions from the Subcommittee...................    77
Schwanke, Dean, Senior Vice President, The Urban Land Institute, 
  responses to questions from the Subcommittee...................    86

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



   THE SERIOUS COMMERCIAL REAL ESTATE CREDIT CRUNCH AND THE GENERAL 
SERVICES ADMINISTRATION: LEASING AND BUILDING DURING AN ECONOMIC CRISIS

                              ----------                              


                         Friday, March 20, 2009

                  House of Representatives,
    Committee on Transportation and Infrastructure,
Subcommittee on Economic Development, Public Buildings, and 
                                      Emergency Management,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 2167, Rayburn House Office Building, Hon. Eleanor Holmes 
Norton [Chair of the Subcommittee] presiding.
    Ms. Norton. This hearing will come to order. The Ranking 
Member is on his way and has suggested we proceed. We will 
certainly ask him if he has an opening statement when he comes.
    Before I begin, I do want to indicate that the staff 
director, whom many of you know, is not here today because her 
mother passed last night, and so she is on her way, on a plane, 
to a funeral. I know all of us would want to offer our deepest 
condolences on the loss of a mother from our staff director, 
Susan Brita.
    I welcome today's witnesses to the Subcommittee hearing on 
the tightening credit market for leasing and construction.
    As we are all aware, the current credit market originated 
in the subprime mortgage crisis and combined with exotic 
investment instruments and nonexistent or poor regulation, that 
then conflated with a bevy of other factors to spread like a 
virus and bring down major aspects of our entire economic 
system. What resulted was an all-consuming global economic 
crisis that has trapped even those, like the commercial leasing 
and construction sectors, which had nothing to do with 
precipitating the crisis.
    Today, we will build on the hearing the Subcommittee held 
in July of 2008 that examined the economic factors affecting 
Federal leasing and construction in the Federal marketplace.
    We examine the commercial-sector market because the General 
Services Administration is perhaps the largest customer for 
office space in the real estate market in the United States. 
Moreover, the agency now has $1 billion to construct the first 
of three buildings in the Department of Homeland Security 
complex, the largest development in GSA's history.
    GSA's ties to the commercial market are clear from its role 
in leasing alone. GSA leases slightly more space than it owns, 
approximately 176 million square feet of leased space, housing 
over 700,000 Federal workers, compared with 175.5 million 
square feet of owned space--almost as much, but rapidly tilting 
toward leased space. The owned space provides office space for 
640,000 Federal workers.
    The Federal inventory is vast and ranges from 2,500-square-
foot border crossing stations to 1-million-square-foot 
courthouse complexes in major metropolitan areas. GSA has a 
large stake in maintaining its strong real estate market 
position, particularly in the leasing market in light of the 
continuing shift to Federal-agency-leased space.
    At this hearing, we seek to learn how the GSA building 
owners and developers, who are accustomed to unimpeded access 
to credit, position themselves in today's puzzling market. Even 
though the competitive system for leasing and construction 
awards in the Federal sector guarantees that only the most 
creditworthy need compete, we are concerned that the recent 
clampdown on credit has already affected even the most 
creditworthy competitors. Inevitably, GSA will be affected.
    Last year, as the subprime mortgage crisis worsened, I 
began talking with experienced developers and building owners 
and found that their strong credit standing with lenders and 
the lengthy time frames and lead time for construction or 
leasing had left them pretty much untouched. That was at the 
beginning. However, their reports to us had changed completely 
by last summer, when we had our first hearing on credit in the 
commercial sector.
    Today, more than a year after the housing crisis became 
full-blown, even the largest banks, whose customers 
significantly include the commercial real estate sector, are 
showing record profit losses. Uncertainty and mounting losses 
have caused continuous shrinkage in all parts of the credit 
markets.
    Federal leasing and construction contracts might have been 
said to be worth their weight in gold at one point, and perhaps 
they still are. But if credit becomes too difficult or too 
costly, the private sector will pass the increased cost on to 
the Federal Government, raising costs to taxpayers.
    GSA's reliance on the commercial office space market and on 
the commercial construction sector to house Federal agencies 
ties the agency directly to commercial market conditions. As 
the Federal Government's major construction and leasing agency, 
GSA cannot escape the reality that it is in the same boat with 
the private real estate and construction sectors.
    The agency, therefore, must begin to use its prime position 
in the commercial marketplace to better leverage its buying 
power and to capture its outsized potential for reduced costs 
to taxpayers. In today's atmosphere of soaring budget deficits 
and rising costs for all concerned, GSA must work much more 
collaboratively than in the past with the private sector to 
reduce the cost of acquiring commercial office space.
    Considering the present economic crisis, it is also 
possible that, by working with our private-sector partners to 
achieve the vision and know-how necessary to reduce costs 
across the board, this Subcommittee, GSA, and its corporate-
sector partners could help stimulate the local and national 
economies while addressing the needs of the Federal Government 
itself.
    Today, we are interested to hear from GSA and financial and 
economic experts on the commercial markets and office 
development. We thank all of them for their testimony to be 
received today.
    And we are very pleased--and we knew he would be here--that 
the Ranking Member has arrived. And I would like to ask if he 
has any opening remarks at this time.
    Mr. Diaz-Balart. Thank you, Madam Chairman.
    Before anything else, I also want to add to your words of 
condolences to Susan Brita, who, obviously, is the very 
dedicated majority staff director of the Subcommittee, and she 
suffered a great loss in her family. And I know that all of our 
prayers are with her and her family.
    So we are thinking about you and your family, Susan.
    Thank you again, Madam Chairwoman.
    The General Services Administration is the single largest 
building manager in the country. And GSA owns and leases over 
340 million square feet of space, which comprises nearly 9,000 
buildings in more than 2,000 communities nationwide. So it is 
across the entire country, obviously, with a heavy involvement 
here in D.C. In addition to office buildings, though, GSA 
properties include border stations, courthouses, research 
facilities, warehouses, and, obviously, post offices.
    Now, because GSA leases more than half of its office space 
from private real estate owners, it is obviously reasonable to 
expect that the credit crunch in the real estate industry, as 
you were saying, Madam Chairwoman, and higher financing costs 
will impact the availability of space and the lease prices, 
frankly, for the Federal Government. So even small changes 
could significantly impact the Federal budget, given the huge 
amount of space that the Federal Government leases.
    So, as was mentioned before in several of our earliest 
hearings, Madam Chairwoman, that you had, part of the problem 
is the Federal Government's reliance on increased leasing and 
to its long-term space office needs. And it becomes a revolving 
circle, that problem.
    Despite consistent reports by the GAO and others, which 
indicate that increased reliance on cost of leasing for long-
term space obviously is wasteful, the problem persists. We need 
to continue to use scoring models, unfortunately, that promote 
leasing over construction or ownership, even though we know--
and that is something that you have been battling for a long 
time. And I hope that this year we will be able to make some 
headway. But I know that you have been, frankly, a great leader 
in that area.
    So, you know, the very rules that are intended to guide the 
administration and Congress to make fiscally sound decisions 
result, frankly, in this leasing case, which means more 
spending of taxpayers' dollars in a less efficient manner. So, 
again, I thank you, Madam Chairwoman, for your leadership there 
in trying to change that.
    Now, last month, the Recovery Act was signed into law. It 
included $5.5 billion for the Federal Building Fund. And, as we 
know, that Recovery Act provided, frankly, little to no 
oversight provisions. Instead, it just requires reporting to 
the Congress and to the public how the money was spent after it 
was obligated. And we spoke about that at length in this 
Subcommittee.
    In response to this, I introduced a House resolution that 
simply provides some real basic guidance and guidelines with 
respect to these funds, so that we don't relive one more time 
the horrors that we are now experiencing with the TARP program. 
That resolution would make it clear that GSA should not proceed 
with projects that this Committee rejected, and that it should 
include this Committee on reporting requirements contained in 
the Recovery Act.
    We know that the potential for waste is huge when it comes 
to real estate--frankly, when it comes to anything, but 
obviously also with real estate. Federal real property has been 
on the GAO's high-risk list since 2003, obviously illustrating 
that problem. And, according to the GAO, longstanding problems 
in the Federal and real property area have multi-billion-dollar 
cost implications to the Federal Government, i.e., in other 
words, to the taxpayers.
    So the current credit crunch serves to emphasize the 
problems with the overreliance on costly leasing. With over 50 
percent of Federal space in leased facilities, which is a 
problem, problems in the lending industry can have a tremendous 
effect on Federal property management.
    Now, in this economy, GSA should be investigating real 
opportunities--real, serious opportunities--that could be good 
investments for the taxpayer, that provide needed space and 
have, also, a real stimulus effect, as well, during the 
process.
    One option, for example, is using acquisition or lease 
purchase as a way of increasing ownership in stabilized 
development projects that, frankly, are either stalling or will 
be stalling due to the economy. There are many development 
projects that are either stalled or at risk of stalling. This 
potentially creates an opportunity for the Federal Government 
to acquire needed property at real significant savings to the 
taxpayer and also to help reduce our reliance of costly leasing 
and the uncertainty of the leasing market. At the same time, 
such investments will help to stabilize economic development 
projects that local communities and economies are relying upon 
to help the neighborhoods and to create sustainable jobs.
    The meeting space that the Federal Government needs must be 
done in a way that gives the taxpayer the best return on the 
investment. And, obviously, lease purchasing or purchasing 
outright would be a much better deal.
    So the current credit crunch can provide a big impact on 
GSA's leasing and building programs. I believe, however, that 
if managed right, if managed correctly, there is also an 
opportunity to make smarter decisions as to how the funds are 
used that, again, would bring long-term economic savings to the 
taxpayers. So I look forward to hearing from the witnesses on 
these and other issues.
    And I want to thank you, Madam Chairman, again. And I end 
my statement, once again, thinking of Susan.
    Ms. Norton. Thank you very much, Mr. Diaz-Balart.
    We will ask our first witness to proceed, Mr. Samuel 
Morris, assistant commissioner, Office of Real Estate 
Acquisition at the General Services Administration, Public 
Building Service.

 TESTIMONY OF SAMUEL MORRIS, ASSISTANT COMMISSIONER, OFFICE OF 
   REAL ESTATE ACQUISITION, PUBLIC BUILDING SERVICE, GENERAL 
                    SERVICES ADMINISTRATION

    Mr. Morris. Good morning, Madam Chairman, Ranking Member 
Diaz-Balart, and Members of the Subcommittee. My name is Chip 
Morris, and I am the assistant commissioner for the Office of 
Real Estate Acquisition in the Public Building Service at GSA. 
Thank you for inviting me here today to discuss the impact of 
the serious commercial real estate credit crunch and GSA's 
leasing and building during an economic crisis.
    My colleague, Bart Bush, the regional commissioner for the 
Public Building Service in the national capital region, is here 
behind me today to answer any questions that you may have about 
NCR's recent real estate acquisition reorganization. We 
discussed that, Commissioner Winstead did, I believe, some at 
the hearings last summer, our plans for that.
    Since our new construction, modernization, and repair and 
alteration programs are funded through appropriations, they are 
generally not directly affected by any decreases in the 
availability of credit. Because GSA pays contractors and 
subcontractors for these projects periodically for work 
completed, they typically do not need to obtain third-party 
financing to complete these projects.
    The credit crunch what has had mixed impacts on our leasing 
program. Financing for government leasing deals where the 
leases are backed by the full faith and credit of the United 
States has always been lower than that for more risky ventures. 
Therefore, when credit becomes more expensive or difficult to 
obtain, lessors of government leased buildings have typically 
obtained financing more easily and on less costly terms than 
other borrowers.
    However, GSA is noticing an adverse impact of the credit 
crunch on its leasing program in certain instances. We monitor 
the impact of the credit availability on lease projects on an 
ongoing basis. Most recently, in February of this year, we 
asked our regional offices to identify leasing projects where 
lessors were experiencing difficulty in obtaining financing. 
The regional responses identified 21 lease projects that they 
believe were impacted by a lessor's inability to secure funding 
that resulted in a delayed delivery of space or a need to 
recompete the procurement.
    The credit crunch is impacting some projects and some 
agencies to a greater degree than others. However, we have seen 
some impact on small, short-term leases as well as large lease 
construction projects. Several lessors have experienced 
difficulty obtaining financing for the build-out of tenant 
improvements. Others have had to withdraw from procurements due 
to their inability to secure financing. In some cases, lease 
procurements have been terminated because of the lessor's 
inability to close on their planned financing. These delays can 
add cost to the overall project and impact our client agencies' 
ability to fulfill their mission.
