CDP Q2 2025: Defense IT Leasing Hits 95.6% as $150B Appropriation Fuels Growth Prospects
Defense sector tailwinds are translating into record leasing and retention for CDP, with a 95.6% leased Defense IT portfolio and raised full-year guidance across key metrics. The $150 billion multi-year defense appropriation and the Golden Dome missile shield initiative set up a multi-year demand runway, positioning CDP for continued outperformance. Investors should watch for a ramp in development and leasing as appropriations flow through to contract awards in 2026 and beyond.
Summary
- Defense Appropriation Surge: Massive new funding and the Golden Dome initiative signal multi-year demand acceleration for core CDP assets.
- Leasing and Retention Outperformance: Portfolio occupancy and renewal rates hit multi-decade highs, driving guidance raises and operational leverage.
- 2026 Pipeline Visibility: Appropriation timing and contract cycles set up a strong leasing and development ramp for next year.
Performance Analysis
CDP delivered another quarter of above-guidance performance, with FFO per share ahead of midpoint and year-over-year growth driven by early lease commencements and cost discipline. The Defense IT portfolio, which comprises the majority of the business, reached 95.6% leased—the highest in nearly 20 years—while tenant retention posted at an exceptional 90% for the quarter and 82% year-to-date. Leasing execution was particularly strong in Northern Virginia and Redstone Arsenal, with 353,000 square feet of vacancy leasing signed in the first half, representing 88% of the initial full-year target.
Other segments, while smaller, showed momentum as well, with notable occupancy gains outside the core Defense IT business. Cash rent spreads on renewals were modestly negative, but management emphasized this was skewed by two specific leases and not indicative of underlying economics. Cost savings from utilities and deferred maintenance also contributed to margin outperformance, though some of these are timing-related and expected to reverse in future quarters.
- Occupancy High-Water Mark: Defense IT segment at 95.6% leased, up 30 basis points sequentially, driving portfolio-wide leverage.
- Retention Drives Stability: 90% tenant retention in Q2, with large government leases expected to renew at near-100% rates.
- Guidance Raised Across Metrics: Midpoints increased for FFO per share, same property NOI, retention, and vacancy leasing, reflecting strong execution and visibility.
Development activity remains disciplined, with $200-250 million in capital commitment guidance and a 1.3 million square foot pipeline of high-probability projects, all aligned to Defense IT demand. Balance sheet strength and fixed-rate debt position CDP to capitalize on new investment opportunities as defense funding cycles play through.
Executive Commentary
"The President's 2026 defense budget request, plus the appropriated funding in the Big Beautiful Bill, amounts to a defense budget of nearly $950 billion, or a 13% year-over-year increase. This is equivalent on a percentage basis to the restorative increase we experienced in 2018, and it's the largest nominal increase in at least 25 years."
Steve Bedorek, President and Chief Executive Officer
"We reported second quarter FFO per share as adjusted for comparability of 68 cents, which was two cents above the midpoint of guidance and represents a year-over-year increase of 6.3%. The outperformance versus the midpoint of our guidance was driven by the commencement of rent earlier than forecasted on several leases and the benefit from lower than anticipated net operating expenses."
Anthony Misud, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Defense IT Core as Growth Engine
CDP's business model centers on secure, mission-critical real estate for defense, intelligence, and cybersecurity tenants. The Defense IT segment now commands 95.6% lease rates, reflecting its role as the company’s primary driver of stable, recurring income. Retention is structurally high due to tenant investments in SCIFs (Sensitive Compartmented Information Facilities, secure government workspaces), which are expensive and difficult to relocate, anchoring long-term relationships and renewal rates above 90%.
2. Appropriation-Driven Demand Ramp
The $150 billion defense appropriation and Golden Dome missile shield initiative are set to unleash a new wave of demand, especially across Redstone Arsenal (Huntsville) and the BWI corridor. Management notes that leasing demand typically lags appropriations by 12-18 months, suggesting a major uptick in 2026 as contract awards flow through. Intelligence and cybersecurity allocations, both up 14% YoY, directly benefit CDP’s key markets and tenant base.
