OFFICE BUYERS EMBRACE GOVERNMENT LEASES

Count on more investors to shift their interest to office buildings with federal, state and local government tenants that can offer guaranteed cash flow in a time of uncertainty — and still get cap rates as high as 9%. Many of these investors now seek the security of a sure bet in hard times after previously coveting other properties such as retail or medical offices. Government buildings can be expected to draw increased interest from investors because their lower risk and long-standing record of good credit is not likely to require space downsizing. Government tenants typically sign longer leases as well, allowing investors to bank on steady income from these government-occupied properties.

HRPT Properties Trust and Genesis Financial Group Inc. will accelerate government building acquisitions with substantial budgets. Both firms purchased some government-leased buildings in the past, though HRPT invested heavier in medical properties and Genesis had an eye for retail. UrbanAmerica, which had a big appetite for retail, now looks to buy into the security of government buildings.
New buildings, meeting stringent security requirements that were implemented on government buildings following 9/11, have created a surge of opportunity for office investors. A few years ago, the Department of Defense increased the requirement for security perimeter setbacks, which forced some tenants to move out of buildings and relocate to ones that met requirements. HRPT Properties Trust set a goal of $400M to $500M in acquisitions this year, which is typical for the investor in years when it doesn’t have slated portfolio transactions. The investor will most likely come in at about $400M by the end of the year. After a $565M sale of medical office assets to Senior Housing Properties Trust, the investor will recycle the $215M resulting gain into office assets with the highest possible cap rates. This quarter, HRPT will close on a $53M office acquisition in Milwaukee for a cap rate above 9%. While cap rates of that strength are unheard of in primary markets, the investor believes that buying the strongest office building in a second- or third-tier market is advantageous for its strategy.

Although it has not yet acquired government offices yet this year, HRPT will be bullish about seeking out new assets and tenants. Its portfolio typically averages between 13% and 15% of government property and is spread throughout markets like Boston, Indianapolis, San Diego and Washington, D.C. Although some investors are hesitant to work with the government due to the work required to negotiate more stringent lease terms, HRPT believes it is well worth the trade because the government has a stronger credit profile and can be counted on to lease long-term and renew. Look for the investor to snatch up government buildings that fit its criteria of cap rates above 9%.

Genesis Financial Group will buy in the fourth quarter after a year of inactivity on the acquisition front. The investor is working on 12 development projects for government tenants, including one in Detroit for Customs and Border Patrol and another in South Florida for the DEA. Later this year, the investor will meet with its investors from Europe who have adopted a wait-and-see approach toward the market but may soon be ready to jump into the game, particularly with so many government portfolios trading.

Genesis plans to invest $700M in government-leased properties during the next three years through the use of three different funds powered by foreign money. Once known as a retail buyer, the investor divested itself of its retail holdings and now invests solely in government assets. Properties from $30M to $100M will catch the attention of Genesis and the investor seeks cap rates in the mid to high 7% range.

UrbanAmerica makes waves with the announcement that it is under contract to acquire 14 government buildings for $515M from Rubicon America Trust, a transaction that will, if closed as scheduled in the middle of the third quarter, include the assumption of $389M of senior debt. The buildings comprise 45% of Rubicon’s portfolio and proceeds will be used to pay off long-term debt. The portfolio, GSA I, consists of 14 government buildings, which will significantly increase UrbanAmerica’s government office holdings. While the UrbanAmerica is traditionally a large buyer of retail, this transaction, along with a $1B partnership with Fisher Brothers, will lead to a boost of office holdings within the investor’s portfolio. UrbanAmerica will target its primary markets of California, Florida, the New York Tri-State area, Texas and Washington D.C., as well as the cities of Atlanta, Phoenix and Philadelphia.