    On larger, more complex projects, we do have available the 
use of our credit tenant lease in order to attract more 
favorable financing. We are also working on our solicitations 
for offers to obtain more disclosures in our bids regarding the 
financing terms both from the lenders and the developers in 
order to protect the government and assure ourselves of the 
financial viability of the prospective offers that we receive.
    That concludes my testimony. I would be happy to try to 
answer any questions that you may have.
    Ms. Norton. Thank you very much, Mr. Morris.
    Forgive me, I neglected to ask Members, and I would like to 
ask them now before I begin my opening statements. The fact is 
that we are talking about a problem that obviously affects the 
Nation's capital and the national capital region, but we are 
having this hearing because of the nationwide effect of the 
credit crunch. So before I begin my questions, may I ask if any 
Members of the Committee have any opening remarks they would 
like to make?
    All right. And thank you, with my apologies.
    Mr. Morris, you mentioned what we suspected, and we wonder 
if it is going to spread, on page 2. In fact, you have given us 
figures, 21 lease projects that were impacted by the lessor's 
inability to secure funding. That is the regional response.
    Mr. Morris. Yes, ma'am.
    Ms. Norton. What about nationwide? Do we see that in other 
places, as well?
    Mr. Morris. Those responses came from across the country, 
not just in the national----
    Ms. Norton. Oh, these are regions across the country?
    Mr. Morris. Yes, ma'am, not just the national capital 
region.
    Ms. Norton. Could you identify those regions for us?
    Mr. Morris. They were all regions. There were regions--
let's see, we have region 1 headquartered in Boston; region 2 
and 3 in New York and Philadelphia; region 4 headquartered in 
Atlanta; region 5 headquartered in Chicago; and region 9 out of 
San Francisco, California.
    Ms. Norton. So we do see a nationwide effect?
    Mr. Morris. Yes, ma'am.
    Ms. Norton. Then you say "some impact on small, short-term 
leases as well as large lease construction projects." Now, that 
really would interest us since we are about to embark on some 
construction projects.
    But you say, in financing--that several lessors have 
experienced difficulty in financing for tenant improvements. 
And I am wondering if this credit tenant lease idea that you 
spoke of is your--would you explain that and how that might be 
helpful here to GSA?
    Because the tenant improvements would, of course, be very 
important to the agencies remaining in the building renewing 
their leases and the like.
    Mr. Morris. I would be happy to try and answer your 
question.
    Actually, the difficulty that we have seen in some of the 
developers obtaining financing for the financing of the tenant 
improvements have been in smaller, short-term leases dealing 
with the acquisitions we have been making on behalf of the 
Census Bureau in connection with the decennial census that is 
going on.
    Acquiring those spaces has been difficult anyway, because 
they are short-term leases, typically less than 2 years. So, in 
this kind of economic times, people are looking for us to go 
longer than a couple of years.
    Ms. Norton. But, Mr. Morris, aren't they having trouble 
finding anybody who wants to lease? Why don't we leverage the 
misery--forgive me--of the private sector here, who would seem 
to want anything they could get at this point with somebody who 
is able to pay?
    Mr. Morris. Well, and that is a very good point. We have 
been pretty successful in obtaining the lease space that the 
Census needs. Out of those 21 projects that we got feedback on, 
eight of them had to do with Census Bureau leases that we are 
acquiring now that we are trying to put in place by the end of 
August of this year.
    We haven't suffered too much as a result of that because 
the Census Bureau has been able to step up. Some of the 
developers had trouble getting financing to handle those tenant 
improvements, and the Census Bureau has stepped up and funded 
the cost of those improvements upfront. So they have taken that 
issue away from those developers who were trying to build out 
that space.
    So we have been able to solve that problem so far. But 
there were a couple of instances where, in fact, the developer 
had--I know, in one case, had trouble actually closing on his 
loan after the award and was not able to actually pay his 
contractor and his subs on a timely basis. That was eventually 
taken care of, and we are back on track.
    But we are having--because of the critical nature of the 
timing on delivering those Census offices in order for them to 
get their mission started later this year, we are really 
following that very closely. We have seen some impact, but so 
far we have been able to handle it.
    But we have also seen it--and this is where your question 
about the credit tenant lease comes into play--we have also 
seen it on several large construction projects. We use our 
credit tenant lease on larger, more complex deals. Think of the 
Department of Transportation headquarters space in southeast 
Washington. We used a credit tenant lease in that particular 
transaction.
    The GSA lease is, if you think of it in commercial retail 
terms, we are tenant-oriented in the requirements, the 
contractual terms. It is more heavily weighted on what the 
government needs for its space, much like an anchor or a big-
box tenant would be in a shopping center or a mall, where the 
developer or the owner of that mall is trying to win that 
anchor tenant to solidify his development for a shopping 
center. So the government has very strong tenant requirements 
in its contracts in our regular forms, if you will.
    When we are dealing with large, complex transactions, we 
have been willing, when the circumstances are right, to 
compromise some of our requirements in order to facilitate 
better financial terms.
    For instance, once a facility has been developed, built to 
our specs, and accepted by the government as meeting our 
requirements, and we are entering into occupancy and we are 
starting to pay rent and we have contact administration going 
on, normally we still have very strong rights to either 
terminate that contract for a default by the landlord in 
failing to meet their obligations or to take self-help actions, 
if you will, and offset our cost against the rent payments that 
we make.
    Well, when you are really looking at large-scale financing 
for those kinds of projects, whether it be bond financing or 
traditional bank financing, we can pay a higher price for that, 
because the lenders, the bond holders want to make sure that we 
have an income stream over the life of that lease, which will 
amortize that debt.
    So when we have completed the project and accepted the 
possession of the premises, we will compromise, if you will, 
our rights to terminate that lease and walk away from it, 
especially with regards to that portion of the rent that goes 
to amortize the debt that is on the project. So that lender can 
be assured that at least so much of the debt that is needed to 
amortize their debt continues to be paid over the life of the 
lease.
    And we seek recourse for if the landlord defaults on 
maintenance or operation of the facilities, to a reserve 
account. Instead of paying all of our rent directly to the 
landlord, we may fund a reserve account that is held in escrow 
on the side. And if the landlord fails to live up to its 
obligations to maintain the premises, then we limit our 
recourse against that type of default to funds in that escrow 
account that can be used to cure that default and bring the 
maintenance and the operations up to par, up to the 
requirements of the lease.
    So we have found that, in those kinds of cases, it 
facilitates obtaining financing for those larger deals, and we 
can usually obtain better pricing.
    And we are looking at, instead of just the large 
headquarter leases, that that credit tenant lease approach may 
help facilitate some of our other large-lease construction 
projects.
    Ms. Norton. Mr. Morris, I can't say enough about the need 
for GSA to act like it is in the real estate business. I mean, 
we so seldom walked away from a lease. So the notion of 
leveraging this termination ability of the government--and it 
is in every lease--with the kinds of practices you are talking 
about, that is the kind of thinking we need to have to save the 
government money. That termination doesn't bring us anything. 
We have it in there because we are the Federal Government. And, 
in my judgment, it needs to be leveraged more often, even in a 
situation that is not a credit crunch like this one.
    I am going to ask a question that is not unrelated to the 
statement of the Ranking Member, and then I am going to go on 
to him and to others before I come back.
    The Ranking Member did have a bill, and I am in sympathy 
with what he was after. I didn't think that we could do it in 
legislation, but the Committee intends, in any case, to work on 
the theory of his bill, which is, you know, after-the-fact 
monitoring won't do, especially for the stimulus projects that 
GSA is in the midst of doing. A specific number of jobs 
forecast, that is the whole point of the stimulus project. 
There is a certain number of days. We are going to require 
those days be met--that a similar period be met by GSA.
    The first thing that would aid and abet the theory of the 
Ranking Member's concern about before-the-fact rather than 
after-the-fact would be the requirement that the list of 
projects be published on the Web site. As of this moment, that 
list of projects is not on the Web site. How could that be?
    How long has it been since we passed the stimulus bill? 
Huh? At least 3 weeks? GSA was, long before passage, correctly 
and justifiably, into considering what those projects--those 
projects are all over the country. Where are those projects? 
Why aren't they posted?
    Mr. Morris. I am going to speculate on that, Madam 
Chairman. I have not actually been a part of the development of 
the project list. And----
    Ms. Norton. Is there anybody here from GSA who can come to 
the table and say anything about that to this Committee?
    Mr. Morris. I can tell you that I think that the GSA has 
come up with their project list, and it is being vetted by the 
administration.
    Ms. Norton. Now, we are aware of that. We are aware of the 
project list. We are aware of it being vetted. Is it your 
testimony that the administration is holding it up?
    Mr. Morris. No, ma'am. I am not exactly sure what the 
status of going public with the list is, at this point in time. 
I would hesitate to speculate on that. We could find out, and 
be happy to get back to you on that.
    Ms. Norton. The Subcommittee should get--the appropriate 
GSA official should be informed that, by close of business 
Monday, we either want the projects up, know the reason they 
are not up, or know when they will be up, particularly since 
GSA doesn't have the same requirements that the States and 
localities have, although it shortly will have, with respect to 
time and the like.
    I am going to ask the Ranking Member if he has any 
questions on this testimony.
    Mr. Diaz-Balart. Yes, thank you, Madam Chairwoman. And 
thank you for that statement. I mean, you have been clearly 
pushing for some of the same things that I have obviously been 
talking about. You have been doing it for longer than I have 
because you have been here, leading on these efforts about 
accountability. And I know that you will do everything you can 
to try to get accountability.
    Obviously, as you well know, my problem has always been 
that, a lot of times, we just don't put this in the 
legislation, and then later there is a lot of hoopla as to why 
things happen. And I think the TARP example is the most 
dramatic but, clearly, not the last one. But I wanted to make 
sure that I mentioned that obviously you have been a leader in 
trying to get accountability. And thank you for that.
    You know, we have about, what, $5 billion, as I mentioned 
before, that you have now because of the stimulus bill. And 
there is a great opportunity, a great opportunity to purchase 
properties, either those that are already up or those that are 
coming up, new facilities that may be coming up. So it is a 
great opportunity to acquire buildings.
    And what I would like is first an explanation now as to 
specifically what are you looking at? I mean, are you looking 
at those? Because this is a lifetime opportunity. And GSA did 
that a number of years ago and with very good results to the 
taxpayer. So are you looking at that?
    And I am going to ask you for a brief statement on that. 
What I would like to do is get together with you, and let's 
look at what you are looking at doing. Because I think we have 
an opportunity of a lifetime to save a ton of money for the 
taxpayers, to help some of the issues that GSA has because of 
the scoring problem, and you have the money right now, you 
know, $5 billion, a little bit over $5 billion.
    Mr. Morris. The concept of an opportunity to purchase, I 
think, from my standpoint, is a good one. The money that is in 
the stimulus bill, to the best of my knowledge--and, as I said 
earlier, I am not on top of that--but, to the best of my 
knowledge, the bulk of the funds are dedicated to repairs and 
alterations of existing Federal buildings to improve them, from 
an environmental standpoint, to make them more energy-
efficient.
    There is also some money in there for swing space for 
leasing that I am aware of, because we have been strategically 
trying to plan for the needs of that swing space to coincide 
with when the repair and alterations of Federal buildings are 
come on-line.
    I am, quite honestly, not aware of money that is being 
devoted for those types of opportunity purchases that you are 
mentioning and that is available in the stimulus bill. I am not 
aware of that.
    Mr. Diaz-Balart. Well, again, because the language 
specifically says it has authorized GSA to "initiate design, 
construction, repair, or alterations and other projects through 
existing authorities of the administrator"--"and other projects 
through existing authorities of the administrator." So it does 
have an open-ended part there.
    And, again, I just think it would be such a shame, 
particularly with all the issues that we have and the fact that 
we have this issue of this vicious cycle of you all not getting 
the funds because we are leasing. So we have a great 
opportunity; there is the money available.
    And I am pretty sure that--I mean, the language, again, 
says that. You are right, what does that mean? But there is 
clearly a caveat there, an out, that says "and other projects 
through existing authorities." You clearly have some existing 
authority to do so, because you have done it in the past, which 
is why I would like to sit down and figure out what you are 
doing. Because I think--my fear is exactly that, that maybe you 
are not really looking at this.
    We have an opportunity, and, you know, we should not be 
doing business as usual when you have this opportunity. The 
market is where it is at. You have the cash on hand. You have 
properties that are probably either available now or will be 
available shortly because of the circumstances.
    It is a no-brainer. And it is a no-brainer particularly 
because one of the things that we should always be emphasizing 
as first and foremost is to make sure that the taxpayers' money 
is well-spent and is done efficiently. And I know you agree 
with that. So this is the opportunity, folks.
