Higher Inflation, Higher Real Estate Valuation

The following column is from Andrés Dallal, executive director, investments, for W. P. Carey, a GlobeSt.com Thought Leader. The views expressed are the author’s own.

Driven by the economy reopening and increasing consumer demand, the US economy is experiencing the biggest surge in inflation in over a decade, with consumer prices rising in May by 5% from one year ago. The Fed expects inflation to continue to rise throughout the year. Although inflation is often associated with negative factors such as higher prices for consumer goods and higher labor costs, corporate owner-occupiers can benefit from a surge in demand for hard assets through a sale-leaseback of their corporate real estate.

In a sale-leaseback, a company sells its real estate to an investor for cash and simultaneously enters into a long-term lease. The seller works with the buyer to structure a lease for a period that meets its needs without having to worry about refinancing. The seller can then use the cash to grow its business, reduce debt or execute on other higher-return core business initiatives.

While there are numerous reasons to leverage this cost-effective financing tool in all market conditions, there are added benefits for sellers amid rising inflation.

• Increased property values: During inflationary periods there is higher demand for hard assets such as commercial real estate, as it is a natural inflation hedge due to its appreciation over time. This means that more buyers are in the market, increasing competition and driving real estate prices higher.

• Less supply: Inflation leads to increased material and labor costs, which disincentivizes developers from building new properties and limits supply. This puts a premium on existing, high-quality properties, which reinforces the fact that sellers can unlock more value out of their real estate.

• Higher borrowing costs: The cost of borrowing is typically impacted during inflationary periods, as inflation devalues the currency and forces lenders to raise interest rates. As a result, loans will be a more expensive option for companies when compared to long-term sale-leaseback financing from all-equity buyers who are better positioned in an inflationary environment.

• Favorable rents: Before inflation continues to accelerate, sellers have the opportunity to lock in low rates on a very long-term basis. The lease term on a sale-leaseback is typically anywhere from 15 to 25 years compared a five- or even 10-year term on a commercial mortgage. Sale-leasebacks also enable the seller to unlock 100% of the value of the real estate compared to a bank mortgage, where 70% to 75% loan-to-value ratio is more likely.

For corporate sellers seeking working capital this means now is the time to act. When considering a sale-leaseback, it’s important to partner with an experienced, all-equity buyer with both the expertise to close quickly and the capital to support its tenants’ long-term business objectives. W. P. Carey has specialized in sale-leasebacks for nearly 50 years and prides itself on being a long-term partner to its tenants. If you or your client are interested in selling your corporate real estate, please contact us at globalinvestments@wpcarey.com.