Thought Leadership
ICSC Las Vegas Preview
ICSC Las Vegas, one of the largest commercial real estate gatherings, will again convene the industry’s leading professionals and retailers next week. Over 30,000 attendees will gather for networking, deal-making and insights into how the retail real estate industry will fare amid a volatile and uncertain economic environment. Tariffs, shifts in consumer sentiment and sale-leaseback opportunities will be among the biggest topics discussed at the conference. Outlined below is an overview of each. Tariffs add pressure and uncertainty for retailers Uncertainty surrounding tariffs is expected to have a substantial impact on the retail real estate industry. The National Retail Federation announced it expects the growth of U.S. retail sales to slow down this year due to consumer anxiety and inflation, with an outsized impact on smaller retailers and certain industries including textiles and electronics. While the long-term impact of tariff policies is unclear, retailers ultimately will have to determine how much of the additional costs they can absorb versus passing on to consumers. These decisions could have significant impacts on retailers’ balance sheets and ability to remain operational, affecting overall investment in the sector. Consumer sentiment shifts will impact investor demand Shifting consumer preferences continue to present both opportunities and challenges for retailers. Uncertainty surrounding the future of the economy has made consumers more budget conscious and focused on necessities. According to the U.S. Bureau of Economic Analysis, essential goods account for 65% of consumer spending. As a result, retailers will likely continue to show interest in grocery-anchored shopping centers, which continue to remain among the best-performing retail property types. E-commerce also continues to redefine retail. As more consumers shift their spending online, retailers like Macy’s are consolidating locations and shrinking their footprints. For investors seeking stability, this means targeting markets with strong population and job growth—where retail assets are most likely to perform well over the long term. Sale-leasebacks remain a viable financing option Despite economic uncertainty, the retail sale-leaseback market continues to grow—thanks to its clear advantages over traditional debt. By unlocking the full market value of their real estate, retailers can reinvest proceeds into their core business and drive stronger returns. Sale-leasebacks also provide long-term capital with no refinancing risk and typically without the restrictive debt covenants or balloon payments that come with conventional financing. In today’s climate, where liquidity and balance sheet flexibility are paramount, that kind of stability is more valuable than ever.
MIPIM 2025: Is the European Real Estate Market on the Rise?
The annual real estate gathering in Cannes, MIPIM 2025, is set to kick off next week. As in previous years, more than 20,000 delegates will gather to discuss both the opportunities and challenges facing the European real estate industry. While concerns about the market remain—including geopolitical tensions, inflation and future monetary policy decisions—investors have entered the year with a sense of cautious optimism. As real estate professionals gear up for an insightful conference, here are the key questions they will be looking to address. Will the European deal environment improve in 2025? 2024 was a year of transition for the real estate industry, with inflation gradually aligning with target levels and interest rates reaching their peak. In the latter half of the year, central banks began to lower interest rates, albeit slower—and in smaller increments—than some expected. Despite analysts projecting only modest European economic growth in 2025, the real estate investment market stands poised for a gradual recovery. Market participants have largely come to the realization that rates will remain higher for longer, bringing some stability to transaction markets. This has further narrowed the bid-ask spread as buyers and sellers align on pricing. Furthermore, lower cost of capital will be accretive to returns for some investors and support increased investment volumes. As a result, we expect more robust investment activity in 2025. What’s the outlook for the European sale-leaseback market? Even with interest rates declining, sale-leasebacks will continue to be an attractive solution for companies looking to boost cash flow. First and foremost, a sale-leaseback frees up capital tied up in illiquid real estate, allowing for greater financial resilience and flexibility without disrupting operations. Companies that pursue a sale-leaseback also benefit from predictable rental payments, making these deals a lower-risk alternative to volatile investments like the bond market. This combination of predictability and adaptability make sale-leasebacks a practical capital solution for companies with real estate assets. In addition, analysts expect the M&A market to rebound in 2025 as sponsor activity increases, regulatory and monetary dynamics normalize, and corporates continue to streamline and simplify their portfolios. When M&A activity increases, there is often an uptick in sale-leaseback opportunities, as private equity firms look to leverage sale-leaseback financing as part of the capital stack for new acquisitions or to support portfolio company growth. How will ESG reporting requirements impact the European real estate market? Sustainability is no longer “just a buzzword” in European real estate strategies. Investor demands, tenant preferences and regulatory requirements are driving companies to prioritize energy efficiency and carbon reduction. With the EU setting ambitious targets for carbon neutrality, businesses that own real estate must find ways to fund necessary upgrades. What some may not realize is that sale-leasebacks offer a great solution, allowing companies to unlock the value of owned real estate to finance energy efficiency upgrades, solar installations and other sustainability-driven improvements. This not only ensures compliance with evolving regulations but also helps reduce their carbon footprint—all while maintaining full operational control of their facility.