    So, anyway, with all due respect, what I would like to do 
is sit down and look at that.
    Mr. Morris. I would be happy to do that, Congressman.
    Mr. Diaz-Balart. Thank you, sir. Appreciate that.
    Thank you.
    Ms. Norton. Thank you, Mr. Diaz-Balart.
    Mr. Perriello?
    Mr. Perriello. Sure, I would just like to follow up on your 
point and the Ranking Member's point and ask you, would you 
agree with the basic premise that there are long-term cost 
savings to be made if we looked at some of these procurement 
strategies, if you had that flexibility and took it?
    Mr. Morris. Yes.
    Mr. Perriello. And can you give a sense of what kind of 
gains we could see, say, over the next 10 fiscal years?
    Mr. Morris. You mean quantify that for you? That is hard to 
do right now.
    One of the things about an opportunity purchase is trying 
to marry up the requirements of particular government agencies 
with the location of where those buildings might be. So I am 
trying to find the buildings in different markets, determine--
we are actually getting a lot of calls. I fielded a call 
yesterday from a citizen saying, "We are looking for 
opportunity purchases for distressed buildings. Do you know 
where there are any?" And it is like, we are not really in 
privity of contract with landlords and their lenders. So, you 
know, what we hear or what we know about is really second- and 
thirdhand.
    But when you have an opportunity in a metropolitan area 
where you see buildings that are stalled and their development 
stalled in construction, and we know that we have, for 
instance, an expiring lease load in that community, that we 
need to transition Federal workers in, that is when you can try 
and marry those things up.
    I don't think that we have done the kind of research that 
you guys are looking for to try and take advantage of that yet.
    Mr. Perriello. But you would agree, both on the issue of 
renegotiating or looking at some of these leases and 
procurements, there are cost savings there?
    Mr. Morris. Yes.
    Mr. Perriello. And then, on the issues related to 
implementation of recovery, can you give us a sense of whether 
you have the capacity you need to be implementing right now the 
various things that have come through as part of that?
    Mr. Morris. That is a strategic part of our planning effort 
to handle the recovery. I mean, we are looking not only at the 
work plans but what it is going to take to mobilize our 
workforce and our efforts. And I think we feel pretty confident 
about that.
    Mr. Perriello. All right. I yield back.
    Ms. Norton. Thank you very much.
    Ms. Edwards, do you have an opening statement or anything 
you would like to say at this point before I----
    Ms. Edwards. No.
    Ms. Norton. Mr. Morris, we had a hearing on the credit 
crunch last summer when it became clear that it had moved big-
time to the commercial real estate sector. What has GSA done to 
evaluate the impact of the credit crunch on its portfolio since 
that hearing?
    Mr. Morris. Well, we have continued to monitor the 
situation. As I mentioned before in my testimony, we have gone 
out to the regions to try to find out if they can identify, and 
they have, projects where they have experienced difficulties 
that they believe were attributed to financing.
    In addition to that, we have actually tried to look at our 
own processes and procedures, the form of our solicitations of 
offers, to see what we can do to protect the government in 
moving forward with procurements for lease acquisitions to make 
sure that we have financially viable developers who are bidding 
on our projects. We have continued the work of a lease 
construction group in my office that have drawn on people from 
across the country to look at how we can better structure our 
solicitation to make them more user-friendly.
    Secondly, we are looking at, as I mentioned earlier, the 
use of our credit tenant lease and more projects, and not just 
the great big headquarter leases but other lease construction 
projects, like the FBI, like--you know, we have a lot of Social 
Security Administration field offices that are lease 
construction projects, and they are in every congressional 
district around the country, and making sure that we are 
getting the best deal on those and that we are having 
developers that are able to secure financing, favorable 
financing.
    Ms. Norton. Well, let me take up precisely an example like 
that. The Committee has expressed concern about quite a 
significant number of leases we have been asked to authorize 
for the FBI. Now, that means the FBI needs space here and 
nationwide. It is a perfect leveraging opportunity, one would 
think, of the kind you are talking about for Social Security 
space.
    Are there any plans to exercise purchase options on any of 
these new leases? After all, if the FBI is there, and you do go 
do all the work for build-out and the rest that a very special 
security agency needs, and you have a number of them coming up 
at the same time, isn't that an example of how you could 
leverage your position in the real estate market?
    Mr. Morris. We do have purchase-option language in the 
leases that we are doing, these lease-construct leases that we 
are doing for the FBI. They are not as tight as they probably 
should be. We inserted those, quite frankly, Madam Chairman, at 
the suggestion of the Committee that we ought to be able to 
have those purchase options available to us when, down the 
road, we have funds available to actually exercise those.
    What we have been doing with the FBI is, for those projects 
that have been approved by the administration and by Congress 
and are under construction, we are monitoring those pretty 
closely to see if they are coming on-line according to plan.
    We have had a couple of instances where we have had 
financial problems with projects under way. We mentioned one at 
the hearing last summer, where we had an FBI project in Detroit 
that was canceled, in part because of financial difficulties of 
the developer. We had another one in Charlotte, North Carolina, 
where we had to cancel the contract after award because the 
developer couldn't perform.
    But we have been going back on other projects that have 
been----
    Ms. Norton. Mr. Morris, could I ask a question? Are those 
FBI buildings more or less alike in these various locations?
    Mr. Morris. The program of requirements are similar, but 
they may vary dramatically in size from one project to another. 
There may be very large ones, several hundred thousand square 
feet, to smaller ones. Even the small ones, though, are large 
by normal standards. They could be 75,000 or 80,000 square 
feet.
    Ms. Norton. And do we have different developers over the 
country, different developers, based on their location, doing 
the work?
    Mr. Morris. Yes. Yes. We have some repeat competitors that 
are, I will call them, chasing those projects. Some of them are 
bidding on more than one, but----
    Ms. Norton. Well, I would hope so.
    Mr. Morris. Yes.
    Mr. Norton. The reason I ask, it just occurs to me that, 
especially in this market, if you are able to bid on one, you 
know how to do it, you know the requirements--the requirements 
are rather special. To have to go from one end of the country 
to the other and start all over again does not seem to me to be 
looking at one's portfolio as to how to leverage a need which 
looks pretty similar across the country and get the best deal 
for the government and the best deal for the developers.
    Mr. Morris. Right.
    Ms. Norton. For example, if one had to do more than one of 
these and really knew how to do them and do them well, 
conceivably that could cost the government less.
    Mr. Morris. That is true. Part of the problem----
    Ms. Norton. And one would be able, indeed, to make a deal 
for more than one at one time if one had such a reliable 
builder to do it, given the specialized nature, and the 
quantity of leases we are talking about, or the space we are 
talking about.
    Mr. Morris. Part of the problem that we have had with some 
of the FBI projects is actually just making sure--and that is 
one of the things that we are having to do now--is really take 
a gut check on some of the projects that have been approved, to 
make sure that the terms and the prospectus that Congress has 
approved are still viable numbers.
    Ms. Norton. In terms of what?
    Mr. Morris. In terms of being able to bring those projects 
in----
    Ms. Norton. At the cost?
    Mr. Morris. Yes, ma'am. So we are going back to those 
projects now and working with the FBI to do a gut check to see 
if the requirements and the rent caps and the limitations in 
those approved projects are really viable in this market to go 
out there. And we want to make sure that we feel like we feel 
comfortable that we can bring those in.
    In addition, we are hiring a contractor to go back and look 
at the program requirements and take a look to see where we 
might be able to value-engineer some of their requirements to 
try to save the government money and bring them in within the 
existing limitations of the prospectus.
    We are also spending some time with the FBI to see if we 
can't----
    Ms. Norton. I would think the costs have gone down.
    Mr. Morris. Well, the costs of credit haven't gone down. 
The cost of materials has leveled off.
    Ms. Norton. Are these people still trying to get the 
credit? These people are just now trying to get the credit?
    Mr. Morris. Well, in some of the projects that we haven't 
gone forward with yet, yes. They are not out on the street yet. 
So those are the ones that we are looking----
    Ms. Norton. How many of these FBI projects are out on the 
street at this time?
    Mr. Morris. I need to provide you that information.
    Ms. Norton. Would you please provide us that information 
within 30 days?
    Mr. Morris. Yes.
    Ms. Norton. We would like to know--we would like a status 
report on the state of the FBI projects, in particular, where 
we are, whether it is a procurement stage, at some later stage.
    Mr. Morris. We can get that for you, ma'am.
    Ms. Norton. You mentioned, in some of your remarks in 
answer to a prior question, making the process user-friendly, 
as well. That is going to be particularly important if you want 
to have anybody bidding on these projects.
    Projects have been worth so much that the private sector 
has absorbed really quite outrageous costs from GSA, larger 
amounts of it from delay, an absolutely frustrating 
bureaucracy. People can't afford it anymore, particularly with 
the cost of credit.
    And I would hope that we would use this opportunity to make 
the entire process more user-friendly and save the government 
money, because when you say save--these developers find a way 
to get their money back after you have, in fact, raked them 
over the coals. Those who don't get the contract, of course, 
are just left out in the cold, and that is a terrible thing to 
do, too. But it may be very much to the disadvantage of the 
government to leave so many out in the cold today, when credit 
is so hard to come by in the first place.
    What comes to mind is the so-called occupancy agreement, 
where there have been times when, the way GSA does the timing 
and the signing of an occupancy agreement, that there have been 
occasions where occupants have been allowed to opt out of an 
occupancy agreement after we are very deep into the process.
    Now, you would think that the occupancy agreement would be 
signed before the procurement. And what possible advantage of 
it is it to the government to allow agencies to act as if they 
are just free agencies, free agents? "It is just somebody 
else's money. I am just going to ask GSA if I can opt out, and 
GSA almost always bends." That is why we are going to 
reauthorize this statute to give the agency stronger authority 
so that that bending will go.
    But what seems particularly wasteful is allowing agencies 
to opt out of an occupancy agreement. Under what conditions 
would an agency be allowed to opt out of an agreement following 
a procurement and all that the agency has gone through?
    Mr. Morris. Let me explain a little bit about that process 
for you and lead up to answering your question.
    The occupancy agreement, as you understand, is the 
agreement between GSA and its customer agency as to the terms 
and conditions of their space requirements.
    In a leasing--we have occupancy agreements not only in 
lease scenarios but also for our Federal buildings. In our 
leasing program, if an agency is moving into leased space, the 
occupancy agreement basically is a pass-through for the terms 
and conditions of that underlying lease.
    When we get ready to start the procurement----
    Ms. Norton. A pass-through for the terms and conditions.
    Mr. Morris. Basically in terms of the square footage and 
the rent that they are going to be paying, they pay us what we 
are paying----
    Ms. Norton. So they are talking to you now, because you are 
already on a limb for this space.
    Mr. Morris. Well, at the very beginning, we go to the 
agencies, before we start the procurement, and get that 
commitment from them and have them sign a preliminary occupancy 
agreement that is essentially their commitment to us that they 
want the space that they say they do and that they are willing 
to pay the estimated rent that we are telling them it is going 
to cost. So we don't start the process until we get----
    Ms. Norton. Yeah, and if you are in the private sector and 
you do that, you are going to be held to it. Why isn't an 
agency held to it?
    Mr. Morris. Well, at the end of the day, when the lease is 
procured, we go back to that agency when we have the final 
numbers, after award, when we know exactly what the rent is 
going to be, and they sign up again, a final occupancy 
agreement, which basically is that billing document from which 
they agree to pay us the rent that is set forth in the lease 
that we have procured for them.
    Now, we don't have many agencies opting out of those 
occupancy agreements at that point in time. The opt-out 
scenario really comes during the term of the lease. And we 
don't see that too much, but there is a regulatory provision 
that agencies can, if they have a change in mission, give us 
120 days----
    Ms. Norton. Well, Mr. Morris, you can rest assured I am not 
talking about that.
    Mr. Morris. Oh.
    Ms. Norton. I am talking about--that is what I want to 
know. If that is the condition for opting out, somehow the 
Federal Government or the Congress has changed your mission in 
some significant way. And if your testimony is that that is the 
condition for opting out, then I would be perfectly satisfied. 
I want to know if there are any other conditions for opting 
out.
    Mr. Morris. I think what we get feedback on and what you 
may be really driving at are the delays that it takes for us to 
get that final occupancy agreement finalized and signed with 
that agency.
    Ms. Norton. And what is it that they are negotiating during 
that time, with you?
    Mr. Morris. Well, I think it is not just the occupancy 
agreement itself. It is just getting them to sign it, to make 
sure that they have their requirements met----
    Ms. Norton. And what would delay them in signing? Here are 
some people who have asked GSA to go out and find them some 
space. Now, so tell me why they tell you they have not signed 
the agreement. We are going to deal with that in the statute, 
so I need to know candidly what is the reason that the agency 
would give you.
