“Like the Wild West” is how one panelist characterized the U.S. General Services Administration (GSA) and Veterans Administration (VA) market at the National Net Lease Investment Conference, produced by NREI and RetailTraffic.com and held on Nov. 1 in Chicago and attended by more than 150 commercial real estate pros.

GSA and VA leasing and development deals are not only becoming rarer but are simultaneously being chased by an increasing number of players, explained “The Government as Tenant” panelist William Schorsch, principal at W.D. Schorsch Commercial Real Estate, a Chicago-based commercial real estate firm that has specialized in GSA and VA projects since 1977. He said that such deals also tend to be intricate, often taking years to close and requiring an abundance of paperwork and fulfillment of requirements.

Moderator Nathaniel Sager, vice president of the credit tenant lease finance group at Mesirow Financial in Chicago, reported that the year-to-date statistics for the GSA and VA market released by the National Federal Developers Association at its annual conference, held in Washington, D.C. last month, were not promising. “New leases are down from over $1.3 billion last year to $150 million this year; renewal rates are trending downward for the first time in recent memory and the future pipeline is basically completely unknown,” Sager said. “These aren’t the kinds of things I’d imagine that you folks like to hear about your sector.”

“It is the worst cycle I’ve ever seen,” Schorsch responded. “To go from over $1.3 billion to [this year's volume] in the same time period for the federal government is a 96 percent decrease. There’s not a lot of clarity with respect to the federal government, not knowing how they want to fulfill their real estate needs or if they want to fulfill their real estate needs. It’s made it very challenging, and anyone who is competing and winning deals today in this environment has to be among the best of the best.”

Although the pipeline is currently in good shape and should remain so for the next 12 to 18 months, there is concern about what will be available for new deals in two years “now that the spigot has turned off,” noted Kris Jankowski, vice president with the Chicago-based Titanium Real Estate Advisors, which serves as asset manager for several institutional investors. He described Titanium’s strategy as “a point in time—we’ve got a bucket of money that we want to go out and place for a client who has identified the GSA market.”

Aasif Bade, president of Ambrose Property Group, a privately held commercial real estate firm based in Indianapolis, said his firm is pursuing a variety of GSA agencies and has completed one full project so far. “We’re a stabilized asset buyer seasoned primarily elsewhere, but trying to build a GSA portfolio,” he said. However, he added, his firm is being realistic by keeping GSA and VA deals as a small amount of its business, which focuses mainly on value-add and opportunistic development.

But while the GSA and VA market presents opportunities, Bade noted, “It’s concerning for any developer … when there’s stalling and some deals simply not happening” as well as the fact that a “herd mentality” seems to be developing throughout the real estate community regarding the market.

Schorsch agreed. “There’s such a lack of volume in the market generally that people are looking to do projects anywhere,” he said. “Certainly when you have a project that combines size with credit like some of these GSA projects can do, it attracts everybody from everywhere who thinks they can try to do this.”

Getting deals done in the GSA and VA market depends on having a solid knowledge base about how such projects work, a team with experience in the market and great relationships, said Jankowski.

“But sometimes it also comes down to luck,” said Schorsch. “You might have four teams interested in a project and it’ll be a ‘beauty contest’ that determines who gets it. Maybe your team will win because of the design or even the color of a building you did, or because someone on your team was impressive. The government is not obligated to go with the lowest price proposal, they’re linked to best practices.”

Jankowski said he believes GSA and VA deals are still worth chasing due to automatic lease renewal in many deals and a tendency to extend holdovers in others. “There is still a big enough spread to deal with the headaches—that’s why we dove in,” he said.

Bade agreed. “We’re a very opportunistic firm and we want to play and to go against the grain,” he said. “Generally speaking, [the GSA market] is the Wild West—it’s not rational but it’s reasonable. And we need the government to be a rational actor to do business, but we make our money on it not being rational.”