As The Aerospace Industry Approaches $1T, Real Estate Struggles To Keep Up

Boosted by investments from billionaires, longstanding companies and the federal government, the aerospace and defense industry in the U.S. is expected to rocket to $1T by 2026. But as money pours in, the specialized needs of aerospace companies mean real estate is struggling to keep up, even in some of the country’s established space hubs.

To conduct their sensitive research, aerospace and defense companies need real estate that is secure, pristine and generally much higher quality than what most other industries require.

“Testing facilities need to be immaculate,” said Pulsar Fusion CEO Richard Dinan, whose UK-based rocket engine company is looking to expand into the United States. “What might be really wonderful space for a computer tech company might not be good enough for a space tech company. Our tech has to be tested in a vacuum to emulate the conditions of space, and if there's any impurities in the house, they will come up in your vacuum.”

For office and research and development space, companies often need what’s called a sensitive compartmented information facility, or SCIF, which are sections of a building cordoned off from other parts for processing classified or other sensitive information.

“We talk to a lot of aerospace companies, and they are in desperate need of this kind of space and it doesn't really readily exist,” said CBRE Senior Vice President Frederic de Loizaga, who is in the Denver office. “It's expensive to build it out and can take a long time.”

SCIFs have varying security requirements based on a company's needs and the project site’s multiple layers of security, according to Blake Sabo, a senior project architect and principal focused on aerospace projects in architecture firm EUA's Denver office.

“Due to the complex nature of a secure environment and the necessary construction and technology specifications and details, these projects are often a costly investment,” he wrote.

Colorado has the second-largest concentration of private aerospace workers in the country. Companies like Lockheed Martin and Ball Corp. — which recently announced it would sell its aerospace division to UK defense giant BAE Systems for $5.6B — maintain large campuses in the Denver area. 

But even with those deep connections to the industry, appropriate space can be hard to find in Colorado because of the investment needed upfront. But the Biden administration’s recent decision to keep the U.S. Space Command headquarters in Colorado Springs will likely lead to more investment in aerospace companies and the properties they need.

On the industrial side, facilities are often built-to-suit, such as Archer Aviation's more than 900K SF aircraft manufacturing complex underway east of Downtown Atlanta. Other companies redevelop existing space, like Axiom Space’s decision to convert a 146K SF former Fry’s Electronics store in Webster, Texas. 

Power is an important consideration, especially for facilities that include research and development and manufacturing.

“A lot of these aerospace companies, especially the startups, go to flex spaces where they can put in a little office, and then they've got the floor space for manufacturing,” said Raise Vice President Matt Harbert, whose brokerage activity largely involves aerospace clients in metro Denver.

“I'm generalizing, but often they had heavy power machinery in those buildings,” Harbert said. “So upgrades can take a long time. So buildings that actually have heavy power already really save our clients a lot of lead time and are more attractive from an aerospace standpoint.”

Other companies need buildings that can tolerate immense loads, requiring special construction and high-quality materials.

Malibu, California-based HRL Laboratories acquired a 104K SF property in Thousand Oaks, California, for $40M, which local Lee & Associates President Mike Tingus described as including a building within a building, with second-floor space that could take 300 pounds per SF held up by structural steel.

“The building was built for Teradyne with a second floor for high-precise work,” Tingus said. “I believe they have about 12 SCIF rooms up there.”

Often enough, neither the landlord nor the tenant takes the entire burden of tenant improvements for specialized aerospace-suitable office or industrial space.

“In most situations, an owner is not going to cover the entirety of that cost, though if it is a seven- or 10-year deal, an owner certainly will put some amount of money towards it,” de Loizaga said. “Companies are also then putting their own capital. It's a combination.”

But aerospace is a capital-intensive industry, with tens of millions needed for even a small rocket launch. So the costs of building out real estate often seem small by comparison, Dinan said.

“Given the value of the investment put into the technology, the industrial space isn't that much of your capital outlay,” he said.

The manufacturing sector of aerospace is one in which the U.S. has an edge: In 2021, aerospace and defense industry exports rose by 11.2% to a total of $100.4B, according to the Aerospace Industries Association’s most recent report.

The space sector of aerospace is particularly hot, with strong growth in the past two years in orbital and spacecraft launches. In 2021, there were 145 reported orbital launches, an increase of 27% over the previous year, and last year there were 187.

Many launches are still government-sponsored, but according to Deloitte, numerous opportunities are attracting the private sector, including in-space manufacturing, asteroid mining, space tourism and space-based solar power.

In aeronautics, the next big thing is the resumption of commercial supersonic aircraft operations, which have been suspended since 2003. This time around, Deloitte reports, supersonic aircraft will be far more sustainable than earlier versions.

Despite any shortage of suitable office and industrial space for aerospace, the demand for it isn't going to abate, Harbert said, including from larger players but also a rising class of startups, which are responding to the fact that aerospace is such an important industry for commercial and defense reasons.

“In the last three years or so, the startup ecosystem has created a much more healthy industry,” Harbert said. “We're seeing a lot of success stories.”

CORRECTION: SEPT. 11, 4:00 P.M. ET: A previous version of this story incorrectly stated CBRE Senior Vice President Frederic de Loizaga's title. The story has been updated.