    Mr. Morris. Not valid reasons, I can tell you that.
    Ms. Norton. Thank you.
    Mr. Morris. They are not valid reasons.
    Ms. Norton. And the agency needs to be protected here. Here 
I don't want to blame GSA, I want to say what I think the 
problem is. Here is GSA charged with a government-wide mission. 
Not very many agencies have a government-wide mission. You deal 
with the public or you deal with a particular sector. Here GSA 
not only deals with the market, the leasing and construction 
sector, GSA has plants that are peer agencies.
    So essentially if you are a peer agency, you are just like 
me. Of course, you have a mandate, a very strong statutory 
mandate, it occurs to us it is not strong enough, because those 
delays cost the government. When you get down to it, those 
delays cost the government.
    As if somehow these people were on their own dime. Well, in 
a sense they are. Well, their own dime turns out to be the 
taxpayer's dime. And it has gotten to the point where the 
delays of that kind, which mean being deferential to the agency 
becomes so costly so that particularly as we look at the state 
of the markets today and what it is going to take for it to 
really write itself up, I don't see how you are going to keep 
the gold standard set of businesses let's call them, because 
they are all across the board you deal with, unless we can make 
the agency far more user friendly and use this opportunity to 
do so.
    I would appreciate, Mr. Morris, if you would undertake to 
look at ways that you think the agency could be helped in 
serving its clients while making the process more user friendly 
to those who have invested money. When I say how could we be 
helpful, I mean there are things we could do, statutorily. 
There may be other suggestions but we do need your suggestions. 
If we don't get them we will just do what the private sector 
tells us they need. If they are willing to come forward, I want 
to hear from the agency's point of view, since you have got an 
agency responsibility to the Federal Government, I want to hear 
from you.
    And we will be having hearings over the next couple of 
years in any case. I would very much appreciate your doing so 
and making sure that those under you begin to think through, 
help us think through and reauthorize a public building service 
statute in effect.
    Mr. Morris. I would be happy to do that. I would like to 
point out there are certain instances, not just to bash our 
customer agencies, there are times--I don't think they happen 
frequently, but there are times when an agency may resist 
moving into new space if they are not satisfied with the 
quality of the construction. Maybe the HVAC system is not 
operating properly, maybe there are some issues with 
adjustments in that. Maybe there are some other quality of 
constructions that aren't being met to the government 
requirements and they will be loud and vocal about those types 
of issues. We have run across those from time to time.
    Ms. Norton. And that is legitimate, obviously. In fact, to 
give you a perfect example, one where the agency has moved in. 
We brought consider being pressure on agencies to in fact move 
to space which cost the government less and is well within the 
delineated area. And so we have them moving to NoMa, which is 
within a stone's throw of the Senate. One of those agencies was 
the Equal Employment Opportunity Commission. They complained to 
us about the size of the spaces for lunches and heat and a 
number of things. And to the credit of the GSA, I said my 
goodness, after we have made sure these agencies would not 
continue to insist upon renting or leasing only in the highest 
cost parts of the district, now you get back complaints that 
basic in nature, heat, not enough space for employees to eat. 
That doesn't speak well to the Congress, speak well of the 
Congress or the agency. And we have been informed that GSA has 
been out there and that there is a build out going on. And that 
is the kind of taking care of the customer that we think is 
absolutely called for.
    Were that all that we knew in our long experience about 
occupancy agreements we would be very pleased. Do know that 
that is something we will be looking at in this kind of 
climate. Somebody dare to say I don't want to go there after 
all.
    Mr. Morris. That is not acceptable.
    Ms. Norton. It just isn't.
    Let me ask you about the holdover status. A witness is 
going to testify here that 60 percent of government leases 
enter into holdover status upon expiration. We believe this is 
a government-wide figure. We want to know how many leases are 
indeed in holdover status and where they are located. We want 
to know about leases in this region since so much of the 
Federal sector is in this immediate region, but we all want to 
know leases government-wide. And we want to know how many 
leases are expiring within the next 6 to 12 months. Do you have 
any information to give us today?
    Mr. Morris. Yes, ma'am. I will start out by saying that 
holdover leases arise when we are not able to provide a 
replacement space solution for an expiring lease in a timely 
manner, and we are unable to negotiate an extension with an 
incumbent or an existing landlord.
    Ms. Norton. Now what are the difficulties in negotiating? 
You are trying to get a better rent for the lease for the 
government perhaps?
    Mr. Morris. I think oftentimes it has to do with pinning 
down the requirements for that agency that is in that space. 
Believe me, a holdover is the worst-case scenario and should be 
avoided if at all possible.
    Ms. Norton. Do most of these agencies want to remain in 
that space?
    Mr. Morris. Well, it really depends. A lot of them do. And 
that is one of the things that we are really working on, 
because, you know, when we are going out for a new requirement, 
we typically go out and have full and open competition. That is 
our modus operandi, if you will. But there are plenty of 
situations. And quite frankly you touched on it in one of the 
hearings that we had last summer where the tenant agency 
requirements haven't changed. They are happy where they are. 
And in those cases the Federal regulations allow for a concept 
of entering into negotiations for a succeeding lease with that 
incumbent landlord.
    We have to do a market analysis to see what the rents are 
like in that area, in that market, see what we are paying under 
the current lease. We have to factor in things like moving 
costs. We actually have to go to the public and advertise that 
we do have a continuing need for space in that market and 
request expressions of interest from the market.
    If we get expressions of interest from other providers of 
space, then we have to make a decision based upon the numbers 
or whether or not it is worthwhile to go into a full and open 
competition. If there are no bona fide expressions of interest, 
then we are free at that time to go ahead and negotiate another 
deal with that landlord.
    There are plenty of those situations around the country 
through and in every region. One of the things that my office 
has been doing to try and address the problem of the number of 
expiring leases that we continue to face each year and our 
inability to replace those leases in a timely fashion is to use 
that as an important tool to say, look, if you know that the 
agency requirements aren't changing, if you go through this 
regulatory process and you factor in the market analysis, you 
look at the moving costs and you seek expressions of interest.
    And the results of those efforts say take a look at 
negotiating with that current landlord, then right now 
especially in these times when rent rates are not rising, they 
are flattening, we need to go long. We need to negotiate the 
best deal we can and lock in on not a year extension, but go 
long and at least out go there 5 to 7 years where we can take 
advantage of the market rates and we can stabilize.
    Ms. Norton. Is that happening? That is like ABCs how to 
operate in this kind of market if you have the leverage GSA 
has. Is there anything written to regions to tell them to 
proceed in that way?
    Mr. Morris. We issued a realty services letter just this 
past year on that very subject reminding them of this 
regulatory authority and encouraging their agents to use this 
whenever they have the opportunity when the situation meets. 
Now when you have got a brand new requirement coming in, we are 
typically going to be going to the market and doing a full and 
open competition, but that is not the case.
    Ms. Norton. You are not going to in this market and doing 
much. That looks like another bureaucratic turn of events.
    Mr. Morris. One of the other things we are trying to do now 
is actually get information out to the regions on a quarterly 
basis about what the market rates are, what the market 
conditions are and major metropolitan areas around the country.
    Ms. Norton. Then all you have to do, it seems to me, is to 
factor in the moving costs.
    Mr. Morris. Well, that is true. What we are doing is 
getting information in all the Metropolitan areas on a 
quarterly basis to say here is what rent rates are for general 
purpose office space in these markets. And by the way, here are 
our current leases that are expiring over the next 12 months, 
24 months, 36 months and beyond. So you have got leases that 
are expiring in these markets and what we need to be doing is 
planning now, as soon as possible to take advantage of the 
current market conditions and go long where you can.
    We have seen trends over the last year and a half, because 
we do this on a quarterly basis where rents have continued to 
flatten and in many markets have started to fall somewhat, and 
this is an excellent opportunity for us.
    Ms. Norton. Mr. Morris, the Subcommittee will hold the 
agency very responsible, if you do not take advantage of this 
market to renegotiate these rents or to extend these rents or 
to move. Because this is the time to do it at the GSA if you 
are an individual you are stuck, there is not much you can do. 
And that is why I want you to get to us the list of the 
holdover leases, their status and also leases that will be 
expiring in 6 to 12 months. And what you say you are doing, I 
am sure has something to do with the fact that the Subcommittee 
required you do some centralizing once again of leasing.
    Mr. Morris. Let me say that the holdover rate is really 
rather small as a snapshot of our whole portfolio. What we end 
up seeing----
    Ms. Norton. Sixty percent, according to an upcoming witness 
entered into holdover status upon expiration.
    Mr. Morris. That is not correct. It represents about 4 
percent of our overall portfolio. We have 8,600 leases in our 
portfolio. We have about 300 leases that are in hold over at 
this point in time that represents about 4 percent of our total 
inventory.
    Ms. Norton. You would have to say a percentage of those 
expiring.
    Mr. Morris. It is about 13 percent of our total leases 
expiring in 2008. Now where the problem is we are not replacing 
all those leases and this is where I think we are getting some 
push back from the private sector, they are not all going into 
holdover status. There are a number of leases and about 40 
percent of our leases that are expiring that are being extended 
on a short-term basis. To me, a holdover lease is when you 
don't even have lawful possession of the premises, you are 
squatting in effect.
    Ms. Norton. You have to extend it on a short-term basis, 
because they are holding over.
    Mr. Morris. Well, some of----
    Ms. Norton. You know this is not some apartment where we 
are on a month to month, or maybe that is what you are talking 
about.
    Mr. Morris. No. The holdover is a situation where the 
landlord has said, I am not going to give you an extension, we 
want you out of here. And we are trying to negotiate a short-
term extension for a year or a 2-year extension while we get 
the agency requirements finalized so that we can effect a final 
solution, but----
    Ms. Norton. Do you have the staff and talent to do that 
quickly?
    Mr. Morris. We have laid out this past year a plan 
nationwide, and will be happy to share that with you to try and 
reduce the extension problem that we have with our expiring 
lease load. We actually are increasing the staff above what it 
has been nationwide. We have been somewhat successful in that 
endeavor, not as much as we would like. We need more people to 
not only work in-house but also to manage our broker program as 
well. As you are well aware of and we talked about it I know 
last summer, just the staffing needs and our leasing 
specialists.
    I will say we made some progress just this past week we 
kicked off a week of what we call our boot camp in the public 
building service where we bring brand new people in who have 
joined the organization in for a week's worth of training in 
Washington. And I had the pleasure of meeting 15 new leasing 
specialists from regions around the country who just started 
with the agency, many of whom had come from the private sector 
and others we had actually recruited from other Federal 
agencies where they had been doing realty work.
    And so it looks like a freshman class of brand new realty 
specialists from around the country who were in Washington for 
a week of training, I got to meet them and talk to them and we 
had a reception afterwards. They were more than enthusiastic. 
They were really quite excited about joining our organization 
and trying to make a difference. We talked about this is a time 
where the country is having economic difficulties. And I hate 
to say it, but it is an opportunity. I hate to say it in the 
sense that we don't want to have bad economic times, but it is 
an opportunity for the government to try to make the most of 
it.
    Ms. Norton. Thank you, Mr. Morris. I am just about finished 
here. I will ask Ms. Edwards if she has any questions.
    Ms. Edwards. Yes. Thank you, Madam Chairwoman. And thank 
you, Mr. Morris, for your testimony. I want to go back to this 
question of lease expirations because my reading of the 
upcoming testimony is that 60 percent of your leases that are 
expiring that are extended.
    Mr. Morris. That is true.
    Ms. Edwards. Thank you.
    Mr. Morris. That is true. Not holdover, but extended.
    Ms. Edwards. Extended, but even still 60 percent extended 
it seems to me not only does that represent kind of an 
unfairness to the government and to the taxpayer but it perhaps 
represents an unfairness also to the landlords in terms of 
their ability to project what their business opportunity is 
going to be. I mean, 60 percent seems rather extraordinary.
    Mr. Morris. I think that is a valid point. There are bona 
fide cases where extension will occur. If we are moving 
clients, and when I say clients, if we are moving customer 
agencies into a Federal building or new lease space and there 
have been delays in the completion of that new space for 
whatever reason, we may have to extend the lease for a short 
period of time until we can actually accomplish the completion 
of their new facilities an move them in.
    Ms. Edwards. I think all of us understand that.
    Mr. Morris. But on a portfolio basis it is my belief that 
it is entirely incumbent when the government enters the 
marketplace to contract for leased space that they have an 
obligation to respond in a commercially reasonable fashion. It 
doesn't do the government any good to do what I call serial 
extension of leases 1 year after another where we are not able 
to look into a long-term lease to house the government.