The Ins and Outs of Build-to-Suits
What is a build-to-suit? A build-to-suit is a real estate solution where a company secures a custom-built facility without the upfront capital investment. In a build-to-suit, a developer or investor funds and manages the construction of a new facility or expansion of an existing one to meet the specifications of a prospective or existing tenant. Upon completion, the company enters into a long-term lease, similar to a sale-leaseback. For companies in need of a new, purpose-built facility, a build-to-suit is an efficient and capital-saving alternative to buying or retrofitting an existing building. What are the key benefits of a build-to-suit? Custom-built facility in the company’s preferred location No upfront capital required, enabling the company to preserve capital for business growth Operational control of the facility post construction Potential for future expansions, renovations or energy retrofits through an investor partnership Who should consider a build-to-suit? Build-to-suits are best suited for companies that: Have specialized layouts, equipment or other design requirements Prefer a new property instead of retrofitting an older building Want to preserve capital rather than tie up funds in real estate development Can commit to a long-term lease (typically 10-30 years) How does the build-to-suit process work? Companies can pursue a build-to-suit through three main approaches: Developer-led build-to-suit: Based on the building specifications, a tenant will hire a commercial developer. The developer will take on the responsibilities (and risk) of land acquisition and building construction. Often, they will work with an investor, like W. P. Carey, as a capital partner to either finance the construction or acquire the building upon completion. The tenant will then lease the property, typically on a long-term basis, from the owner. Reverse build-to-suit / sale-leaseback: In this scenario, the tenant takes on the initial responsibilities of land acquisition, financing and hiring a general contractor for construction. Upon completion, an investor like W. P. Carey acquires the building. This allows the tenant to recoup the acquisition cost and reinvest that capital into their business. Investor-led build-to-suit: With this option, a tenant can bypass the developer and work directly with an investor like W. P. Carey that offers in-house project management services. The investor would work hand-in-hand with the tenant on site selection, land acquisition, design and construction, delivering a building that meets the tenant’s unique needs with no upfront capital required. The investor would own the building and lease it to the tenant on a long-term basis upon completion. How long does a build-to-suit take? Build-to-suits can take anywhere from 12-36 months depending on the size, location, permitting and other specifications. Rent payments typically do not begin until the building is substantially complete and operational. The lease term of a build-to-suit property is also usually longer than those of a typical commercial lease, ranging anywhere from 10-30 years. Conclusion: Is a build-to-suit right for your business? While build-to-suits may seem intimidating for companies who have never pursued one, they are a great solution for custom-built real estate with little to no upfront capital involved. W. P. Carey has extensive experience working with tenants and developers to structure customized build-to-suit financing programs that meet their specific needs – whether it be traditional construction funding, financing upon completion or a full scope of in-house project management services. Considering a custom-built property for your company? Reach out to our team today!
Will the Net Lease Market Thrive in 2025?
The net lease industry has faced significant challenges in recent years, grappling with widespread economic uncertainty, soaring inflation and elevated interest rates leading to muted growth. However, a turning point came in the second half of 2024, when the Federal Reserve began cutting interest rates, ushering in lower cost debt and injecting some optimism into the market. While most industry experts believe net lease is poised for an upswing in 2025, the extent of the recovery remains in question. As the industry gears up to “thrive in ‘25”, here are three predictions for the year ahead. Transaction volume will likely increase, but uncertainty around interest rates will remain After three rate cuts by the Federal Reserve last year, real estate investors have gained more confidence in the market, signaling the beginning of a turnaround for transaction volume. Colliers latest outlook forecasts a 25-33% growth in aggregate volume in 2025, driven by a strong economy, improving fundamentals and growing demand for key asset classes. The bid-ask spread between buyers and sellers will also continue to narrow in 2025, supporting more robust investment activity. However, the predicted boost in transaction volume is largely tied to the future of interest rates which is uncertain. The timing and pace of further rate decisions will depend on many factors, including the impact of the incoming administration’s policies – mainly surrounding tariffs and immigration – on inflation. Net lease investors will explore new property types as technology and innovation drive trends Shifting economic factors and trends will also likely lead to a change in where net lease investors will look to allocate their capital. One of the fastest growing sectors over the past year has been data centers, which have seen a huge uptick in demand because of growing digital infrastructure needs and the advent of artificial intelligence. The average vacancy rate among primary North American data center markets in 2024 hit a record low of 2.8%, according to CBRE. The firm also forecasts the average preleasing rate for data centers to rise to 90% or more in 2025. Another sector to watch is healthcare, with an aging population, growing healthcare spending and new technologies supporting increased investor demand. In particular, medical outpatient buildings are well-positioned to benefit from these trends, in addition to shifting consumer preferences for accessing healthcare in more convenient locations. Industrial and retail will remain steady as positive tailwinds support demand Despite new sectors potentially drawing investor interest, the net lease sector will remain underpinned by two of its core property types – industrial and retail. Driven by e-commerce needs, warehouses and other industrial real estate properties are still in demand. In Q3 2024, industrial vacancy rates dipped slightly to 6.7%, according to Moody’s CRE. Furthermore, changes in trade policy will likely boost demand for industrial facilities near the U.S.-Mexico border – bolstering markets such as San Antonio, Austin and Dallas/Fort Worth. Retail enters the new year with the lowest vacancy rate of any commercial real estate sector and will remain steady throughout 2025. Demand for retail continues to be primarily driven by location – with assets in densely populated areas garnering the most investor interest. Increased consumer spending as a result of easing inflation will also be a positive tailwind for retail growth in 2025.
