Defense Industry Brokers Gear Up For Their 'AI Moment' As Startups Hit Growth Mode

Defense contractors have long served as major office and industrial users in pockets of the country. But as defense spending ratchets up with another $150B, courtesy of the One Big Beautiful Bill Act, these companies are poised to grow their physical presence.

That growth means brokers who can work in the defense and aerospace segments of the commercial real estate market are the busiest they have been in years.

“You have AI, you have robotics, it’s probably the most feverish pitch it's ever been in my 30 years of doing this,” said Cresa Vice Chairman Tom Birnbach, a defense industry expert based in Washington, D.C.

Huge legacy players have pulled back in recent years, shedding space in line with more modern office needs, and the Department of Defense has sought to cut its footprint, along with most of the federal government.

But where these stalwarts have retrenched, startups have emerged.

In many cases, startups focused on advanced manufacturing in sectors such as robotics and drones seek out flexible workspaces for research and development, engineering and office work.

Leasing and activity for advanced manufacturing companies connected to space and defense is up in markets like Southern California, Northern Virginia and Colorado Springs, Colorado, with smaller markets like Huntsville, Alabama, and Tucson, Arizona, slowly emerging.

Venture capital has surged, according to Pitchbook, with $19.1B in deals in the second quarter, a 106.5% jump from Q1. Investment this year has already surpassed the total in 2023 and will easily overtake 2024. 

“This is kind of our AI moment,” said JLL Executive Vice President Mac Burridge, who works in Southern California. “Northern California has AI, and we have this advanced manufacturing. I know about it because I'm in it, but I hope the rest of Southern California understands what's happening because it’s super exciting.”

A Cresa report from May indicated that while office demand from these companies remains flat, industrial and flex space demand has surged in recent quarters. Accordingly, more brokerages are entering the space or expanding the teams focused on these firms, Birnbach said.

Typically, the companies are looking for second-generation industrial space that’s been converted, with high ceilings, roll-up doors, reinforced concrete floors and newly installed HVAC. Most range from about 25K to 75K SF, because startups can build weaponry with much less space than what was needed a few decades ago due to advanced manufacturing techniques. 

These are bespoke spaces requiring specialized experts to design and retrofit, according to Cresa Head of Research Craig Van Pelt.

In the Northern Virginia and D.C. areas, space held by the bigger defense contractors has shrunk as the number of startups has grown, said Avison Young principal Nick Gregorios. Some submarkets, like those near Arlington County and closer to the capital, are filled with new next-generation defense tech firms. 

The larger, established contractors are “hunkering down,” Gregorios said, and are more focused on renovating existing space, while startups, often coming out of coworking spaces, are starting to sign their first government contracts and looking for space to quickly expand. 

One of the strongholds of current defense industry activity has been the greater Los Angeles region, where a legacy of aerospace innovation has laid the groundwork for a new generation of space, drone and satellite startups. 

CBRE data shows that aerospace and defense leasing jumped nearly 26% between 2023 and 2024, hitting 1.8M SF of office, industrial and flex space last year. There is expansive interest in firms focused on satellites, drones and missile defense, said CBRE Executive Managing Director Robert Peddicord, who works out of the firm’s South Bay office. 

“I would say the biggest change is the velocity,” said JLL’s Burridge. “This ecosystem started as one centered around the primes, the traditional defense contractors like Honeywell and Raytheon, and now it has blossomed into one of the most prolific early-stage advanced manufacturing ecosystems.”

In addition to the surge of startups, there are also tech firms that have expanded at a rapid clip that are seeking larger spaces and starting to better challenge the established companies, Birnbach said. For example, autonomous systems maker Anduril just made a deal to build a massive manufacturing campus in Ohio for drones and advanced weaponry.

These larger sites become even more of a challenge since they can take years to close and run into competition for power supplies from the booming data center industry, he said. 

Brokers need to contend with several challenging factors when working in this industry, including the need for a detailed understanding of defense priorities, emerging technology and new advanced manufacturing systems. 

They are vetting clients more closely because as new technologies evolve, it’s more important than ever to understand what may or may not pan out with the barrage of new technologies, Gregorios said.

Companies working with the DOD or other government agencies also require security clearances for employees and often need secure facilities and access to sensitive compartmented information facilities, or SCIFs. These are expensive, specially constructed spaces for holding secure, often classified conversations. 

These spaces can run up to $450 per SF to build, and many existing SCIFs are near the end of their usable lifespan, suggesting demand for more of these rooms in the near future, Gregorios said. 

It can be tough to get financing for new startups pushing untested tech and seeking expansive leases. Often, brokers work on securitizing the leases for these firms to help protect landlords, CBRE Senior Vice President John Lane said. It’s a solution, but it often adds another layer of complexity to already difficult negotiations. 

Additionally, it is difficult to find open space in competitive markets. Due to the long timelines for signing leases, which can take years depending on a startup’s contracts and government approvals, there’s very little of this space built speculatively, making it harder to find the kind of flex space newer firms favor.  

But increasingly, owners and operators such as Sares Regus Group are seeing the value of converting their industrial spaces for these uses. Rents can go as high as $250 to $325 per SF on a triple-net basis, which outpaces what many industrial tenants can pay, Lane said.

“It's heavily nuanced,” Burridge said. “I think you're talking about one of the most competitive real estate markets in California right now, this South Bay ecosystem.”

One of the perks of working in space and defense is the sheer range of new technology on display. Lane said anything you can think of that’s space and defense related is currently being built by a startup. 

He has spoken with companies trying to farm in space, harvest water, build nuclear reactors and even build space stations. Finding an office for them is far from typical, but it can be rewarding to work with such cutting-edge technology, he said.

“It's just fascinating all the different minds that are out there creating these new ideas.”