    And I believe you are right. We are getting pushed back 
from our private sector landlords who say we need stability in 
our portfolio in our building. And we need to know what you 
folks are going to do. And we have an obligation to be able to 
deal with this.
    Ms. Edwards. Well, I appreciate that and I look forward to 
hearing from you and from the agency and the future of your 
progress on that. Because I share the view of the Congresswoman 
we are in a great position for the government, for the taxpayer 
to get a really good deal on a long-term lease opportunity in 
this current market. And we should take full advantage of that 
and so we shouldn't come back here in another several months 
still discussing 60 percent extension rates for expired leases.
    I want to go to another set of questions and it really has 
to do with this region, the Metropolitan region. In addition in 
some upcoming testimony we see a chart that shows the amount of 
GSA owned and leased space in the Metropolitan region. I 
represent a significant portion of Prince George's County and 
some of Montgomery County. There has been a longstanding 
complaint particularly in Prince George's County that Prince 
George's County has not enjoyed in this region a fair share of 
GSA lease opportunities for full service lease base, not just 
for warehouse space. And so I'd be interested and it doesn't 
have to be here, that I and this Subcommittee see some kind of 
breakdown of how those leases breakdown across the region by 
county, because when I look at 18 percent in this region of GSA 
space going into suburban Maryland compared with 25 percent in 
Northern Virginia and 57 percent in D.C., I certainly 
understand the District of Columbia numbers. I am not quite 
sure I understand the great discrepancy from suburban Maryland 
to Northern Virginia.
    I dare say that when we look at suburban Maryland and break 
that down by county that we will see that indeed it is not the 
imagination of developers in Prince George's County that the 
County has been shortchanged and there is a fairness in this 
region. I think the concern isn't just about this Metropolitan 
region, that it is replicated in other Metropolitan regions as 
well, where there needs to be sort of a fair shared opportunity 
for GSA leasing in our Metropolitan region. And I know that in 
my work on this Subcommittee, it will not be the last time you 
will hear this question until there is an answer that is much 
more satisfactory to the people of the 4th congressional 
district.
    I would also like to ask you about, if you would, please 
describe the process by which and the transparency provisions 
by which you analyze where GSA lease opportunities will take 
place. And I am particularly interested in the way that you 
both value the lease and how you assess things like 
transportation, because Prince George's County has, I believe 
has the greatest number of Metro station stops in the suburban 
Metropolitan area, and those are all stations that could be 
fully developed out. And so I am curious to know how you 
analyze transportation as a core factor, and frankly as a green 
factor in determining where to locate GSA leases.
    Mr. Morris. It is a big consideration. I would like to 
start out by saying that we had the pleasure of this week, Bart 
Bush, my colleague from the national capital region behind me, 
and I, along with the acting commissioner for the public 
buildings, had a very frank meeting with the director of the 
economic development for Prince George's County and along with 
several of the senior business men of the county to have a 
frank discussion about some of the issues that you just brought 
up.
    Quite frankly for me it was enlightening, because I am not 
only focused on NCR, but also the country at large. And some of 
the issues that they brought to our attention, I frankly, 
wasn't aware of. But in determining to try and answer your 
question to begin with where we go, transportation patterns 
play an important role, the agencies themselves that we are 
trying to find space for tell us where they come up under our 
regulatory scheme with the delineated area that they are 
looking for in terms of locating.
    Now they factor in a number of factors that are mission 
related. This very topic has been a huge point of discussion 
with the Chairman of the Committee, the Subcommittee and other 
Members of the Committee. In fact, we are now following 
guidelines in our larger deals where the prospectuses 
themselves contain an explanation of what that delineated area 
is going to be. And once that is determined and put into the 
prospectus, we are bound by that, unless there is some kind of 
significant change. In which case, we would have to come back 
and notify the Committee.
    To try to answer your question to begin with, 
transportation is a huge factor, establishing the delineated 
area is the first job of the agencies that we are trying to 
locate. And then we take a look at what they tell us and try 
and consult with them and advise them on what kind of 
competition opportunities are there and are they too small and 
is there need to actually enlarge that area to achieve better 
competition and the opportunity for better pricing.
    Ms. Edwards. Thank you, Mr. Morris. You can just bet that 
there will be ongoing questions at least from this 
Congresswoman about these issues because they are profound and 
they deeply impact the ability for the district that I 
represent to enjoy the kind of economic development and 
prosperity that the rest of our region enjoys.
    As well with 16 available Metro stop opportunities for 
transportation-oriented development that GSA can participate 
in, some of us will be very, very hard pressed to believe that 
you can't find some on that class A space that is located in 
Prince George's County, and not to take away from any other 
parts of the region, but as you begin to look at these leases 
that are expiring and I'd be curious to know the numbers of the 
leases and the square footages in the Metropolitan region as 
these are expiring so that you can take a new look, a fresh 
look at available opportunities throughout the Metropolitan 
region. Thank you very much.
    Mr. Morris. Let me just follow up, because I would like to 
share with you one important factor that they actually brought 
to light in our meeting was what they perceive as a 
disadvantage, the Prince George's County officials in terms of 
the availability of existing space. Obviously in Washington, 
D.C. It is much more built out. Northern Virginia has a larger 
stock of existing buildings than Prince George's County. So 
that oftentimes in these procurements, competitors from Prince 
George's County their space solution in that kind of 
procurement is going to be new construction and that it was 
important to understand that if you are dealing with new 
construction and that is going to be a possibility, that the 
pricing on existing space is not really going to carry over to 
pricing for new construction because the costs are going to be 
probably the same across the region. The point was made the 
cost of concrete in Prince George's County will be the same 
that it is in----
    Ms. Norton. Mr. Morris, the gentlelady has made a point 
that goes well beyond when new construction--and I am going to 
put it on the record now given your explanation to her. In the 
leases that are expiring within 6 to 12 months, we want the 
exact location.
    Mr. Morris. We can give you that.
    Ms. Norton. By county and by place in the County. And the 
reason that the gentlelady's questions are so apropos has to do 
with many instances in the District of Columbia I could site, 
but a particularly shocking one from Prince George's County. 
Now the reason that I want to put this on the record is because 
I believe that the developers in Prince George's County are 
sophisticated enough to have written to the Chair of the 
Committee and therefore inform me. I must conclude that 
throughout the United States this same, and I am going to call 
a spade a spade, red lining is occurring. This is what we 
found. We got this long, almost scholarly letter from a 
developer in which he laid out how the procurement that you 
actually cited, you cited the prospectus, how the agency had in 
fact violated the prospectus through the amendment process. You 
are right.
    We said that these complaints about proceeding after the 
delineated area to have agencies do whatever they want have 
become so systematic that you can't change a prospectus without 
coming back and reporting. And this is what the agency did when 
Prince George's and Montgomery County, two very middle class 
counties, some of the highest, highest income counties in the 
United States. This is not like far in the southeast and 
northwest. This is how the agency handled that seeing that they 
had to come back if they were going to change the prospectus, 
they read into it that well, we are not going to change the 
prospectus, we will show Norton and the Committee, we are going 
to amend the prospectus. And they trusted us enough so that 
they didn't get a lawyer to come down and get through every jot 
and tittle to catch us. So we are going to amend it.
    And what did they do to Prince George's County? Here was an 
HHS new facility, not entirely new, but they needed more space. 
And this is what the public building service did, in absolute 
unadulterated collusion with the agency it came forward with a 
set of conditions that only the present Montgomery County 
location could possibly have met. These included places of 
worship. If I may say so that one really got to me as a strong 
believer in the separation of churches and state. That we could 
actually have a Federal Government document that said places of 
worship was a factor in location. And then they went down a 
trivial list that included hardware stores, beauty salons, we 
are trying to remember them all. It was as if someone went out 
and said what is it around the agency today that we have. And 
then they said fine, make a catalogue of that, put that on 
GSA's desk and say get us a place where you can get that. Here 
was somebody trying to compete for the process that he had 
the--the one that really got us was distance from the Metro. 
Now, the Prince George's location was closer to the Metro here 
where everybody is trying to change the world green before it 
completely boils over, they simply extended the distance of the 
Metro. They said, we will fix that. It says, uncertain 
conditions we can extend it. So we will just do that and it 
will all come together and they will never catch us.
    That is why you don't see me having confidence in the 
agency. A very, very sophisticated developer who didn't just 
write me a complete, jot and tittle. I couldn't believe it, 
that right under my very nose that the very agency with whom I 
worked so closely would do something that was abusive, 
deceptive, a lie. So we call them in and they tried to indicate 
as best they can why these unheard of conditions were put and 
doing it by amendment. And then the staff and I sat and said 
what can we do about that. And to make it worse, the RFP was 
already out. One of the things we don't do in the Federal 
Government, we do abide by the right rules. We couldn't then 
say well, look just throw it back and throw it all out.
    Never and I have worked with this agency ever since I came 
to the Congress in 1991. I can only think that under our very 
noses this was happening day and night, and we never would have 
learned about it. Well, that one instance has only been a part 
of a catalogue now of growing instances where the agency has 
essentially lied to and violated the express written 
requirements of the Subcommittee. When that happens enough and 
you have the nerve to sit here and tell her about the 
prospectus and to give her a lesson in how you go about it, 
when I have this outrageous example setting before us, I want 
you to know that it angered me to no end, it reduced to the 
level of minus zero my confidence in the agency. They double-
crossed the Chairman, who they knew had had this problem with 
red lining in the district and they were doing the same thing 
to one of the counties. As a result, it was one of the 
circumstances that has lead me to engage in the present process 
of reauthorizing the entire agency and holding the agency much 
stronger to account on its reporting requirements to us. It was 
a total betrayal of trust. And the gentlelady wants to say 
something to this regard.
    Ms. Edwards. Thank you, madam Chairwoman. What I do want to 
say is that I am from Maryland, and I represent both Prince 
George's and Montgomery County, and the last thing I want to do 
is to set up a competition between the counties. And that is 
why the imperative of fairness and parity in the GSA process is 
so important. Because I know Madam Chairwoman that the 
developers that you represent and the interest that you 
represent here in the District of Columbia and I in Prince 
George's County and Montgomery County and my colleagues we just 
want a level playing field and want to know what the rules are. 
We want to know that when the rules are placed in order that 
the developers and the interest in our districts understand 
what they are and that people are playing by the rules.
    And what the chairwoman has described is a circumstance 
where there were no rules. And in fact, to the extent there 
were, they were changed in the middle of the game and that is 
not fair to anybody, not to any of our jurisdictions nor is it 
fair to those who want to compete for GSA leases. And so you 
can be assured that I and I know that the chairwoman on this 
Subcommittee are going to be looking at these issues in great 
detail because looking at our region and one only has to look, 
I think the Brookings Institute did a study several years ago 
called a region divided. And when you look at the dots on the 
map, you can see the disinvestment and that disinvestment is 
happening in a county that I represent. And so there will be 
additional questions and I hope that the agency is both held to 
account and then displays the kind of parity, fairness and 
transparency that the taxpayer deserves of and certainly that 
the people of the 4th congressional district deserve. Thank 
you, Madam Chairwoman.
    Ms. Norton. I thank you, Ms. Edwards. I do want to say that 
the gentlelady makes a point. She represents both counties and 
she is not trying to pit one county against the other. But I 
need to tell the gentlelady that I am trying to put all the 
counties in play. I have put all parts of the District of 
Columbia in play. I mean, if K Street comes up with a lower 
figure and better space, too bad NoMa, too bad the other area 
that we have encouraged to develop down by M Street, sorry that 
is exactly what we want. We want the best deal for the 
government. I want Prince George's in it. I see some explored--
unexplored opportunity for price reduction, for encouraging--
there was going to be new space here. This man was going to 
have to build so your notion about hey, as if Virginia had the 
smarts to build and Prince George's did not. On the contrary. 
Virginia got the contracts to build and they built, that is the 
only way Virginia has gotten it. So that has left an 
opportunity. We see what happens when there is an opportunity. 
Let me tell you about opportunity.
    During the fiscal crisis in the District of Columbia real 
estate collapsed in one of the wards in Anacostia, Ward 8. So 
people abandoned property and moved out and sold it for 
nothing. And look what we have happening in Ward 8 now, smart 
folks like the Federal Government has not been swooped in to 
Ward 8, saw the that land prices were lower than they were in 
other parts of the district. We have whole new developments of 
middle class housing all through Ward 8.
