CDP Q2 2025: Defense Lease Retention Hits 90% as $150B Budget Fuels Long-Term Tailwind
CDP delivered sector-leading 90% tenant retention and record 95.6% leased rates, underpinned by a historic $150 billion defense budget infusion that signals robust multi-year demand for defense IT and mission-critical assets. With appropriations and contract awards lagging funding by up to 18 months, the company’s pipeline and occupancy gains position it for accelerating growth into 2026 and beyond. Management’s guidance lift across four key metrics reflects both operational outperformance and the structural demand surge from defense priorities like Golden Dome and cybersecurity.
Summary
- Defense Spending Inflection: Record $150B appropriation drives multi-year demand surge for CDP’s core assets.
- Leasing Momentum Accelerates: 353K square feet leased YTD; retention and occupancy hit two-decade highs.
- Guidance Raised Across Board: Upward revisions signal confidence in capturing defense-driven external growth.
Performance Analysis
CDP’s Q2 results demonstrated both operational discipline and sector outperformance, as FFO per share exceeded guidance midpoint and grew 6.3% year over year. Same property cash NOI rose 2.2%, reflecting both increased occupancy and the benefit of early rent commencements on several leases. The company’s portfolio-wide leased rate reached 95.6%, the highest in nearly 20 years, with defense IT assets leading at 94% leased and 93% occupied.
Leasing execution was a standout: 353,000 square feet of vacancy leasing in the first half represents 88% of the full-year target, with another 120,000 square feet in advanced negotiations. Notably, tenant retention hit 90% in Q2 and 82% year-to-date, supporting stable cash flows and reducing rollover risk. Renewals of large leases continued at a 96% rate over the last four quarters, with government tenants showing near-total renewal rates due to high switching costs, especially for secure SCIF (Sensitive Compartmented Information Facility, high-security workspace) investments.
- Occupancy Gains Drive NOI: Portfolio occupancy climbed 40 basis points sequentially, while defense IT occupancy hit decade highs.
- Other Segment Progress: Non-core office assets saw a 300 basis point occupancy lift, with 100 Light Street now the main vacancy drag.
- Expense Control: Lower net operating expenses and timing of repairs contributed to FFO outperformance, though some costs will shift to Q3.
The company’s ability to lease and renew at high rates, despite modest cash rent spread pressure, underscores the resilience and stickiness of demand in its specialized defense and government tenant base.
Executive Commentary
"Our total portfolio is 95.6% lease, which is the highest level in nearly 20 years. The administration's massive recommitment to defense investment should provide opportunities for us to create facility solutions for new and expanded missions in the near to medium term, following appropriations and contract awards, providing a runway to continue our highly successful record of creating shareholder value."
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 Budget Tailwind
The One Big Beautiful Bill Act appropriates $150 billion in incremental defense spending over four years, with $113 billion allocated for 2026 and a 13% YoY increase in the overall budget. The Golden Dome missile defense program, with a $175 billion cost and $25 billion down payment, anchors a new wave of demand, particularly benefiting CDP’s Redstone Gateway in Huntsville, a hub for missile and space technology.
2. Specialized Asset Base and Tenant Stickiness
CDP’s focus on defense IT, intelligence, and mission-critical properties means tenants have high switching costs, especially those with SCIF buildouts that are expensive and immovable. This underpins sector-leading retention rates and positions CDP as the landlord of choice for government and defense contractors, as competitors struggle to fund and deliver secure space.
3. Vacancy Leasing and Development Pipeline
Strong leasing velocity has absorbed much of the available space, but tight supply is now shifting the growth lever to new development. The company has a 1.3 million square foot pipeline of development leasing opportunities with a 50%+ win probability, all at defense IT locations. Management expects to capitalize on these as appropriations convert to contract awards over the next 12-18 months.
4. Prudent Capital Allocation and Balance Sheet Strength
CDP maintains 97% fixed-rate debt and is planning a $400 million bond issuance to pre-fund 2026 maturities, taking advantage of tight spreads to Treasuries. The company funds growth with operating cash flow and maintains leverage neutrality, with a conservative approach to land banking for future development (e.g., Des Moines land held for long-term optionality).
