The sale-leaseback market is expected to see robust transaction activity as healthy corporations that own their real estate are expected to pull the trigger on sales with the aim of bringing in institutional buyers who are seeking long-term, stable plays at this point in the cycle. What’s more, there is an abundance of middle-market companies that haven’t yet explored sale-leasebacks as a tool for growth, according to Daniel Herrold, senior director at Stan Johnson Company.
“I was on a recent conference call with a publicly traded company that is in the business of acquiring sale-leaseback properties, and the chief investment officer said there are more than 70,000 middle- market companies in the U.S. that own their real estate and haven’t approached the universe of investors out there about doing a sale-leaseback transaction,” Herrold said. “There are so many small, medium and large companies that have not yet evaluated this as a tool for growth, so there is significant opportunity while the market is right.”
Sale-leaseback volume ramped up last year, increasing to more than $12b in transaction volume, more than 12 times the volume seen in 2009, according to research by Stan Johnson Company and Real Capital Analytics. Similar volume is expected this year, with department store operator JCPenney being one of the latest major retailers to pursue a sale and partial leaseback of its Texas headquarters. It has tapped CBRE Group Inc.’s capital markets team to search out buyers for the 1.8 million-square-foot office park, in a strategy that it hopes will allow it to capitalize on attractive market fundamentals, reduce debt and establish long-term savings.
Sale-leaseback transactions are seen as stable, long-term investments because companies will typically lease back space for 15-20 years. “It’s important to recognize the state of this commercial real estate environment, especially with cap rates being so low,” Herrold said. “This offers an opportunity for companies to maximize the value of their assets at a peak point in the market and for investors to take advantage of these long-term plays in anticipation of the fact that the market won’t be this way forever.”
When carrying out a transaction like this, it is important for investors to take into consideration the critical nature of the asset and its tenant profile. “If I’m buying an asset from a company, I want to know how much money has been invested in that facility and whether it’s an asset that can be easily sold off at a later point or if it’s something I’ll need to invest capital into to maintain and operate,” Herrold stated, adding that it’s also important to take into consideration how well a property is doing from a profit and loss standpoint and how the tenant base is performing.
While last year’s volume may be difficult to top, Herrold said, he doesn’t anticipate a slowdown in sale-leaseback activity this year. “I would argue that last year was probably the largest year in terms of sale-leaseback volume, and I think the market has kind of hit a peak,” he said. “That said, unless some sort of economic disaster happens, such as interest rates rising at an aggressive rate, I don’t think activity will slow down at all this year.”