    Now we are asking for GSA to play that role. As it turns 
out Prince George's County ain't Ward 8. Prince George's 
County, and I repeat, is one of the most prosperous counties in 
the United States of America. And it got that way the same way 
that Fairfax got that way. All of them got that way because the 
Federal presence moved out into the area. When the Federal 
presence moves out, all other kinds of businesses move out and 
that is the way it happens. The same thing has happened in the 
District of Columbia. If the Federal presence moves into an 
area or a district, that is the good housing government seal of 
approval and others comes.
    So where you already are set up for success, because you 
have one of the most highly educated workforces in one of your 
counties, then I say she can--I understand it and I am not 
trying to put her in competition with one part of her 
constituency or the other, but I can say let's get it on, let's 
get it on. Between all the counties that are likely places for 
new construction to be built, where we are building new 
construction and it happens all the time so that we have a 
fair--to the government--yes, we want to be fair to Prince 
George's, but guess what? I want to be fair first and foremost 
to the government and wearing her Federal hat that is exactly 
what the representative from Prince George's wants.
    So you had to take this tongue lashing because you're here 
before us. But we want to put it on the record so it can be 
clear that we are not going to take the assurances from the 
agency any longer. We are going to put it into law. If this 
agency ever does to us what it did to Prince George's, because 
when they did it to Prince George's, they did it to us, we are 
going to hold you in contempt because it was a contemptible 
act. In any case, sir, you can take that tongue lashing and 
give it to the rest of the folks back there.
    Mr. Morris. I hear you, Madam Chairman, loud and clear.
    Ms. Norton. We called them all before us right in my office 
and told them what we thought of the violation of trust between 
us and they needn't violate trust with me, because I have been 
a prime defender of this agency. I have respected its 
expertise. And so when an agency double crosses me, believe me, 
they ain't got no friends up here then. And I expect to be 
treated with the kind of respect that the Prince George's 
County episode tells me I was not treated with, that the 
Subcommittee was not treated with. And frankly, Prince George's 
with a treated with contempt and I believe it was red lined and 
I will not go any further than to say red lined. You know what 
that means. I think that is what happened.
    Thank you very much for your testimony, and I want to go on 
to the next or the last panel of witnesses who are very 
important to us.
    Richard Purtell, Chair and chief officer CEO of BOMA; 
Mitchell Schear, D.C. Downtown Business Development District, 
also is a president of Vornado Development. And Dean Schwanke, 
senior vice president of The Urban Land Institute. We are 
pleased to receive your testimony.

    TESTIMONIES OF RICHARD PURTELL, CHAIR AND CHIEF ELECTED 
   OFFICER, BOMA INTERNATIONAL; MITCHELL SCHEAR, DC DOWNTOWN 
 BUSINESS IMPROVEMENT DISTRICT; AND DEAN SCHWANKE, SENIOR VICE 
              PRESIDENT, THE URBAN LAND INSTITUTE

    Ms. Norton. As to who should proceed first, I am not sure 
we have any chosen order, so shall I just go from my left to my 
right or would any of you like to proceed first? Mr. Schwanke?
    Mr. Schwanke. Thank you, Madam Chair and the Ranking Member 
Diaz Balart and the rest of the Subcommittee Members. My name 
is Dean Schwanke. I am the senior vice president for 
publication and awards at The Urban Land Institute here in 
Washington, D.C. In Georgetown. We are a not for profit 
association with 38,000 members around the country and the 
world, primarily involved in development and investment in the 
real estate industry. Our mission is to provide leadership and 
the responsible use of land and in creating and sustaining 
thriving communities worldwide.
    Pertaining to the current real estate environment, we have 
been over a lot of this already, but I will go over some of the 
things that we see, the current financial crisis and the 
economic recession are pulling the commercial real estate 
sector into a very difficult business environment characterized 
by numerous negative trends including the following. Increasing 
vacancy rates, falling rents, dwindling development prospects, 
lack of available capital for lending, stricter underwriting, 
falling property values, sluggish investment and transaction 
markets, increasing loan delinquencies and foreclosures and 
growing distress for property owners.
    While the trends are bad for the commercial real estate 
industry, they present somewhat more favorable environments for 
tenants as the availability of space is increasing while rents 
are declining.
    Of particular interest to the GSA is the office sector. A 
couple of facts here, office space rates in the U.S. have risen 
from 12.8 percent in the fourth quarter of 2007 to 14.7 percent 
in the fourth quarter of 2008 according to one estimate and 
others are even higher. And some estimates suggest that vacancy 
rates will go to 18 to 20 percent by the end of 2010, which 
creates quite a favorable environment for tenants.
    Our office rent growth has turned negative in the latter 
part of 2008 and negative rent growth is expected to continue 
well into 2010 and probably longer depending on how the economy 
performs. Increasing vacancy and falling rents will translate 
directly into reduced income for commercial properties will 
which put strains on operating budgets, reduce values and 
create distress for owners.
    So commercial real estate developers facing a dismal 
period. Financing is evaporating for new construction, demand 
is falling and projects coming on line will struggle to lease 
up falling short of forecasts. By one estimate, office 
completions in 2010 will total only about one-third of the 
completions in 2008. I think completions are expected to remain 
at low levels until 2012. So we will have a real shortage of 
new space coming on line over that period of time.
    Turning to the capital markets, the lack of liquidity in 
the financial sector has been well documented and is promised 
particularly severe for the commercial real estate sector as it 
is a capital intensive business. Perhaps most important for 
real estate capital markets are the problems in the commercial 
mortgage-backed securities market. A CMBS issuance grew 
dramatically over the past 10 years, and as of early 2008, had 
come to be a huge source of debt capital for commercial real 
estate, with over $230 billion of CMBS issuance in 2007 alone. 
However, there has been no new issuance of CMBS since the 
second quarter of 2008, zero. And it is unlikely this critical 
source of commercial real estate debt capital will be revised 
any time soon.
    In addition to the lack of capital availability 
underwriting standards have shifted drastically and the cost of 
debt capital has gone up. Commercial mortgage interest rates 
spreads over Treasury's have increased substantially. Bank 
underwriting standards and equity requirements are now much 
more demanding and conservative. More of property values have 
declined not only because of declining fundamentals but also 
due to raising capitalization rates and lack of investor 
confidence. Further declines are likely for several more 
quarters if not years.
    As a result of all the trends, refinancing of any 
commercial mortgage coming through will be extremely difficult 
for most property owners in 2009 and 2010. Many borrowers with 
loans coming due will find themselves unable to obtain suitable 
financing as any new financing sources will require more equity 
and charge higher interest rates than many borrowers can 
manage, especially if the property's value has declined which 
will occur in some cases.
    As a result, many owners will find themselves in distressed 
situations and will either lose the property to the lender or 
will sell the property at a distressed price level. This can 
and will happen even to owners with properties that are 
performing well. And the problem will severely impact a large 
number of the commercial real estate owners and investors 
lenders that have used leverage to finance properties.
    So what does this mean for GSA? The current environment 
presents both opportunities and problems. Now on the negative 
side because of the lack of financing it will be more difficult 
for developers to develop new buildings to meet specific GSA 
standards and requirements as you have already talked about. 
Although GSA's certainly a strong credit tenant for any 
proposed development deal and will make any such deal look much 
better than most others.
    The lack of new speculative buildings in the market tend to 
be more green and energy efficient will inhibit GSA's ability 
to find the most technically advanced green energy efficient 
space through the leasing process. However, the retrofitting of 
existing buildings to be more green and energy efficient will 
proceed we think as owners seek to upgrade their buildings to 
compete in a difficult market that is increasingly demanding 
such space. GSA can certainly be a leader in hastening this 
trend as it has been in the past.
    On the positive side, availability and choice in office 
space markets is improving while costs are decreasing as we 
have discussed. In the 2009, 2010 period will certainly be a 
tenants market, if not into 2011 and 2012. Rents and occupancy 
costs will decline and stabilize at attractive levels for 
several years. Thus the next 2 years should provide an 
excellent environment for leasing new space or renewing or 
renegotiating leases at attractive terms. Moreover attractive 
acquisition opportunities will present themselves in a 
transaction market where there will be distressed sellers and 
few buyers. GSA could find attractive buying opportunities and 
could potentially acquire quality, well located office building 
for its own use, at greatly reduced prices.
    That is my testimony, and thank you, Madam Chair, and 
Subcommittee Members, and I appreciate being here.
    Ms. Norton. Thank you, Mr. Schwanke.
    Ms. Norton. Mr. Schear, am I pronouncing your name 
correctly.
    Mr. Schear. It is Schear.
    Thank you for the opportunity to be a part of today's 
session. My name is Mitchell Schear and I have been active in 
the Downtown BID since its formation in 1997. The downtown BID 
is a nonprofit corporation that works to improve a 1 square 
mile of downtown Washington, D.C. To include 62 million square 
feet of office space. Within that area, GSA owns 17 million 
square feet and leases an additional 7 million square feet.
    I am also president of Vornado/Charles E. Smith, which is 
the Washington division of Vornado Realty Trust. We are the 
largest lessor of office space to the Federal Government in the 
Washington, D.C. Area. Vornado is one of the largest owners, 
developers and managers of real estate in the United States 
with a portfolio of over 100 million square feet.
    Your decision to hold this hearing today is timely because 
these discussions are taking place all across the sector and 
people are focused on these issues. What I would like to do is 
recognize Representative Norton and this Committee and GSA for 
their work on behalf of D.C. and the region.
    And on a lighter note Representative Norton I would like to 
congratulate you on your performance as Glenda earlier this 
week in the Arena Stage benefit. Having said that, I would like 
to skip over my formal testimony and having listened to the 
exchange back and forth I would just like to make several 
observations.
    I would like to reiterate that this is really an 
extraordinary time for GSA to be leasing space in the 
marketplace. There are great opportunities for the government 
to take advantage of and basically as you were saying before, 
come at us. We have got the space, we are going to compete 
against one another and demand is what we are looking for.
    It is also a great time for GSA to buy. And I think what I 
would say, it is not only good for the government to buy, it is 
also good from the owner's standpoint for GSA to buy, because 
what the government will be doing is putting liquidity into the 
market, putting cash into the market. And if you look at 
companies and the amount of capital that then comes back out, 
then they can use that money for other purposes as well. So we 
think there is a win, win situation out there.
    I would also just like to add as you talk about these new 
projects because we think you will see very little construction 
taking place, that really new projects are not really economic 
in the marketplace today. And I think the reason we would say 
that is threefold. One, is due to the rents that would be 
required to be paid by the government in particular. Due to the 
construction financing and permanent financing, you need both 
pieces of that puzzle.
    Ms. Norton. Did you say due to the rents that the 
government would----
    Mr. Schear. Yes, let me finish. So what happens is because 
of the availability of debt, and the cost of the debt, and the 
rents that would then be paid there is basically a current 
disconnect so that the developer would not go forward with a 
project generally speaking. And then finally, the third reason 
that the projects would not go forward is there is really going 
to be an abundance of space that is existing or under 
construction already. So I think that that is just not an 
avenue that will necessarily be pursued by the private sector 
in the near term. I am happy to answer any questions, thank 
you.
    Ms. Norton. Thank you very much, Mr. Schear.
    Mr. Purtell.
    Mr. Purtell. Good morning, I am Dick Purtell, portfolio 
manager for Grubb and Ellis Management Services. And I am here 
today in my role as chair and chief elected officer of The 
Building Owners and Managers Association International and our 
local association here in Washington, the Apartment and Office 
Building Association of Metropolitan Washington, DC.
    As the district's Congresswoman, you may be interested to 
know that AOBA's members own or manage 75 percent of the city's 
private office space and that one-third of the city's privately 
owned space is leased by GSA. When I appeared last summer at a 
hearing on the credit crunch it was already clear that our 
Nation was in a downward spiral and the commercial real estate 
industry was beginning to feel the pinch. Unfortunately there 
is no good news.
    Today, the roughly $6.5 trillion income producing U.S. 
property market faces its worst liquidity challenge since the 
Great Depression. With virtually no liquidity, commercial 
borrowers face a growing challenge of refinancing maturing debt 
and the threat of rising foreclosures and delinquencies. 
Through the end of 2009, an estimated $200 to 500 billion in 
commercial and multi-family real estate loans will mature from 
a variety of sources. Over the next few years these maturities 
increase to well over $1 trillion. We are faced with the dual 
challenge of developing strategies to stop the downward spiral 
and restoring confidence in the markets.
    While the incremental measures taken to date to address the 
crisis may have fortified the balance sheets of certain 
financial institutions, they have failed to address the root 
cause of the problem. It is imperative to enact measures that 
will enable financial institutions to effectively restructure 
their balance sheets to take toxic assets off banks' books and 
to start lending again on solidly underwritten transactions. By 
stabilizing financial institutions and restoring confidence to 
the credit markets, commerce will once again move forward, but 
the time to act is now.
