Government-Leased Sales Trend

Most investors would probably agree that cap rates for government-leased properties are trending downward.  We took a quick look at sales of government-leased properties (90+% leased by the federal government) over the past decade.  The trend was about as anticipated with cap rates moving steeply lower and sales volume increasing into 2007.  Then a variety of capital markets and economic crises completely turned off the spigot with volume picking up again in the latter half of 2008.

Our study is by no means rigorous.  Though the tenancy (and credit) is fundamentally the same deal-to-deal, asset location varies substantially spanning primary, secondary and tertiary markets.  We made no effort to parse long-term leased properties from short-term leased and we focused on sales priced at $10 million and greater.

Nevertheless, we can readily observe that:

1.  Investment is back.  In fact, there are a number of funds that are focused solely on the government-sector and several others in formation.  There is an increasing focus on the government property sector, even though the “core” investment opportunities are somewhat limited.

2.  The government-leased property trend line (in blue) more or less mimics the overall average cap rate trend for office space as presented by Real Capital Analytics.  In some respects, this is not entirely coincidental since government-leased sales contribute to the Real Capital Analytics average.

3.  Cap rates are turning downward again.  Our polynomial trend line probably overemphasizes this trend, but inexpensive debt and a dwindling supply of long-term-leased properties is clearly compressing cap rates for long-term leased properties.