3. Disciplined Development and Capital Allocation
Development is tightly focused on high-probability, build-to-suit opportunities in core submarkets, with targeted initial yields of 8.5%. The pipeline is robust but selective, and management is not chasing speculative projects. Balance sheet discipline is evident with 97% fixed-rate debt and plans to pre-fund upcoming maturities, maintaining low risk and flexibility for opportunistic growth.
4. Portfolio Optimization and Asset Disposition
Non-core segments are being actively repositioned or prepared for sale, but management is waiting for improved interest rate conditions to maximize value. The remaining non-defense assets are concentrated in a handful of properties, with occupancy and leasing steadily improving, paving the way for eventual divestiture and capital recycling.
5. Embedded Growth from Contract Structure
Government lease structures provide unique renewal and rent stability, including standstill agreements that ensure continued rent payments during delayed renewal processes. This contractual framework gives CDP a margin of safety and cash flow predictability not common in traditional office REITs.
Key Considerations
CDP’s Q2 results reflect a business operating at the intersection of national security priorities and real estate fundamentals. The company’s strategic focus on defense IT and mission-critical assets is yielding both operational leverage and forward visibility.
Key Considerations:
- Appropriation Timing Sets Up 2026 Ramp: Leasing and development activity expected to accelerate as defense funding cycles flow through to contract awards.
- Retention Moat from SCIF Investments: High cost and complexity of secure facilities drive structural renewal rates and portfolio stickiness.
- Balance Sheet Readiness: Fixed-rate debt and planned bond issuance position CDP to act on new opportunities without overextending leverage.
- Non-Core Asset Monetization: Disposition of legacy office assets is on hold pending rate improvement, but operational progress continues.
- Rent Spread Optics vs. Economic Reality: Headline rent spread declines are not reflective of actual economic outcomes due to lease-specific factors and underwritten assumptions.
Risks
CDP’s fortunes are closely tied to U.S. defense spending cycles, and while current appropriations are robust, any future shifts in budget priorities or political sentiment could affect demand. Project execution risk remains, especially around development timing and permitting, as evidenced by minor delays in the data center pipeline. Interest rate volatility and capital market conditions could impact both asset sale timing and refinancing costs, though the company’s fixed-rate structure mitigates near-term exposure.
Forward Outlook
For Q3, CDP guided to:
- FFO per share (as adjusted) in the range of 66 to 68 cents
For full-year 2025, management raised guidance:
- FFO per share midpoint up one cent to $2.67, with a narrowed range
- Same property cash NOI growth midpoint up 50 basis points to 3.25%
- Tenant retention midpoint increased to 82.5%
- Vacancy leasing target raised by 50,000 square feet to 450,000 square feet
Management emphasized that appropriation-driven demand will materialize with a lag, setting up a strong 2026 and beyond. The development pipeline remains robust, and capital allocation discipline will continue.
- Watch for contract award timing to drive leasing acceleration
- Monitor permitting and development execution in key submarkets
Takeaways
CDP’s Q2 confirms the company’s strategic alignment with U.S. defense priorities, delivering operational outperformance and raising visibility into a multi-year growth cycle.
- Defense Appropriation Tailwind: The largest nominal increase in defense funding in 25 years underpins the demand outlook for CDP’s core assets.
- Operational Resilience: Leasing, retention, and disciplined development combine to drive stable growth and mitigate sector volatility.
- 2026 Set to Inflect: Appropriation-to-leasing lag positions CDP for an outsized year as contract awards ramp next cycle.
Conclusion
CDP’s defense-focused real estate platform is capitalizing on historic funding increases and mission-critical tenant demand, with record leasing, retention, and raised guidance across the board. The lagged impact of appropriations and a robust development pipeline set the stage for continued outperformance and operational leverage into 2026 and beyond.
Industry Read-Through
CDP’s results reinforce the secular tailwinds for defense and intelligence-oriented real estate, highlighting the value of specialized, secure assets as the broader office sector faces headwinds. Investors in traditional office REITs should note the divergence: defense and government-anchored portfolios are benefitting from policy-driven demand and renewal moats, while commodity office assets struggle with oversupply and tenant churn. The Golden Dome initiative and rising cybersecurity budgets signal ongoing demand for secure, purpose-built infrastructure, with implications for contractors, service providers, and adjacent real estate segments focused on mission-critical government work.