Corporate real estate owners are navigating uncertain times. With the Federal Reserve increasing interest rates and higher borrowing costs, many are looking to creative options to fill the gaps. And, as we push into 2024, these companies also wonder: what's coming next?
According to Gordon Whiting, managing director and head of net lease real estate at TPG Angelo Gordon, two significant trends will continue to impact the net lease market in 2024.
The first is high cap rates and an acceptance of this as a "new normal". Second, as corporate borrowing costs remain high, he expects a rebound in the creative capital raising option, especially sale-leasebacks.
High Cap Rates Become The 'New Normal'
Cap rates are at a 15-year high, and Whiting doesn't expect a significant drop in 2024. Indeed, cap rate expansion in industrial and office have led US single-tenant cap rates to an average of 6.24% in the third quarter of 2023, according to Real Capital Analytics. For sale-leasebacks, cap rates have been observed at 7% to 8%, which are above historical averages as well.
He also explains that the market recently emerged from a decade of declining cap rates and low interest rates and is coming to accept the fact that high interest rates are here to stay. This acceptance may increase sale-leaseback volumes in 2024, allowing owners to sell a building to an investor and then lease it back over a long period to raise capital.
"As the markets get clarity around Fed tightening, transaction volume will naturally increase, as buyers and sellers feel more certainty around pricing," says Whiting.
Rise In Sale-Leaseback Transactional Volume
Mr. Whiting notes the current single-tenant net lease transaction volume is approximately $45 billion for 2023, according to data from Real Capital Analytics. He expects that number to climb closer to the five-year historical average of $80 billion in 2024. The increase, in part, will be fueled by a need to raise capital in an era of expensive financing.
"Sale-leasebacks are an attractive form of financing that allows owners to maintain operational control and is generally less expensive than corporate debt today," says Whiting.
Traditional financing options also contain more financial covenants than in the past, making sale-leasebacks an attractive alternative.
"It's also important to consider that according to JP Morgan, roughly a third of outstanding leverage loans are high-yield bonds that will mature over the next three to five years," says Whiting. "The need for creative corporate finance options for firms will create strong tailwinds for a rise in sale-leasebacks as we move into the new year."
For more thought leadership from TPG Angelo Gordon, click here.
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