A mostly model tenant

Who spends $5.6 billion a year on rent? Who else but the federal government, the leading occupant of real estate in the U.S.

Last year Uncle Sam leased 334 million square feet of space; the government already owned 3 billion square feet of property that it uses for post offices, military facilities and the like. More than half of the leased real estate -- 185 million square feet -- was traditional office space, which the government is increasingly opting to rent rather than own.

Between 1997 and 2002 the government increased its office-leasing commitments by an average of 8.3 percent a year, spending roughly $3.6 billion on rent in 2002. Government construction and purchases of office space rose an average of just 2.3 percent over the same period.

Though the threat of terrorist strikes looms over high-profile government sites, from a landlord's point of view, no tenant could be more stable or creditworthy. Just ask Thomas Peschio, CEO of Omaha, Nebraskabased Government Properties Trust, which went public with a $193 million IPO in January. The real estate investment trust's sole tenant is the federal government.

GPT's portfolio holds about 420,000 square feet of space acquired for $82 million; some of the properties are leased to the Drug Enforcement Administration and the Federal Bureau of Investigation. In mid-June the REIT acquired a $10.5 million building in Lenexa, Kansas, leased to the Food and Drug Administration.

"We're buying for the government credit," says Peschio. "We're buying because we'll have zero percent delinquency and 100 percent occupancy. It's absolutely the best credit possible."

"Our leased inventory has been growing dramatically in the last decade or so," notes William Jenkins, national realty services officer of the Public Buildings Service, the U.S. General Services Administration division that serves as the landlord of vast tracts of government property. (The military and the U.S. Postal Service, among other government entities, manage much of their own real estate.)

With limited construction funds available, leasing has become a more attractive option for the government. In addition, Jenkins points out, the PBS has been evaluating and restructuring its owned real estate inventory -- much as many corporations have been -- replacing older offices with more efficient workplaces. "If it doesn't make economic sense to reinvest in, say, a 30- or 40-year-old general purpose office building, we will move the people out to leased space. It's a major portfolio-restructuring effort," Jenkins explains.

As government leasing heats up in the wake its property sales, a growing number of investors in single- and multi- tenant properties are finding that the government is providing a significant part of their income. Case in point: Newton, Massachusettsbased HRPT Properties Trust, which began buying office buildings leased to federal government agencies in the mid-1990s. Uncle Sam, HRPT's biggest tenant, accounted for 17 percent of its total rental income at the end of 2004's first quarter; that ratio will increase in the wake of the REIT's mid-July acquisition of Hallwood Realty Partners, a company that receives 23 percent of its rental income from the government.

For the most part, though, the government's leased space is scattered among many real estate owners. According to GPT's Peschio, the 8,200 locations leased by the government represent roughly 7,500 different landlords.

Not surprisingly, government lease contracts tend to be convoluted. "Doing business with the federal government is a complicated undertaking," says Peschio. "This is a business for people who have the patience to perform the necessary due diligence."

The government can be a demanding tenant -- but at least its rent checks don't bounce.