by Craig Estey, Executive Managing Director
When a manufacturing company wanted to lease a 50,000-square-foot warehouse in Oakridge, TN, Cushman & Wakefield’s Aerospace & Defense group stepped in to represent the tenant. The result? A one-year contract, with six one-year extensions.
This was definitely not a standard industrial lease. But then again, the tenant wasn’t a standard industrial tenant. The company had a contract with the U.S. Department of Defense calling for processed uranium. Given the nature of the business, and the fluidity of government contracts, the short-term lease and extensions represented a successful deal.
With 6% of the U.S. budget, or $602 billion, funneled into defense industry spending in 2016, government defense and aerospace suppliers require the right space for peak optimal functioning. Such space necessities differ from those required by more traditional tenants.
Differences Create Challenges
Companies working within the aerospace and defense industries end up with numerous commercial real estate needs. Those requirements also vary, ranging from traditional office space, to high-bay warehouses with enough room to handle large-parts assembly, to huge swaths of land geared toward missile or jet-engine testing.
Furthermore, as government contracts are the main source of revenue in most cases, leases must often reflect when contracts begin and end, and include the possibility of extensions. In many cases, tenants require agreements drawn up in one-year increments.
Such agreements can be an issue for some landlords, especially those in core markets. Defense and aerospace tenants are, more and more, venturing into core markets, such as Los Angeles or Manhattan, to recruit a highly skilled workforce. With this migration into major markets, tenants are finding themselves in competition with more traditional users of space.
Lastly, these industry cycles differ from those of the overall economy. Certainly, aerospace and defense took a hit during the 2007-2009 downturn, as did others. They were also negatively impacted in 2013, when government sequestration kicked in. Yet during wartime, government funding and contracts increase.
These days, cyber-security is a focus, especially for defense industry companies. This, in turn, is boosting the need for different types of CRE space. Yet offsetting this trend are companies selling divisions to focus on core competencies. So while growing cyber-security forces increase demand for certain types of buildings, shrinking firms are reducing real estate footprints.
To reduce, or circumvent, the challenges of non-traditional leases and variable economic cycles, Cushman & Wakefield’s Aerospace & Defense group adopts an “early bird” philosophy for original leases and renewals. The search for space begins as early as possible, while renewal negotiations often begin years before lease expirations.
The good news for these tenants is that landlords, for the most part, know who they are. The landlords also know that aerospace and defense firms have exemplary credit ratings. Another aspect piercing through landlord skepticism is that, in many cases, tenants leave the properties in better shape than when first leased because of required improvements and upgrades.
Given the industry’s unpredictable nature, the Aerospace & Defense group is less concerned about single transactions or quick turnarounds, and is more focused on building, and maintaining long-term relationships. In this way, the group is better prepared to work with tenants throughout varied economic cycles and ever-changing requirements.
Craig Estey is the Executive Managing Director for Cushman & Wakefield.