FBI Field Office Sales Revisited

In November 2013, I published a brief analysis looking at the cap rate trend for FBI field office sales tracked from the end of the Global Financial Collapse. FBI field offices are a good subject for this type of analysis because they are mostly build-to-suits, generally homogenous and there are enough sales of long-term (15+ year) leased assets to construct a reliable trend.

When we looked at the trend back in 2013 the most recent sale traded at a 6.8% cap rate–down considerably from an 8.7% cap rate trade at the beginning of 2009. The lowest cap rate reported for any transaction during that 5-year period was the 6.4%. At the time “low 6” cap rates felt like a pretty tight yield but based on where the trend has gone since, maybe not. The most recent field office trade was recorded at a cap rate just less than 6%–and that building had a second-generation lease.

Draw a trend line through the data and we can see that the vector has not changed much from our analysis more than two years ago. Cap rates have continued to decline about 46 bps each year.

The Big Question, of course, is will this trend continue? On the one hand, projected increases in the federal funds rate will ultimately inflate Treasuries, which will squeeze the delta between that financial instrument and cap rates. At some point this will dull interest in federal properties. On the other hand, there is a lot of capital chasing long-term federally leased assets while the number of those assets is dwindling. Among those investors seeking safe harbor real estate investments, price competition will intensify.

I won’t tackle the Big Question directly in this article but will note that sub-5% cap rates will be achieved only for long-term leased assets where at least one of these conditions is also present: 1) The real estate itself warrants more aggressive pricing (this is why many properties in big-city downtown markets like Washington, DC routinely trade in the low 5% cap range); 2) The government’s rent is at or below market rent; 3) The rent includes bumps (which is rare); 4) The mission criticality of the facility ensures the tenant’s “stickiness”, and/or; 5) The lease contains modifications (like net of electric clauses) that condition common risk factors associated with GSA leases.

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