The Trends Driving Sale Leasebacks

After a Spring pause in the market caused by the COVID shutdowns and uncertainty, net lease came roaring back later in 2020.

“It was the first area that came back,” says Ken Hedrick, executive managing director at Newmark. “Investors wanted to buy these types of bond-style assets. What came out of the pandemic was this new bucket called essential retail. Essential retail was anything that was open and paying rent.”

Suddenly, those businesses that stayed open, including convenience stores, grocery stores, pharmacies and farming supply stores, were hot items. So were transportation and logistics hubs. 

“In the second half of last year, there was a lot of product on the market,” Hedrick says. “But a lot of that product got sold.”

With historically low interest rates, competition only increased from groups like high-net-worth individuals, 1031 exchange buyers and institutional investors. “The prices have increased dramatically,” Hedrick says. “We’re probably past pre-pandemic pricing, especially in these essential retail buckets and in transportation and logistics.”

As the market began to heat up, the essential tenants who owned their own real estate are starting to think about cashing in.

“The marketplace is created in an environment where prices are high,” Hedrick says. “So any tenant that is in that essential bucket or the transportation bucket is starting to look at potential sale leasebacks.”

Hedrick says tenants and owners of real estate are starting to look at sale-leasebacks for several reasons, including the low-interest-rate environment, high competition and lack of available product.

“By utilizing a sale-leaseback, they’re able to realize 100% of the value of the property and unlock that equity and use it for other things to help build their business,” Hedrick says. “When prices are high, tenants look at sale leasebacks as a viable financing option.”

In the process, these tenants can maintain control of their mission-critical assets, according to Hedrick. He says most sale-leasebacks are for 15, 20 or 25 years

“You’ll see absolute triple net leases where the tenant pays for taxes, insurance, and maintenance,” Hedrick says. “It allows them to take control of mission-critical assets, but extract all the value out of them and use it for their business purposes. They can also set the rent at market or below market, depending on how each asset is performing.”

Sellers can use the proceeds generated from their sales for many things. “They could use funds to pay down debt, which could increase their credit profile,” Hedrick says. “They also could use funds to expand growth. If they want to expand into new markets, they could use those funds from a sale-leaseback to do that. Or they could use those funds for general operations.”

The use of the proceeds will often be determined by the financial pressure faced by the business. “Each tenant is going to have different demands and criteria that they use to make that decision,” Hedrick says.