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Government -Leased Properties Are Drawing More Investors
The Wall Street Journal
September 18, 2002
By: Sheila Muto
Uncle Sam is looking particularly appealing to real-estate investors these days.
More and more investors are turning their attention to office properties occupied entirely or mostly by government agencies. These days, such properties are perceived to be less risky than multi-tenant office buildings or even other properties occupied by a single company. The government is seen as having good credit and as less likely to downsize or vacate.
So far this year through August, investors have spent $817 million to acquire - government-leased properties, more than double the $345 million that was spent a11 of last year, according to Real Capital Analytics Inc., a real-estate research firm based in New York.
"There's been a flight to single-tenant properties with a substantial increase in activity in the second quarter, and properties where the government is a tenant is a favorite because the government is seen as rather risk-free," says Robert White Jr., Real Capital's president. What's more, "it's an easy investment," he says. There are fewer management hassles for owners because "you don't have a -lot of renewals and tenants to deal with."
Wells Real Estate Funds, an Atlanta based firm, closed on a $51 million deal yesterday to buy a 257,000-square-foot property on Long Island in New York that serves as a regional processing center for the Internal Revenue Service. HRPT Properties Trust, a Newton, Mass.-based real estate investment trust, beat out several bidders to acquire for nearly $73 million a 532,000-square-foot office property in Fresno, Calif., last month. The property is home to the IRS, which has 10 years remaining on its lease. And a 200,000-squarefoot office building in New Orleans, La., the majority of which serves as a base of operation for the U.S. Department of Interior's Minerals Management Service, was sold in July to New York-based Elman Investors for about $24 million, slightly below the seller's asking price.
Wells Real Estate's purchase of the IRS-occupied property in New York is the first acquisition of a government-leased property the firm has made, says Chief Investment Officer David Steinwedell. Previously, Wells Real Estate focused on single-tenant buildings that are leased by large corporations. Now, properties occupied by government agencies will make up about 20% of the more than $1 billion that one of the firm's REITs plans to spend this year to diversify the portfolio.
"The government is probably the best credit tenant out there these days," says Mr. Steinwedell. And it "shows the greatest tendency to stay in place."
Still, there are some complications to having the government as a tenant. "The government has its own mandated lease forms and its own way of doing business," says Mr. Steinwedell. Owning a property leased by the government through the U.S. General Services Administration "is different than owning a property occupied by a corporation. Not every buyer will want to get involved with these properties because it does take extra work."
Indeed, GSA leases are different from typical leases landlords sign with corporate tenants, says Joe Delogu, a principal at real-estate services firm Spaulding & Slye Colliers in Washington, D.C., and a former official at the GSA. Landlord "are signing a government contract and it's government contract law that governs the agreement rather than local real estate law."
For instance, a federal-government lease contract will require landlords to use small and minority-owned businesses for certain services, use prevailing wages for renovation and other work done on the property and maintain a drug-free workplace. These contracts also outline circumstances under which the federal agency can break a lease, which corporate tenants cannot easily negotiate into a lease agreement.
"There's a whole list of clauses in a government lease with a basis in 'presidential orders and public laws that-typically don't exist in commercial leases," says Mr. Delogu. What's more, "if the government really wants your space, they can take it from the landlord by condemning the building;" he says. In rare situations, the government agency may be in default on the lease, but it will remain in the building: "Show me a corporate tenant that can do that."
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