Could Sale-Leasebacks Move Beyond Essential Assets?

Ken Hedrick, executive managing director at Newmark, has seen a marked increase in the number of sale-leasebacks transactions this year. And discussions with tenants are increasing about these kinds of transactions.

“I think we’ll see an increase in that activity through the remainder of this year,” Hedrick says.

Part of the reason is buyer demand from groups like high-net-worth individuals, such as 1031 exchange buyers and institutional investors, who are looking for single-tenant net lease assets. If those investors can’t get them through build-to-suit projects or second-generation projects, they’re turning to sale-leaseback.

“The build-to-suit side of the business is a big part of our business,” Hedrick says. “They [developers] are trying to catch back up, but they haven’t been able to catch back up to the demand yet. So that causes investors to look elsewhere, which means knocking on the door of tenants and trying to do sale-leasebacks.”

While there is a lot of demand from investors, Hedrick doesn’t see them chasing large numbers of non-essential assets, like fitness centers and movie theaters. Those assets were trading very well before the pandemic, but he doesn’t believe a market has been set for them post-pandemic.

In some cases, Hedrick could see some one-off transactions. “You typically have access to unit-level financials,” Hedrick says. “There will be some investors that might be able to take advantage of the market by setting rents on a high-performing, non-essential location. But I don’t think carte blanche you’re going to see that across the board through the remainder of this year.”

Hedrick expects to see most sale-leasebacks occurring with essential tenants, especially those in transportation and logistics.

Sale leasebacks could even stretch into other areas. “It’s still soft in the single-tenant office sector, but we are seeing some activity begin to pick back up with credit tenants in good markets with long-term leases of 12-plus years,” Hedrick says.

When investors bought early in the pandemic, the due diligence on deals was changing. At that time, third-party inspection services could not get on-site, depending on the state and the local municipality rules.

“We did have extenuating circumstances during the pandemic,” Hedrick says. “That was from the second quarter into the early third quarter of last year.”

After that, Hedrick says Newmark worked to find local third-party groups that were already in a city and didn’t have to travel. “They could just go on-site and do their reports that way,” he says.

Under challenging circumstances, the company adjusted.

“We have been able to do videos inside of buildings and provide those to the potential investors and do walk-throughs through video technology,” Hedrick says.

Fortunately, things are changing. “Today, things have opened back up to where we see normal timelines and more normal third-party report processes that are in place on the single-tenant side of the business,” Hedrick says.