Long-Term, GSA-Leased Investment Opportunities Are Limited

The investment market for GSA-leased properties has become progressively robust as investors seek to place capital in long-term leased, stable assets.  To the degree that these can be bought with 10+ years remaining (and a properly structured lease) many investors feel like they are buying a bond, except with improved returns.

Unfortunately, however, there are surprisingly few of these investments available relative to the size of GSA’s 195 million square foot national portfolio, especially if we further target the $20 million+ property investments that appeal to most institutional investors.  To quickly illustrate this, we prepared these two scattergraphs.  The one above illustrates the entire inventory of GSA leases* in the U.S. and its territories.   We thought it was instructive to show that there are a few huge leases (the highest dot represents the 2.4 million square foot PTO lease in Alexandria, VA) but the vast majority of leases are under $10 million in annual rent, generating values for long-term leased assets roughly $100 and under, using some broad assumptions for prevailing cap rates and operating expenses.  This is the real sweet spot for today’s prototypical government investors.  Yet, if we look at the graph below and focus in just on the portion of GSA inventory in that size range, we note a few things:

1) The bulk of GSA leases have less than 5 years of firm (non-cancellable) term remaining.  Beyond that, the volume of leases steps down substantially, with a pretty dramatic drop-off beyond 10 years of remaining firm term.  Only 2.5% of GSA’s leases have more than 10 years of firm term remaining.

2) If we look at the value generated from these leases, the results are equally stark.  Almost 87% of GSA’s leases have full-service annual rent below $1 million.

3)  Finally, if we decide to look at that quadrant of leases above $2 million in rent (Approx $1.5 million NOI) and 10+ years of firm term, the pickins’ get especially slim – there are just 69 leases in the nation that meet that criteria.

* This analysis uses just GSA leases because rent data was readily available for this class of leases.  GSA leases comprise the vast majority of the government inventory, though some agencies (ex. FDIC, US Postal Service, OCC, etc.) have leases executed directly using independent, statutory or delegated leasing authority that would add to the inventory figures depicted above.  Further, our analysis does not attempt to aggregate multiple leases in the same building to determine how many of these opportunities represent buildings that are primarily government-leased.  Though, that is an analysis we’ll definitely perform in the future.  Stay tuned.