From Brian Saal
Government Investor Services – Capital Markets
As each week passes with another cyber-attack dominating the news cycle – from Sony to Target to the Office of Personnel Management – Congress, the White House and the American public are becoming more and more committed to the idea of long term cyber defense.
What does this growth and focus mean for owners and investors in federal real estate?
With more than $32 billion spent in the past decade and trillions more planned for the decade to come, we anticipate that cybersecurity will renew federal leasing velocity in ways not seen since the stimulus package of 2009.
The Federal Government has a near-term demand for operational facilities that can support the cybersecurity mission and the required funding. This translates to the possibility for premium investment quality assets; secure facilities with long-term leases and major capital investment in the supporting infrastructure.
Government investors and lenders have responded very favorably to the rise of cybersecurity as a national defense priority due to the opportunity to create and retain value with functional assets that house cyber-security tenants. The reason behind this confidence is the certainty of renewal created by the specialized nature of the properties and clear growth trajectory in the sector.
With cybersecurity growing as a major concern for both the government and the private sector, the Federal Government is at the forefront of coordinating a national response. This translates into a large initial tenant improvement allowance and even more specialized capital investment like fiber connectivity, highly secure communications rooms, and site security. It is not uncommon for the federal Government to sponsor $50 – $200 RSF in additional improvements in a 10 – 15 year initial lease term.
Sophisticated investors have begun to understand that cyber-related tenants with shorter firm terms may actually have higher renewal potentials than other federal users in traditional office space under longer term leases. Buyers are placing increased emphasis on the specialized nature of cyber related installations and underwriting higher renewal probabilities, driving down cap rates and recognizing increasing asset value for sellers.
Please feel free to contact me for more information or questions.