Lease Accounting 101
Classifying leases as finance or operating is fundamental to how companies manage leased assets and report them under today’s U.S. GAAP standards. Regardless of whether a company is entering into a traditional lease or a sale-leaseback, understanding the distinctions is essential for accurate financial reporting and decision-making. What is a finance lease? Leases are classified as ‘finance’ when they have characteristics that make them similar to financing the purchase of the underlying asset. To qualify as a finance lease, one or more of the following criteria must be met: Transfer of Ownership: Ownership transfers to the lessee at the end of the lease Lease Purchase Option: The lessee has an option to buy the asset (and likely will) Lease Term: The lease term represents most of the asset’s remaining economic life (typically 75% or more) Present Value: The present value of the lease payments (and any residual value guarantee) is equal to or exceeds substantially all of the asset’s fair market value (typically 90% or more) Under a finance lease, the lessee is deemed to have control over the asset. As such, finance leases are accounted for as if the lessee has ownership of the asset. Accordingly, the lessee recognizes the rent expense as a bifurcated expense between interest expense and depreciation on the income statement as well as a right-of-use asset and lease liability on the balance sheet. Given the nature of the arrangement, finance leases require careful consideration due to the impact on said financial statements. What is an operating lease? An operating lease is much more like a typical lease arrangement, where the lessor permits the lessee to utilize an asset for a set period of time. Under older accounting standards, these assets and related liabilities were not recorded on balance sheet, but that changed in 2016 with ASC 842, in which lessees are now required to bring operating leases on their balance sheet. Leases are categorized as operating if none of the four criteria for finance leases listed above are met. With an operating lease, ownership is not transferred at the end of the lease period. This carries with it the risk that when the lease term ends, a company may be asked to leave or offered unfavorable terms to renew the lease. However, this could also be a plus if the company is looking to move locations. On financial statements, operating leases are accounted for as a right-of-use asset and a lease liability, with all rent expense being recorded as an operating cost. Special considerations for sale-leasebacks Sale-leasebacks have an added layer to consider. For the transaction to qualify as a true sale under ASC 842, the sale-leaseback must be classified as an operating lease. If it is classified as a finance lease for any of the reasons above, it is treated as a ‘failed sale.’ When the sale fails, the seller/lessee: Does not derecognize the asset on its balance sheet and instead records the proceeds as a loan Pays down the loan through lease payments, which are split into principal and interest expense. The interest rate is based on the seller’s incremental borrowing rate W. P. Carey can help Understanding the differences between finance and operating leases is crucial for businesses, especially those considering a sale-leaseback. With both lease types now displayed on balance sheet, it’s important for companies to understand the nuances of each so they can best adhere to accounting standards and make well-informed decisions about their lease agreements. For a deeper breakdown into lease accounting, take a look at Lease Accounting: IFRS vs. US GAAP. In this article, we explore the key differences in lease classification, measurement and presentation under IFRS 16 and ASC 842 and go into more detail on the implications of failed sale accounting for buyers and sellers. W. P. Carey has more than 50 years of experience executing sale-leasebacks and helping companies structure customized leases that make the most sense for their business. While W. P. Carey can help, lessees should consult their accounting professional to address their specific needs.
What’s Next for Commercial Real Estate?
