By Peter Halm
In a surprising turn of events, higher interest rates, often considered an impediment to transactions in the broader commercial real estate market, are proving to be a catalyst for significant growth in the sale-leaseback sector. Data from SLB Capital Advisors reveals a robust surge in both transaction volume and dollar value, setting new records and indicating a positive trajectory for this unconventional financing method.
Record-Breaking Performance in 2022
According to SLB Capital Advisors, the total U.S. sale-leaseback volume reached 874 unique transactions in 2022, surpassing the previous record of 789 in 2021. This represents an 11% increase from the prior highs of 2019 and 2021. The total dollar volume soared to $31.4 billion, a remarkable 14% increase over the 2019 figure of $27.6 billion.
The Trend Continues in 2023
The momentum has carried into 2023, with SLB Capital Advisors reporting an 8.3% increase in dollar volume for sale-leaseback deals, reaching $5.1 billion in the second quarter compared to the first. Transaction counts remained steady, reflecting a stable market. Projections for the coming year suggest continued strength in sale-leaseback activity, buoyed by the Federal Reserve's current stance that signals a reluctance to implement rate cuts.
Attractive Relative Cost of Capital
Scott Merkle, Managing Partner at SLB Capital Advisors, emphasizes the increased attractiveness of sale-leasebacks from a relative cost of capital standpoint. Despite rising cap rates, sale-leasebacks remain more appealing compared to alternatives such as high-yield bonds and bank debt, which have experienced significant increases of over 400 basis points in the past year. Cap rates on sale-leasebacks also have increased, but not as dramatically—100 to 200 basis points.
Private Equity and Corporate Capital Allocation
SLB Partner Matt Wrobleski anticipates that sale-leasebacks will continue to play a larger role in private equity and corporate capital allocation. With sale-leasebacks often below the weighted average cost of capital and, in many cases, below the cost of debt, businesses and investors are recognizing the value of this alternative financing option.
Factors Driving Sale-Leaseback Growth
The surge in sale-leaseback deals is particularly notable amid a decline in M&A transactions, historically a key driver for such transactions. Sale-leasebacks offer an attractive financing mechanism for business owners seeking to raise capital and unlock equity tied up in real estate. The trend is further fueled by businesses recovering from the pandemic and looking to strengthen their financial positions.
Investor Interest and Flight to Quality
Despite economic uncertainties, the pool of sale-leaseback buyers remains active, ranging from REITs and large institutions to family offices and high-net-worth individuals. Investors, seeking stability in uncertain times, exhibit a flight to quality, resulting in smaller cap rate movements for prime assets occupied by major players like Amazon or FedEx, and bigger moves in cap rates for lower credit companies or weaker locations that have more risk.
Companies like W. P. Carey are optimistic about the year ahead, citing a more stable financing environment and better visibility into capital costs. The ability to navigate market dynamics, access capital in the bond market, and benefit from a rebound in stock prices positions certain players to take advantage of opportunities while some competitors struggle with the impact of higher interest rates.
In summary, the sale-leaseback market is experiencing a significant upswing, defying expectations associated with higher interest rates. As businesses continue to seek alternative financing avenues, sale-leasebacks are emerging as a reliable and attractive option, offering stability and flexibility in a dynamic economic landscape. The outlook for 2024 appears promising, with the sector poised to play a pivotal role in corporate funding strategies and private equity investments.
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