5. Selective Disposition Strategy
Non-core assets are being prepared for eventual sale, but management is waiting for a more favorable interest rate environment to maximize shareholder value. 100 Light Street remains a key focus for future disposition, with the rest of the segment at 86% leased.
Key Considerations
CDP’s Q2 results reinforce its differentiated position as the leading provider of secure, mission-critical real estate for defense and intelligence tenants. The company’s performance is increasingly decoupled from traditional office market headwinds due to its specialized focus and the structural demand surge from U.S. defense priorities.
Key Considerations:
- Appropriation-to-Demand Lag: Leasing and development demand typically lag new defense appropriations by 12-18 months, setting up a multi-year runway for growth.
- Tenant Retention Moat: High retention rates are driven by tenant investments in SCIF and secure facilities, making renewals a near-certainty for government leases.
- Development-Driven Growth: With available space tightening, new supply will be met through build-to-suit and speculative development, especially in Redstone and BWI corridors.
- Non-Core Asset Strategy: Progress in leasing non-core assets improves optionality for future dispositions, but monetization is gated by rate environment.
- Defense Priorities Realignment: Golden Dome, cybersecurity, and intelligence budget increases are reshaping demand patterns, favoring CDP’s portfolio concentration.
Risks
Execution risk remains around the timing of contract awards and appropriations converting to real estate demand, with some near-term moderation expected as the 2025 budget was only recently approved. Interest rate volatility could delay asset sales or raise refinancing costs, and any reversal in defense spending priorities would directly impact the external growth thesis. Cash rent spreads remain under modest pressure, though management’s underwriting has proven conservative.
Forward Outlook
For Q3 2025, CDP guided to:
- FFO per share (as adjusted): $0.66 to $0.68
- Same property occupancy to remain flat in Q3, with a small decline expected in Q4 due to known non-renewals
For full-year 2025, management raised guidance:
- FFO per share midpoint increased by one cent to $2.67
- Same property cash NOI growth midpoint raised by 50 basis points to 3.25%
- Tenant retention midpoint lifted to 82.5%
- Vacancy leasing target increased by 50,000 square feet to 450,000 square feet
Management highlighted that compound annual FFO growth of 4% is expected through 2026, with 2025 on track for the seventh consecutive year of FFO growth. Appropriation-driven demand is expected to accelerate in 2026 as contract awards catch up to funding.
- External growth opportunities tied to Golden Dome and Space Command remain additive and not yet in pipeline assumptions
- Balance sheet flexibility supports future development and opportunistic investment
Takeaways
CDP’s Q2 validates its strategy of focusing on secure, defense-aligned assets, with record occupancy and retention rates providing stability and visibility. Guidance raises across all major metrics reflect management’s confidence in capturing the coming wave of defense-driven demand.
- Tenant Retention and Occupancy Leadership: High switching costs and mission-critical infrastructure deliver best-in-class renewal rates, supporting stable cash flow and reducing rollover risk.
- Multi-Year Defense Tailwind: The historic $150B budget increase and Golden Dome program create a durable, multi-year demand surge for CDP’s specialized assets.
- Development Pipeline and Optionality: Tight supply in core markets shifts the growth lever to new development, with a robust pipeline and balance sheet to match.
Conclusion
CDP’s Q2 2025 results confirm its status as the top landlord for defense and intelligence tenants, with operational execution and sector tailwinds converging to drive both near-term outperformance and long-term growth. The company’s leasing, retention, and development pipeline set the stage for accelerating value creation as defense funding converts to real estate demand.
Industry Read-Through
CDP’s performance and management commentary provide a clear read-through for the broader defense real estate and mission-critical infrastructure sector: Specialized, secure assets tied to government and defense tenants are decoupling from traditional office market softness, with high retention and occupancy rates driven by tenant investment in infrastructure like SCIFs. Defense spending cycles now have a direct, lagged impact on real estate demand, and competitors lacking balance sheet strength or secure asset focus will struggle to capture growth. Investors should monitor how defense appropriations translate into contract awards and development starts, as this dynamic will drive the next phase of sector outperformance.