After several challenging years contending with the impacts of a global pandemic, the commercial real estate market finally seems to be healing. As noted in the latest Emerging Trends in Real Estate report from PwC and the Urban Land Institute, the Fed's 50-basis-point cut in September and subsequent 25-basis-point cut in November have generated some optimism in the CRE community that we are entering a new expansionary phase in the real estate cycle. Here are four of the top emerging trends taking shape as a result. 1. Interest Rates and Capital Cost Concerns Have Eased, but Still Remain In the aftermath of the global financial crisis of 2007-2008, the Fed attempted to revive the economy by lowering the federal funds rate to near zero. What followed was nearly a decade in which cheap debt became a way of life. However, starting in the spring of 2022, with inflation surging, the federal funds rate was increased 11 times, pushing the rate from zero to over 5 percent, bringing real estate investment activity to a near standstill. Reflecting on the market today, interest rates and cost of capital remain among the top concerns of respondents to the PwC Emerging Trends in Real Estate survey, but those concerns have eased since last year. While respondents largely agree that the rate cuts so far are not enough to alter deal economics fundamentally, the monetary policy movements have still injected optimism into the market. In addition, more than 80% believe that commercial mortgage rates will decrease in 2025, with 75% believing those rates will continue to decrease over the next five years. As an industry that relies heavily on leverage to get deals done, signs of lower-costing debt bode well for the future and will support more robust deal volume. That said, the Fed’s future decisions on rate cuts will depend on how inflation and the overall economic outlook evolve. 2. Acquisitions, Refinancing and Development Markets Improving The acquisitions, refinancing and development markets are slowly starting to heal, the Emerging Trends report noted, pointing to steady improvement in liquidity and more bids in the market, as well as tighter prices and debt spreads. Industry participants are also optimistic about debt conditions ahead, with lending expected to grow by 24% in 2025, indicating a full recovery to pre-pandemic levels and further signaling that normalization and stability are on the horizon. Another key factor market participants are looking at is the stabilization of recent real estate price declines. Cap rates began rising when prices peaked in mid-2022 and continued increasing until plateauing in early 2024. The most recent figures suggest prices might be turning positive again, although this may simply reflect that higher-quality real estate is accounting for a larger share of transactions. 3. Occupied Space Now Exceeds Pre-Pandemic Levels in Most Sectors The pandemic created significant changes in how tenants use space, and where. There are fewer office workers commuting to the workplace, more consumers shopping online and more goods being stored in warehouses. However, despite these changes, overall demand for space has more than recovered from the pandemic and remains robust across most property types, with the exception of office. When looking at the future of the retail market, survey respondents indicated that location is key. While newness is a significant priority for some property types like office, retail spaces tend to derive much of their value and demand based on their location. Frequently, older retail centers command the best locations, preventing newer entrants from gaining a foothold and making them more attractive to investors. In the industrial sector, net absorption has been positive, meaning more space is occupied than ever before. Yet demand has not kept pace with new supply, leading to an increase in vacant space. This has given more negotiating power to tenants, who are increasingly seeking spaces with more modern features such as high energy efficiency, LED lighting and higher clear heights. However, this “flight to quality” trend should abate slightly as the pipeline for new product slows and the supply/demand dynamics balance out. 4. There Is Less Movement Due to the High Costs of Relocation The pandemic not only created a shift in the demand for commercial property, but also shifted where people want to live and work. After years of increasing interstate migration, many areas are experiencing slower population growth or even outright population losses due to soaring home prices, fewer renters having the ability to transition to home ownership, and fewer households relocating for new jobs. The report notes that climate change is also becoming a greater factor in location decisions. The report points to a Freddie Mac analysis that shows natural disaster concerns have prompted one in seven households to consider other places to live. Many commercial properties are also at risk of damage from natural disasters and commercial property owners are facing increasing insurance premiums as a result. Conclusion As the real estate market transitions into a new cycle in 2025, we remain cautiously optimistic for the future. With change comes opportunity, and we’re excited to see how the landscape evolves as we enter a phase of recovery and renewal. With more than 50 years of experience operating in all market cycles, we’re well positioned to continue helping companies unlock otherwise illiquid capital from their real estate assets. If you're interested in learning more, contact us today.
Corporate Capital Outlook - Q3 2024
Written by Colliers Corporate Capital Solutions, the report details the current state of the global economy and how that’s impacting the net lease sector. The report also features contributed content from Christopher Mertlitz, Head of European Investments at W. P. Carey, on what to expect as we enter a new real estate cycle and the outlook for sale-leasebacks.