    We are encouraged by the creation of the TALF and the 
Public Private Investment Fund. If engineered properly, these 
programs could provide credit markets with the economic 
confidence they need to reconnect in the wake of a broad 
dislocation and help restart the stalled economy.
    The cost of not taking immediate action grows higher with 
each passing day. Real estate directly and indirectly generates 
economic activity, equivalent to nearly 20 percent of the 
Nation's gross domestic product. Nearly 9 million jobs are 
created from real estate activities which annually generate 
millions of dollars in Federal, regional and local tax 
revenues. Local governments especially depend on this revenue 
which amounts to approximately $0.70 on every local budget 
dollar to pay for public services such as education, road 
construction, law enforcement and emergency planing and 
response.
    Beyond these industrywide credit issues there are specific 
areas where private sector and the public building sector could 
effectively work together for our mutual benefit. First, we 
congratulate Congress for allocating funds to the General 
Services Administration to implement energy efficiency 
retrofits in Federal buildings. We would like to suggest that 
these retrofits not be limited to Federally-owned buildings but 
also allocated to make needed retrofits to space the government 
leases from the private sector.
    The building owner will benefit from capital improvements 
made to the building, the Federal Government will benefit from 
improved high performance space, while demonstrating leadership 
and new technologies and taxpayers will benefit from job 
creation and improving our environment.
    We would also like to call attention to a growing problem 
of the government's overuse of short-term lease extensions. 
With increasing frequency the U.S. Government is asking its 
commercial landlords to enter into short-term extensions at the 
end of the lease term instead of renegotiating the lease or 
giving notice to vacate the space according to the termination 
terms of the lease.
    It is standard market practice to give anywhere from 6 
months to 4-years advance notice of the intention to vacate or 
renew a lease prior to the lease expiration. Some of our 
members have estimated that currently 60 percent of the 
government leases enter into these makeshift holdover 
arrangements upon lease expiration. This practice happens for a 
variety of reasons. In some cases, the future space needs have 
not been addressed by GSA's client agencies which can be due to 
budget uncertainty or the agency's growing pains. Also the 
lengthy process for securing congressional authorization for 
GSA's large deals goes through the prospectus process and this 
can cause delays or get bogged down in bureaucracy.
    While the causes may be understandable the result can be 
costly for both the Federal Government and for the landlord. 
Leasebacks carry a large penalty, typically 50 percent above 
the rent they were paying before lease expiration. The 
government deprives itself of the ability to obtain the best 
financial terms and a full range of options in the marketplace. 
This practice is also problematic for the landlord. If the 
building is trying to secure financing, potential lenders will 
treat the space as vacant in the absence of the lease. A vacant 
or underutilized building will have a low income stream and 
therefore impact the credit worthiness of the building which in 
turn leads to onerous loan terms. In addition, the landlord 
cannot market the space to potential clients without the 
knowledge of the tenant's intentions to vacate the space. It 
can also effect other tenants in the building who may have 
expansion rights in their leases.
    The government has always been a valued tenant and customer 
of the private sector real estate community. Due to their 
credit worthiness and guarantee of payment, many landlords are 
willing to make significant accommodations for government lease 
tenancy. However, in the present economy, the increasing 
practice of lease holdovers is creating additional distress. We 
encourage this Subcommittee to consider ways to help streamline 
GSA's leasing practices and eliminate unnecessary bureaucracy. 
We support full and open competition, but with sufficient time 
remaining on the lease to eliminate the uncertainty and 
upheaval to the landlord.
    Thank you very much for the opportunity to be here today.
    Ms. Norton. Thank you.
    All three of you have given a virtual catalogue, a very 
synopsis form, in not only the market today, but the areas 
where we should be particularly conscious to look, that 
testimony is particularly helpful to us and I would like to 
begin with some questions. Mr. Purtell, your testimony, page 4 
you take 245 raised question I was putting to GSA regarding the 
scenario that makes us see both sides of the issue and come to 
grips with what is at play here. Indeed, if BOMA has within its 
BOMA portfolio, so to speak, 90 percent of the leased space in 
this region. And third of these leased by GSA, that says 
everything about why we have to look at these credit markets 
just as you would like it as perhaps even more so given the way 
we are affected across the board.
    Just let me begin with the lengthy process, because with my 
government hat on, GSA knows I am going to insist that it go 
through, as you yourself mentioned, the competitive process, 
that gets us the best deal for sure. But we are particularly 
interested in really outside the box thinking about how to do 
things that meet the government's competition requirements and 
other regulatory requirements, while at the same time, doing so 
speedily. My great interest in government and coming to the 
Federal Government was precisely--I came as a lawyer to a very 
troubled agency, the Equal Employment Opportunity Commission, 
and started a practice which my allies in the various movements 
shrunk at that. I looked at it and I saw the cases, the large 
cases where the payback was, where you would want to bring a 
systemic charge. And then I saw where the agency was putting 
its time into cases of individuals that deserved full attention 
from the government, but for lack of a better term, I would 
call nickel-and-dime cases, because there were nickel-and-dime 
cases and had a very open process. There were almost no 
remedies, because people could file very easily.
    And so I started a settlement process whereby very early 
brought both sides together. When both sides are in doubt and 
put the investigators to work, calling out to each side what 
the areas of doubt were. We ended up with a much larger revenue 
rate for those who brought grievances. Had they gone through, 
in fact, some of them would have gotten something, but more the 
energy, more of the agency resources going into where the 
biggest payoff was. My major interest is in the jigsaw puzzle 
of making government regulations meet the standards of keeping 
the balance moving.
    Now when you heard our first witness describe what he went 
through--and then, of course, you have to advertise, because 
there may be somebody who comes forward, that even when you 
factor in all your moving costs and so forth, it makes sense to 
move out. And just knowing nothing about the process, I said, 
well, you know, the market conditions--why do you have to do 
that every time? You know what those are. They don't change. In 
fact, you don't want to change on a day-to-day basis. You want 
to market to conditions in--I hope not even the quarter--but in 
some larger time frame. So you really don't have that many 
expenses to look at to make a judgment.
    I don't know if any of you have suggestions that you would 
like to offer at this time, but I would like to know any 
suggestions you have for streamlining that process where we 
have had so much concern, what we are calling the holdover 
process, what amounts to leases for short-term, which also are 
not in the interest of anyone concerned, whether you can offer 
any suggestions for streamlining that particular process.
    Mr. Purtell. I would just start to say that I am from 
Cincinnati, Ohio. I have worked with GSA leases in a number of 
cases. I think in the previous testimony there were comments 
about, I think, looking at leases expiring in 6 to 12 months. I 
think the process needs to start a lot sooner than that.
    Ms. Norton. So one of the most obvious things you can do is 
to start earlier than when the thing is about to expire in the 
first place.
    Mr. Purtell. Absolutely.
    Ms. Norton. How much earlier?
    Mr. Purtell. Right now, I am working with tenants, and the 
properties I am responsible for, about 2 years in advance of 
that process. And it takes a while. Even GSA has its own issues 
to deal with. But even in the private sector, the companies I 
am working with, it takes a while to get through a significant 
lease renewal. So I would highly recommend you start that 
process sooner.
    Mr. Schear. Madam Chair, I think it is really not for me to 
really necessarily suggest how for the General Services 
Administration or for the Congress to attack this, but you 
asked for outside-the-box ideas, so I am going to throw one out 
there for you.
    The situation, I think, is such that if--you asked GSA if 
they had enough resources to take care of everything, and I 
think the answer was not a resounding "yes" in terms of that. 
So if you take a look at today's marketplace and you look at 
all of the real estate professionals who are unemployed because 
of what has happened--and you have them right here in this 
region. You have them in every region. Because there have 
been--they are very qualified, capable people.
    So I guess the question is, might there be some resources 
available perhaps on a short-term basis where the government 
would either hire or contract some additional resources? And 
what they could perhaps do is catch up once, if you will. So if 
they are working right now on leases that are already on 
holdover, then they can't get quite ahead, as we suggested, on 
the deals that are 2 and 3 years out. So it is possible that 
there could be a one-time sort of clean-up, if you will, and 
then begin to try and get further and further.
    Ms. Norton. Mr. Schear, just as Mr. Purtell suggested, a 
commensense notion, hey, start a little earlier, and a large 
part of the problem will take care of itself. Your notion is 
about backlog. That, by the way, is exactly what I meant at the 
EOC, a 100,000-case backlog. So no matter how much I streamline 
this process in the front end, I am still going to end up with 
a backlog. So we just separate it out into backlog cases and 
say we will proceed on a backlog strategy. That is different 
from the other strategy, takes into account other factors.
    You are right about their own personnel. They have been 
bled dry. And it may be for on a short-term basis something 
like that could be done. But that is the thing we are looking 
to. If you are serious about it, you don't keep filling the 
backlog and congratulating them for getting the new cases. You 
try to find a way to clear the decks so that the new procedures 
can, in fact, click in.
    Mr. Schwanke, I am nervous about exactly what you indicated 
in your testimony. You say in page 5 that financing of any 
commercial mortgages coming due will be extremely difficult for 
most property owners in 2009 and 2010. Many commercial real 
estate loans are structured as 5-year loans and, thus, for 
these type of loans, roughly 40 percent of the loans will be 
coming due in the next 2 years.
    That reminds me of the subprime mortgage crisis. Some of 
these are securitized loans. But these are certainly not the 
same kinds of things.
    What is going to happen? Do you think that they will--those 
who hold these loans will see that are all in the same boat and 
will negotiate their way out of this problem that apparently 
you see as large scale?
    Mr. Schwanke. Yes. I think it is large scale; and no one 
really knows how we are going to get through it, especially the 
securitized loans, which are set up with servicers that have 
certain requirements they have to follow and may not be able to 
renegotiate that loan, as a bank might be able to.
    Ms. Norton. May not be able to because of what?
    Mr. Schwanke. Because they have certain rules they have to 
abide by. Because these securities are held by a whole set of 
owners in the securitized loan market, and they have rules they 
have to follow, and they don't have a lot of leeway like a 
bank.
    Ms. Norton. You know, the government has had to help with 
this in the private sector. Do you believe the government may 
have some role to play here for--I mean, we see 40 percent of 
these loans then take down office space in large cities across 
the United States. Somebody will wish they had come up with 
some way to do something here. And I am not sure anybody is 
paying much attention at those levels because we are so 
occupied, preoccupied here with what is on the plate now.
    Mr. Schwanke. If something is not done, this could be the 
next wave of problems. It is a mortgage-backed security. It is 
a commercial mortgage-backed security, just like the other 
mortgage-backed securities that are causing all of the problems 
with the subprime. It is a much healthier market. They didn't 
have the kinds of problems as the subprime. They were generally 
good loans when they were made. They are going to go into 
distress situations simply because of the economics of the 
marketplace.
    Ms. Norton. These are people who could pay. These are not 
people who are in distress.
    Mr. Schwanke. They are going to be in distress because 
property values are going down and interest rates are going up, 
and what they are asked to put back into the next refinancing 
deal is going to be way more than they had to start with.
    Ms. Norton. Whereas if they were a bank, they could 
negotiate in keeping with the state of the market.
    Mr. Schwanke. And even some banks won't negotiate these.
    Ms. Norton. Mr. Purtell.
    Mr. Purtell. Many of these loans that we are going to be 
dealing with are interest-only loans. So the impact, when those 
come due, that is going to play out.
    Just, for example, in the metropolitan D.C. Area, in the 
next 5 years there is $21 billion of these loans alone.
    Ms. Norton. Of these securitized loans?
    Mr. Purtell. By 2013.
    Ms. Norton. And do you have any idea how much of that space 
would be government occupied?
    Mr. Purtell. I don't have those statistics. We will be glad 
to help do that.
    Ms. Norton. Mr. Schear, did you have anything to say on 
that score?
    Mr. Schear. Nothing additional.
    Ms. Norton. Let me ask you, Mr. Schear, how do you believe 
that even with a GSA lease whether you believe or, for that 
matter, whether any of you believe that if you have a lease or 
a Federal tenant they are still going to have trouble getting 
financing? A Federal Government lease with the good faith of 
the Federal Government behind it, will that have an effect on 
the cost of credit itself? Would it have an effect on credit 
availability?
    Mr. Schear. Are you thinking in terms of new construction 
or refinancing an existing or both?
    Ms. Norton. First new construction, then refinancing.
    Mr. Schear. Okay. I think that in terms of new 
construction, I think, clearly, if anything is going to get 
financed, it is going to be a Federal Government lease. But I 
think in today's market in this month of this year, it is 
nearly impossible to get financing for a new project, even with 
a government lease.
