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Does Runaway Inflation Spell Trouble for US Government Real Estate?

The annual inflation rate in the United States swelled to 6.2 percent in October of 2021, prices are rising at a faster rate than they have in decades. To put it into perspective, the Federal Reserve considers two percent or lower to be the “sweet spot” for a healthy economy. The glaring erosion of the dollar’s purchasing power is flashing before our eyes. Last week, Treasury Secretary Janet L. Yellen said that it was time to stop referring to this bout of inflation as “transitory.” Price increases have endured longer than expected, purchasing power is shrinking, and consumer confidence is beginning to fall. Among the medley problems that rising inflation poses, federal real estate leases are likely to get caught in the wake.

Asset-sive behavior

Federal Reserve Chairman Jerome Powell had hinted back in August that the Federal Reserve is gearing to reduce asset purchases, which typically contain mortgage-backed securities, to curb the stubborn inflation rate. Last month, Powell dangled that carrot again to the Senate Banking Committee, stating that “we now look at an economy that is very strong and inflationary pressures that are very high, and that means it’s appropriate for us to discuss at our next meeting—which is in a couple weeks—whether it would be appropriate to wrap up our purchases a few months early.” 

The Fed had been on a spending spree of $120 billion in bonds each month to carry the financial markets and overall economy since June 2020, after spending trillions in bonds when the pandemic initially struck. Cutting back on these purchases shows that the Fed is optimistic about economic recovery, even with the eye-popping inflation rates.

However, when looking at how the Fed evaluates inflation, it might be overlooking how much impact rent prices can have on the whole monetary picture. “Rent is less critical to the Fed’s preferred inflation gauge, the one it officially targets when it shoots for two percent annual inflation on average, than it is to the Consumer Price Index,” said New York Times writer Jeanna Smialek. The rising rents across the U.S. during the pandemic directly fueled inflation rates, which could result in a vicious cycle of lease cancellations. 

Insufficient funds (?)

This is where a little something called the “Antideficiency Act” comes into play. The Antideficiency Act [31 U.S. Code § 1341] is legislation intended to prevent the incurring of obligations or the making of outlays over available funds. In layman’s terms, the federal government cannot enter into a contract unless it has allocated the necessary budget funds to support the deal. 

That might sound like a financial no-brainer, but that could become problematic in the context of staggering inflation rates. Federal real estate leases are notorious for being easily revoked because of the provisions included in the Antideficiency Act. This explains “why many federal contracts are cancelable—and why we so often read about the government canceling or cutting back on contracts,” said Kurt Stout, Executive V.P. of Colliers International’s national Government Solutions practice group. “Because federal real estate leases are, essentially, long-term contracts spanning multiple fiscal years, they are very difficult to fund.”

Whenever a landlord decides to lease a building to the federal government, they typically correspond with a General Services Administration (GSA) officer who serves as a proxy for the U.S. government. The GSA will submit an Occupancy Agreement (OA) to the federal agency that will be renting the building. The OA spells out the lease terms and the agency’s specific needs for the space. But, because of the Antideficiency Act, there’s always a key clause in the OA that the tenant agency will not have to pay their rent unless they get adequate annual budget appropriations. If it turns out that the budget can’t handle the rent, the agency can abruptly cancel the lease with as little as four months’ notice, so long as the agency settles any unpaid balances from tenant improvements.

Lease are special times

So, the current theory stands that the subsequent messes of the pandemic (economic shutdown, mass exoduses from cities causing demand for houses to soar, limited supply of homes as well as limited ability to build new ones thanks to a supply chain crisis, which, funnily enough, caused prices on goods to go up which then caused inflation) are going to contribute to a series of rent cancellations on behalf of federal agencies in the future. But how much weight does that theory hold?

With inflated rent prices and other financial woes like federal budget deficits and growing U.S. debt, “the pressure is on to cut budgets, and that could translate into early lease terminations, fewer lease renewals, and shorter lease terms for the ones that are renewed,” according to Jack and Diana Sauther of Top Hand Realty Advisors. But just as the Fed bought an inordinate amount of bonds to keep the economy afloat, the Fed can just as easily hike up interest rates on loans, which would in theory decrease the amount of money in circulation. Less money, less inflation, less of an impact on rent prices for federal leases. In essence, any anxiety associated with federal terminations could be all for naught. “To be honest,” lamented the Sauthers’, “it’s impossible to say what impact the current status of our country’s finances will have on the GSA lease sector.”

Staff Writer
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