A Resurgence of Investor Confidence
Earlier this week, real estate professionals from over 70 countries gathered in Munich for the annual EXPO Real trade fair. After a muted year of investment volume, participants were eager to meet with peers to discuss prospective deals and the outlook for the market. The mood can be best described in two words: cautiously optimistic. After rising interest rates caused months of uncertainty and volatility, attendees finally feel stability is on the horizon. Below are three key topics discussed as delegates look ahead to 2025. Interest rates on the decline Monetary policy decisions on both sides of the Atlantic were a major topic at this year’s EXPO. The European Central Bank began cutting rates this summer, followed by the Federal Reserve in September. These rate cuts are an indicator that inflation is on track to reach its target level for price stability. As a result, we’ve seen the bid-ask spread between buyers and sellers narrowing as real estate values adjust to more realistic levels. For investors waiting on the sidelines for economic clarity, this has also served as the impetus to start deploying capital into new and existing assets. At W. P. Carey, however, we would caution that investors should not focus too much on the next interest rate decision. Instead, they should consider the more important factor – long-term borrowing costs. Real estate investors typically borrow on a long-term basis given the length of their leases, so short-term rate cuts won’t have as much of an impact as some are anticipating. New sectors growing in popularity Post-pandemic challenges in sectors including office and some segments of retail have made investors far more selective in terms of capital allocation. Industrial remains among the most popular asset classes as it continues to benefit from strong market fundamentals. The e-commerce boom and logistics sector’s key role in European supply chains remain long-term growth drivers, while the emerging trend towards nearshoring will provide manufacturing and logistics with a further boost. We’re also starting to see some newer sectors growing in popularity. Self-storage, cold storage, senior living, hospitality and data centers have emerged as attractive investments, with strong operating fundamentals and positive long-term growth potential. As investors continue the flight to safety to protect returns, we expect to see a shift in the sectors – and geographic markets – receiving the most capital. An uptick in sale-leasebacks in 2025 Despite some volatility, the overall environment for sale-leasebacks remains favorable, with high-yield debt and leveraged loans continuing to be expensive. The influx of cash from a sale-leaseback remains incredibly valuable for companies, supporting debt restructuring, strengthening balance sheets and providing capital for operating expenses and growth investments. In addition, we continue to see interest from private equity firms in sale-leasebacks as a means of financing new acquisitions or bolstering the growth of portfolio companies. Last year alone, approximately 75% of W. P. Carey’s investment volume was attributable to transactions with PE-backed companies and we anticipate a significant portion of this year’s deal volume will be as well. While it will take some time for the sale-leaseback market to recalibrate and reach its new normal, we are starting to see the green shoots of a more stable industry as we gear up for a busy fourth quarter. We remain “cautiously optimistic” heading into 2025 and look forward to continuing to find opportunities to help companies unlock capital from their real estate assets.
Navigating Economic Tides: Interest Rates & Commercial Real Estate
Last month, the European Central Bank (ECB) announced it would cut interest rates for the first time since 2019, bringing the deposit rate down to 3.75%. This decision came following Eurozone inflation declining from its 10.6% peak in 2022 to 2.5% in June. But what does this mean for the European commercial real estate market? Inflation is cooling The rate cut is an indicator that inflation is on track to reach the ECB’s target of 2%, which is its desired level for price stability. Investors are hopeful that more stability in the market will further narrow the bid-ask spread between buyers and sellers, helping boost transaction volume. The rate cut will also lower borrowing costs for some investors and encourage more bank lending, increasing liquidity in the market and encouraging those on the sidelines to start deploying capital into new and existing assets. Still a muted impact Despite the positive implications, most real estate professionals expect the impact of the cut will be muted. While it’s a first step in reducing borrowing costs, there is not a universal consensus as to how the ECB will view future rate decisions. In its July meeting, the ECB decided to keep rates stable. A key issue remaining for the commercial real estate industry is the refinancing risk for maturing loans. While the cut will likely help some borrowers at the margin, it is not expected to have a significant impact on the pressures facing those needing to refinance. Additionally, cutting rates too quickly may not be ideal for some European economies. If inflation climbs back up, the ECB may have to reverse course and increase rates again, causing further volatility in the market. It is also important to consider the divergence between the ECB and the U.S. Federal Reserve’s own decision to hold rates steady for now. This could impact the Euro-U.S. Dollar exchange rate, which feeds into inflation via the prices for imported goods and services. Final thoughts While the ECB’s decision has garnered a lot of attention, we believe the more important factor is long-term borrowing costs. Real estate investors typically do not borrow on a short-term basis, but rather on a 5- or 7-year fixed rate basis. In this context, SWAP rates often matter more than the ECB’s (short term) deposit rate. As a result, we do not see this decision having a significant impact on the real estate investment market at this point in time. Investors should remain focused on their long-term strategy and direct their attention to factors within their control like quality underwriting, timely execution and capitalizing on opportunities when they arise.