CHICAGO—Stan Johnson Company, a national real estate brokerage firm that specializes in net-lease investment properties, recently hired Mark Hellwig as a director in its Chicago office. Hellwig has an extensive track record in the sale of office and industrial investment properties, and one of his responsibilities at Stan Johnson will be handling the sale of GSA-leased assets. As reported extensively in GlobeSt.com, the single-tenant net leased market in general has attracted hordes of investors, and we spoke with Hellwig specifically on the state of the GSA-leased market and how the recent economic news will influence it.

How would you describe the state of the sale of single-tenant government leased buildings?

There is very strong demand for larger, long-term GSA-leased assets, and the market is providing a low supply of such properties. These fundamentals have caused a steady decline in cap rates over time. Demand for long-term leased, stable assets among institutional investors and well capitalized private capital funds are probably as strong as it has ever been. Government build-to-suit projects have slowed, causing an overall drop in the supply of newer properties available for purchase. As the inventory of GSA-leased product grows older, average lease term is decreasing, resulting fewer of the most desirable long-term leases available. As capital continues to seek out acquisitions, it is considering shorter lease terms, smaller assets and locations outside of the primary and secondary markets.

What makes a government leased building attractive to an investor? Is there a substantial difference between federal leased properties and those leased by states?

GSA-leased properties provide a safe and consistent income stream, especially when compared to corporate-leased investments. There's very high quality of credit, AA+, and although most GSA leases don't extend beyond five years, an investor is buying into very little renewal risk since the retention probability is as high as 96%. The average GSA-leased property keeps its tenant for 25 years.

There is not a substantial difference in credit quality between the full faith and credit of the federal government and most states. In fact, 13 states have the same S&P rating as the US government, and an additional 15 have a AAA rating. Nevertheless, the market for GSA-leased investment properties is decidedly better due to there being a much larger pool of buyers for them, a much greater comfort with the GSA's propensity to renew and the end of the lease term, and its historical stability in keeping a given agency's programs in place.

How is the current state of the economy impacting the value of single-tenant government leased buildings?

Stable, low interest rates and ready availability of acquisition financing have been a boon to single-tenant net leased values in general, and to government-leased assets in particular.

Why is now a good time to sell a government-leased building?

Cap rate compression is the main reason to sell today. The imbalance between supply and demand for these investments has contributed to some of the lowest cap rates in history and cap rates are actually still trending downward. Inexpensive debt and an environment that sees the federal government executing on average shorter leases means that the trend will continue with regard to the medium- and longer-lease term assets.

What markets of government leased buildings are garnering the most interest from investors?

The most aggressive bidding is for larger, newly constructed single-tenant properties having long-term leases in place with certain federal agencies that have bipartisan support, such as Department of Justice, FBI, CIA, or that are defense-centric, such as Veterans Affairs, Homeland Security or Department of Defense. When one of these investment opportunities comes to market, it gets quite a bit of attention. Notwithstanding, there is good liquidity for assets that don't meet these criteria, but investors expect some premium.