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Virginia creates new division to manage state’s real
estate portfolio
by
Rob Walker
Virginia Business
March
2005
It’s
not privitization in the pure sense, but Virginia is
moving closer to handling portions of its sizeable real
estate portfolio in a manner consistent with the private
sector. In so doing, it’s emerging as a leader
among states replacing inefficient, decentralized management
systems with a more streamlined approach that could
save taxpayers millions.
Armed with an executive order from the governor, state
Secretary of Administration Sandra D. Bowen is leading
an initiative that in the first phase targets about
5.5 million square feet of leased office, warehouse
and storage space — properties that generate the
highest costs and thus the greatest potential for savings.
This fundamental re-engineering of the way Virginia
handles real estate assets valued at more than $13 billion
is expected to save the state at least $60 million over
the next 10 years. The goal is to establish “a
unified, integrated real estate portfolio management
system,” explains Bowen.
Virginia will be one of the first states to adopt such
a model, although other states are moving in the same
direction. “Many states are looking at this, because
the business case is so solid,” says Bowen. Recently,
the federal government adopted a similar approach.
After studies by both the Wilder Commission on Efficiency
and Effectiveness and commercial real estate company
CB Richard Ellis, Bowen says the state realized that
“we have an enterprise comparable at least to
a Fortune 500 company that has not been managing, buying
and leasing facilities to the benefit of the Commonwealth.”
A newly created Division of Real Estate Services will
oversee the state’s real estate holdings, which
all told include 360,000 acres of land in more than
1,000 locations along with 13,000 buildings and about
117 million square feet. In addition, the state holds
1,500 leases for 14 million square feet of space at
a rent of $127 million per year. In Richmond alone,
Virginia leases about 2 million square feet of space.
According to a recent survey, it owns another 500,000
square feet that is not usable due to deterioration
and safety concerns.
Already on board to head the new division, which falls
under the Department of General Services, is Director
Robert Gluck. He comes to Virginia from Ann Arbor, Mich.,
where he worked as the CFO for McKinley Associates,
a real estate development firm that manages $1.2 billion
in assets. Gluck is hiring new staff and redeploying
other state workers for the new division whose offices
will be located in the new Executive Office Building
in the old State Library building on East Broad Street
in Richmond.
By applying economies of scale and market leverage,
the state hopes to eliminate redundant spaces and better
coordinate functions, improving operations and saving
money. Outsourcing some functions is also planned. Vital
to the success of the overhaul is collaboration in landing
favorable deals with private commercial real estate
companies. An area the state wants to target is negotiating
with landlords for master leases where multiple agencies
have had separate leases — often at disparate
rates — as another cost-saving measure.
As proof of the potential savings, Gluck described a
working deal for an administrative office building in
Northern Virginia that would reduce the state’s
rent by $6 a square foot, for a savings of more than
$600,000 a year. “That’s just one transaction
on a single property.”
The change has been welcomed by the commercial real
estate industry. “They have been wonderfully supportive,”
says Bowen. Indeed, brokers say they can see many positives.
“Doing business with the state hasn’t been
a very businesslike process, and the state is a very
big business,” says Henry Scholz, senior associate
broker with Hall Associates Realty in Roanoke. “It’s
been pretty haphazard,” adds B. Randolph Atkins,
managing director of Studley Inc. in Tysons Corner.
“If they can operate like a large corporation,
then the state, the taxpayers, and the industry should
all benefit.”
Relying on the industry to broker deals should produce
better results than deals arranged by a bureaucracy,
says Andrew Little, principal with John B. Levy and
Co. in Richmond. Some brokers and landlords that have
favorable deals with the state today may complain initially,
but over the long term, Little says, “This is
absolutely the right thing to do.”
So far, the state’s plan does not include assets
on college campuses, corrections facilities, mental
hospitals, or ABC stores, and some of these institutions
— which are heavily regulated — are likely
to continue to operate outside the newly formed real
estate division.
However, that still leaves plenty of buildings for the
state to examine. “We’ll take opportunities
to reconfigure space, to co-locate, consolidate, and
to see how we can use space smarter,” Bowen said.
“We also are working on our database, which is
an important part of this, and we need to improve facilities
management and maintenance.”
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