A Vital Subcategory in CRE
Recently, the concept of industrial-leased government assets has gained significant attention. These assets are government-leased industrial buildings such as manufacturing plants, warehouses, distribution centers, research and development facilities, and other comparable assets. While government leasing is not a new concept in CRE, the emphasis on industrial-leased government assets has increased due to the rising demand for industrial real estate and the increased need for government agency space in the private sector.
In the U.S., government agencies such as the General Services Administration (GSA) lease millions of square feet of industrial space (over 23,000,00 SF) from private landlords every year. These leases typically occur in five-year increments, ranging from 10, 15, and 20 years, and often come with options for renewal. For property owners, these long-term leases provide a reliable and stable source of rental income, making them an attractive investment opportunity. There is a large revolving market between NNN to GSA leased backed assets and blended correctly adds the diversity a portfolio needs.
The government possesses and rents a greater number of commercial real estate assets than any other organization, estimated at 178M SF with annual expenditures over $5.8B. Source: GSA
Understanding Industrial-Leased Government Assets
According to Mike Salik, First Vice President of Matthews Real Estate Investment Services™, “The average price per square foot is determined mostly by the agency’s requirements. Government leases are normally driven by fair market values of the local region, then add mission-specific improvements to the building and lease requirements. For design-build projects, we create a lease contract value based on percentages of the costs to build.”
As for the leasing process, “It’s complicated, and only recommend seniors or leasing experts should perform the work,” said Salik. “Most lease projects take 12-36 months to finalize, RLP packages are in excess of 100 pages, and the landlord’s time is better spent hiring an expert.”
Because of federal contracting laws, the government normally requires a full-service lease, including utilities, pest control, janitorial, taxes, insurance, etc. This means a rate that includes the shell component, operating expense, and any TI.
Advantages of Government-Leased Assets
The stability and dependability of government tenants are two of the most significant benefits of industrial-leased government assets. In contrast to private renters, government agencies are regarded as highly reliable tenants, as their contracts are typically long-term. Additionally, rent is 100 percent backed by the government, meaning tenants can’t default. As a result, investors, developers, and property managers seeking a solid, long-term investment might consider industrial-leased government assets.
Government entities typically enforce strict security and safety standards, which often require property repairs and improvements, even modernization of the leased facility. These may involve installing security access, fire suppression systems, and other upgrades to enhance the property’s value and attractiveness to prospective tenants. These costs are normally divided into shell and tenant improvements.
From the government’s perspective, leasing industrial properties from private landlords can provide a cost-effective alternative to constructing their facilities and budgeting for annual maintenance.
Leasing allows the government to avoid the upfront costs associated with construction while providing them with the flexibility to relocate their operations if the mission should change.
Industrial-leased government assets can also be build-to-suit properties; according to Salik, “Always look first at existing buildings, but sometimes the government requirements are so unique/strict that a new build is the only way to fulfill the need.”
Challenges
Government leases frequently include specific restrictions and compliance criteria that the landlord must meet, such as accessibility standards, environmental regulations, and building codes. As a result, the lease is complicated, and the government goes into holdover, so investors and developers must collaborate closely with the government agency and consult with legal and real estate professionals to ensure all standards are met.
Another key component of government industrial-leased assets is the requirement for specific knowledge and experience in facility operations. Because government leasing is a highly specialized subset of the commercial real estate market, investors, developers, and property managers must be well-versed in government procurement laws and regulations, leasing agreements, and the unique needs of industrial tenants.
COVID-19 also had a significant impact on the sector. According to Salik, “The impact on the industrial markets is mostly from e-commerce and supply chain issues. The private sector does not want delays therefore driving market rents upward. The government is a huge purchaser of goods and services, and with demand increasing for additional spaces, the government must look elsewhere.
Takeaways
Industrial-leased government assets are an important subgroup in the commercial real estate market. While they have their own set of challenges and requirements, they also provide stability, dependability, and the possibility of long-term growth and profitability. Working with experts in the field, investors, developers, and property managers can tap into this expanding market and contribute to the
