Experienced GSA-leased property investors are quite familiar with the advantages and challenges associated with ownership of property leased to the GSA. However, new entrants to the investment sales market for single-tenant GSA-leased property often ask why investors seek to acquire these assets. We typically answer this question by highlighting the advantages and challenges associated with such investments. Here’s a brief rundown of some of the more notable ones.
- Strong credit tenancy – In an unpredictable market, a GSA-leased property offers investors a strong credit tenant under a lease contract that is guaranteed by the U.S. government.
- High lease renewal rate – The long-term, stable tenancy of GSA-leased properties is well-documented. For the period FY 01 through FY13, GSA maintained occupancy in their leased facilities for an average of 23.3 years weighted by RSF or 14.6 years weighted by lease.*
- Specialized facilities – Single-tenant GSA facilities are often purpose built and very specialized with extensive tenant improvement and security requirements. Think border patrol stations, DEA labs or courthouses to name a few. The unique functionality and associated replication costs of these buildings generally increases the likelihood of renewal and remaining in a facility well beyond the initial term.
- Higher returns – GSA-leased properties typically exhibit higher returns than similar single tenant NNN investments–sometimes as much as several hundred basis points. Experienced investors that are willing to take on the risks of real estate ownership and operations find that these facilities can provide yields of more than 500 basis points over 10 year US treasuries.
- Full Service Gross lease structure – The typical GSA lease is full-service, which requires significant landlord responsibilities. Long-term operating expense risk is pushed primarily to the landlord, particularly as it relates to utility costs.
- Early termination rights – Many GSA leases include a soft term whereby GSA has the right to terminate the lease based on a specified notice period. This presents significant underwriting challenges, especially as relates to debt placement.
- Lack of product– 87% of existing GSA leases have less than 5 years of firm term remaining. 73% have less than 3 years of firm term remaining. The budget constrained environment and other factors have in effect shortened the average lease term, thus limiting the number of long term government-leased investment opportunities.
- Lengthy lease renewal process– The GSA lease renewal process is often opaque and bureaucratic resulting in great frustration for owners who may be expecting timely action.
- Consolidation/downsizing– As older buildings are being vacated, GSA is making a push to occupy its owned inventory to a greater extent. Consolidations are causing tenant relocations, as is the difficulty of renovating in-place. The historically high rate of renewal may decrease. Experienced investors mitigate this risk by focusing on modern, efficient buildings, especially first-generation, specialized facilities.
- Secondary/tertiary locations– GSA-leased facilities are often allocated in secondary or tertiary markets, at rents above the market norm. For investors unfamiliar with these specialized facilities, this is a source of concern as it relates to residual use. Many investors will underwrite the risk of the tenant vacating facility, which can lead to a wide variety of viewpoints on pricing from a prospective pool of buyers.
Of course every GSA-leased investment opportunity possesses its own, unique story and investment in this sector is certainly not without challenges. Yet, it is pretty clear that investors and developers continue to aggressively pursue single-tenant GSA-leased assets.
*Source: GSA Lease Turnover Analysis.