Industrial Sale Leasebacks: 2023 Market Outlook

Industrial owners and tenants take advantage of sale leasebacks amid challenging financing climate.

In an environment where accessing financing is a lot more difficult – and expensive – than it was a year ago, industrial property owners are recognizing the advantages of unlocking capital tied up in their real estate.

Lender spreads have widened, effectively pushing mortgage interest rates on long-term debt from lows of 2.5% to rates of 5% and higher in some cases. At the same time, lenders have pulled back on the amount of capital they’re willing to lend. Borrowers that previously were able to obtain 75% to 80% leverage are now offered closer to 60%. For industrial owner-operators, that means keeping at least 40% of their equity in their real estate. A sale leaseback allows an owner to monetize 100% of the value of their real estate. 

Flexibility & Maintaining Control

One of the most attractive features of sale leaseback financing is the flexibility in how a deal is structured. If an owner decides to go out and mortgage a property or secure a loan, there’s not much they can do to change the terms. Even shopping a loan to different lenders doesn’t yield much difference in the rate or amount a borrower is willing to lend. In contrast, there is considerable flexibility in a sale leaseback structure, with different levers that an owner can pull to change the metrics of a deal, such as the amount of rent and lease term. 

For example, an owner can get a higher purchase price, and more proceeds, simply by agreeing to a 20-year lease compared to a 15-year lease. With inflation that is top-of-mind, built-in rent escalations that are attached to the CPI with a ceiling are another way for sellers to enhance the value of a Sale Leaseback. “It’s really a math equation for the operator to determine how much they want to pull out of the real estate and still have a comfortable rent number,” says B+E Director Spencer Henderson. “So, even in a higher interest rate environment, owners have the ability to structure a sale leaseback at very attractive exit prices.” Another advantage that often goes overlooked is that the buyer effectively becomes a long-term capital partner and can serve as a resource if a business wants to expand in the future, adds Henderson.

Buyers maintain healthy appetite for industrial

Industrial owners conducting a sale leaseback continue to find a strong pool of interested buyers. E-commerce has been given much of the credit for flipping the script on industrial assets. What used to be a low-profile segment of the real estate investment market is now at the forefront. Industrial assets across the board – warehouse, distribution, logistics, and manufacturing – are highly sought-after by both individual and institutional investors. “Industrial assets are not immune to interest rate impacts, but they are less impacted compared to some other segments of the market, such as retail,” says B+E Director Tim Hain. 

According to B+E’s Q4 Cap Rate Report, asking cap rates compressed for both distribution and manufacturing facilities. “The elephant in the room is that sale leaseback market conditions have changed in the last few months due to higher interest rates,” says Hain. Deal velocity has slowed, while cap rates have moved up about 50 basis points higher. 

Although the fourth quarter saw an uptick in for-sale inventory, including industrial assets, there continues to be a limited supply relative to other NNN categories. For example, there were 22 warehouse and 28 manufacturing industrial properties for sale in the fourth quarter across the entire U.S. as compared to more than 500 dollar stores and 1,000 QSR restaurants. When buyers start drilling down into their particular investment criteria related to factors such as tenant credit, lease term, and location, that often shrinks the inventory even more.

B+E’s predictions for the 2023 net lease market

B+E expects 2023 to be a very strong year of activity for a number of reasons. Chief among them is that sale leasebacks continue to represent an attractive financing option for property owners. Sale-leasebacks allow property owners to raise capital in a very efficient manner.

Looking ahead to what could be a recession later in the year, many operators are considering tapping into available capital as they navigate market challenges or opportunities.

In some cases, companies may want to pay down debt or strengthen their balance sheets. “Any time you’re looking at moving into a recession, it’s smart to deleverage, and sale leasebacks can help a company to do that by raising capital that can be used elsewhere or to maintain cash reserves,” says Henderson. In other cases, companies may be looking to gather some dry powder to take advantage of buying opportunities that could emerge, such as acquiring a competitor. Another advantage is that the buyer essentially becomes a long-term capital partner and can serve as a resource if a business wants to expand in the future.