    Ms. Norton. Now, a new project with a government lease with 
the government behind the project, what makes it difficult to 
get a loan in that case?
    Mr. Schear. Just simply the scarcity of lending capital 
available, the number of lenders who are willing to lend.
    Ms. Norton. Even to the government that is financing so 
many of them?
    Mr. Schear. That is what I would say.
    Mr. Schwanke. Certainly you could find yourself in a 
situation where, well, the cost of construction is going to be 
higher than what the rents are going to support.
    In a leasing situation, you can see a situation develop 
where if the loan is coming due and a lease is coming due at 
the same time and the market has a situation where the rents go 
down and the owner still has to cover the cost of his debt and 
he has to put more equity into it, he has less income----
    Ms. Norton. That was the problem we were describing before. 
This is all circular. You have got to have somebody who can pay 
and yet, with the costs going down, the market going down, that 
controls the square footage, the cost per square foot, which 
isn't enough to take care of the higher cost of credit and 
debt.
    Mr. Schwanke. It does present an opportunity, I think, 
where if the GSA is in a building that becomes in a distressed 
situation and they have to sell, GSA can be a buyer and get a 
very good price on that and not have to move and find 
themselves in an attractive market situation.
    Ms. Norton. Now, the GSA testified that, well, yes, but 
that might depend upon the location and the rest. Should it 
really? I mean, if you have got a rock-bottom price in an area 
where you usually need some space, should you be that picky 
about, well, we can't meet the--that is not exactly what the 
agencies are looking for at this time.
    How would a private party look at that market when he 
leases all over a defined region, may need more, for the 
moment, in Fairfax than in Prince George's, but there are some 
properties in Prince George's that are particularly favorably 
priced? How would somebody look at that? As an opportunity or a 
risk?
    Mr. Schwanke. Well, it depends on what kind of leasing is 
in place. If it is an empty building, it would be a huge risk, 
because you would have the risk of leasing it up. And in this 
market, it would be extremely difficult.
    Ms. Norton. No. We are talking the government and that the 
government needs spaces all the time. Because, as you have 
heard, some of these leases expire, people would like to move 
somewhere else, and the question of getting new space, you just 
testified, is not going to be easy. So here comes a building--
maybe it is one of these buildings you just testified about. 
The ARM, as it were, became due, so they just can't meet it.
    So there that building springs up in D.C., Prince George's, 
Montgomery County, what if you had the money, like the 
government does, and were weighing the risks and opportunities? 
What would you regard as the risk and what would be the 
opportunity, if any?
    Mr. Schwanke. If you have an empty office building that the 
GSA can fill, that is a golden opportunity and meets your 
specifications. Now, a lot of these buildings won't necessarily 
do that. They are not going to be trans-oriented. They are 
going to be out on a highway somewhere. They are going to be 
empty.
    Ms. Norton. I am assuming--our own procurement rules say--
Ms. Edwards would tell you, you have to be near a subway and we 
show you an exact number of feet. So I am assuming all of that 
is in order. And, in fact, we know where people build. They 
build because they want us to come in the first place, so do 
understand that. The first and foremost kind of tenant they 
want is the Federal Government.
    So assume that is all in place. But you don't have a tenant 
in the moment. You may not even have the money at the moment. 
You may have to come to say to Norton, can you help us? Because 
this will help the save the government a gazillion dollars. 
Whatever it is.
    If you could get hold of the money, my question is, even 
though there may not be someone right now who wants that space 
in that place, is this for a big-time lessor or developer? A 
risk or is it an opportunity?
    Mr. Schear. If I think I understand the question, if 
capital were available and the government were available to 
lease, that is a win-win-win for everybody. So I think that 
regardless--as long as it meets the requirements, then I think 
that would absolutely be a good thing.
    Ms. Norton. We are trying to orient the GSA to think in a 
down market what the advantages are. There are obvious 
disadvantages that have come out in this very hearing. But the 
terrible disadvantage of having someone who is prepared to 
continue to pay on his mortgage but the short-term mortgage has 
become due, it is hard for me to see, as a benefit to somebody 
in the market there--I don't see the benefit to the lender. I 
don't see the benefit, of course, to the builder put in that 
position. But, heaven help us, it might be to the GSA to take 
advantage of it instead of having to come up with a procurement 
for a building it doesn't own and then lease it and then still 
it doesn't own it. And then, by the way, keeps on leasing it 
until it buys it several times over. Those are the kinds of 
practices we are trying to get rid of.
    Should the government, in short, have an investment 
strategy of its own? If you were--just off the top of your 
head. You haven't had time to think through this question. If 
you were to advise the government today on an investment 
strategy--and one of you--I think it was Mr. Schwanke--
testified of a reasonable financing strategy for the Federal 
Government. Bearing in mind that we lease and sometimes we have 
to construct entirely a new space for an agency, what would be 
your investment strategy, given where the Federal Government 
and the market are at this time?
    Mr. Schwanke. I would suggest it is a great time to buy. 
Over the next year, it will be a great time to buy commercial 
real estate if you are going to use it. You don't have to take 
a risk if you can occupy the space. It will not only serve the 
government well by allowing them to acquire space at very 
greatly reduced prices, but it will also help the overall 
commercial real estate market by putting a floor under prices 
of buildings.
    If there is a buyer in the marketplace willing to buy at a 
certain level, that is a floor that is there. Right now, no one 
quite knows where the floor is going to be, and that is bad for 
the commercial real estate market, it is bad for all of the 
banks and all the lenders that are lending into that market. So 
you can serve two purposes with one by buying low and being a 
market maker, essentially.
    Mr. Schear. I think, simply stated, if you are a user of 
space in today's marketplace, investment strategy would be to 
be opportunistic and take advantage of today's current 
situation.
    Ms. Norton. Ms. Edwards, do you have any questions?
    Ms. Edwards. Thank you, Madam Chairwoman; and thank you to 
our panelists today. It has been a very illuminating 
conversation.
    I think one of the points of illumination--and I hope that 
our colleagues have heard that--is a very similar warning that 
we received from the FDIC 3, 4 years ago about the subprime 
market and the securitization that was taking place in that 
market and the impending disaster.
    What we have heard right now is that we have a lot of 
commercial-backed securities that are maturing and need 
refinancing over the next 5 years, and it is a boatload. And 
the credit markets are closed in, and so the capacity to 
refinance in this situation is dire. And we are talking about 
loans that are good.
    I think when we looked at the housing market, we saw a 
housing market where, at first, we started out with a subprime 
problem; and we have quickly deteriorated into a prime problem 
and with, again, a shrinkage of credit. And this is really 
scary.
    So thank you for that, because it is a bit of an 
illumination for me.
    My questions actually have to do with looking at the GSA 
sort of lease plan and the lease-versus-buy options. I am 
reminded that a few years ago, I, actually, for a nonprofit 
that had cash, was looking at leasing space and then decided--
because, in 2000, it was a horrible commercial market. There 
was space available all over this city. I got a great deal on a 
building over on Dupont Circle, retrofitted the building, and 
it is a good deal right now.
    It seems to me GSA isn't exactly in that kind of position, 
whether it is positioned to take advantage of that or has the 
capacity or analysis to do that or not. So, again, I appreciate 
your pointing out those options.
    I wonder if, when you look at what the possibilities are 
for GSA, if you have some recommendations. You made a couple 
about how to proceed from here. Because I think we are in a 
little bit of a quandary. We know that it is a buyer's market. 
We know that it is, in some ways, a landlord's market. But we 
don't seem to be able to take advantage of it. How do we do it?
    Mr. Purtell. I think the first way is to assist the GSA 
with some of that backlog by getting the expertise that maybe 
is not there right now so they can deal with that. Because, 
obviously, the opportunity won't last forever. So I think the 
next 12 months are critical to take some steps to deal with 
that.
    Ms. Edwards. Do you have some sense--I wasn't quite sure 
GSA knows what--has a handle on the numbers of leases that are 
coming to term. Because I don't know how you both, as the 
chairwoman has pointed out, deal with what is ahead when you 
haven't dealt with what is behind. And it wasn't clear to me 
that, whether it is using technology or something else, that 
GSA fully has a grasp on the magnitude so that they can deal 
with issues of capacity.
    Mr. Schear. I think that, clearly, the uncertainty of GSA 
prior to today has been thinking of these matters. The industry 
is available to work with them. It is easy for us all to sit 
here and say there are great big opportunities out there, but 
then to match a specific situation to a specific requirement 
really is a challenge, whether you are in the private sector or 
in the public sector. So I think that that will be seen as time 
goes on.
    We should make sure whatever resources are available and 
see if, in fact, those kinds of situations will emerge. If they 
emerge in 2 of 15 situations and something is able to be done 
on an opportunistic basis, that may be a great standard, as 
opposed as to not being able to take advantage of any.
    So I think that we will have to see how it plays out, 
really, in the trenches. Because it is really not that--we 
can't sort of look at it from on high and say, hey, just go do 
it.
    Ms. Edwards. I can appreciate that.
    Just one question, and it is about retrofitting for energy 
savings versus new construction. And I am just really unclear 
about how you assess the cost. Because we hear all the time--
and some of you have said it. You have said in your testimony 
that, you know, retrofitting buildings might be a more 
effective strategy than new construction just because of the 
gaps in the rents that would be available and the new 
construction financing.
    But if you factor over a period of time--and I don't know 
what that period of time is--how much energy savings that you 
might get by building new and green, is there some parity in 
the retrofitting versus new construction?
    Mr. Schwanke. Well, I think retrofitting, clearly, you have 
an asset in place. So it is greener to use an asset in place 
than it is to build something new. And strictly from an energy 
efficiency point of view, the payoff should be pretty good over 
a short period of time. If you start going into other greener 
things that are more costly and don't get into cost savings, 
operating savings, that is another question.
    But, clearly, from an energy efficiency point of view, I 
think it is something we will see a lot more of. Because 
building operators are going to want to reduce their costs, and 
they then can then position their buildings as being more 
green. Clearly, the Obama administration is positioning the 
whole Federal Government to attack that issue and become more 
green.
    So I think it is a win-win, and a lot of building owners 
are seeing that as something they are having to do whether they 
are building a newer or retrofitting an older building. 
Especially if you find a situation where a building becomes 
largely empty or has enough flex in it so they can start 
retrofitting the space within the empty space, then that gives 
them an opportunity to become more green.
    I know our offices we turned into a green office several 
years ago just because we wanted to.
    Mr. Schear. I think you are right on sort of the forefront, 
and it is really an interesting and important question that is 
not yet answered. Because I think we have all figured out how 
to build new green buildings, and I think the industry has 
advanced very rapidly in a very short period of time. So from 
ground up, I think we can deliver really good quality, 
sustainable product.
    In terms of the existing inventory, which is mostly what we 
are focused on, we are not going to be in a period of huge 
building. It is much more complicated to figure out, within the 
existing inventory, how to build efficiencies. So I think that 
is a question that the industry is focused on right now, 
looking at the cost effectiveness, looking at a whole variety 
of issues, and I think there is more to come in the coming 
months in that front.
    Ms. Edwards. Mr. Purtell, you actually specifically 
mentioned a desire to retrofit leased buildings, which I think 
is a little bit more complicated. So I wonder if you could 
elaborate on it.
    Mr. Purtell. I guess the comment--and I would confirm what 
has been said before me--is that the existing building stock is 
the biggest part of this discussion and the opportunities are 
probably the biggest there as well. It is aging, we have a lot 
of equipment that has to be replaced, and I think it is another 
opportunity to incentivize those owners to do that and be more 
efficient at the same time.
    Ms. Edwards. The government would only get--and the 
taxpayer--a real benefit from that if there were really a long-
term lease so that we actually get sort of our bang for our 
buck, as opposed to what could amount to, essentially, a 
windfall for a leaseholder who then, when the lease terminates, 
gets to lease out this great green building.
    Mr. Purtell. I can give you a simplified example.
    For buildings in my market, the energy cost is near $2 a 
foot. If we can save, you know, 10 percent by being more energy 
efficient, do the math on all of the numbers and see how that 
works.
    So there is an opportunity immediately to save money for 
the taxpayer and the GSA.
    Ms. Norton. I want to thank the gentlelady very much.
    And I want to say to all three of you that, first, I 
appreciate your waiting us out as we went through the issues 
with our GSA representative, but to say as well that, as we try 
to think of what to do going forward, your testimony, in 
particular, has been of immeasurable value to us, and we thank 
you very much for it.
    This hearing is adjourned.
    [Whereupon, at 12:35 p.m., the Subcommittee was adjourned.]

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