Commercial Real Estate
Navigating Net Lease Retail
Rising interest rates, increased cap rates, and sluggish deal activity created changes in the retail market over the past couple of years. Indeed, the bid-ask spread left many retail net lease deals stuck in negotiations. “There was a time when buyers and sellers found themselves pretty far apart, trying to find a way to meet in the middle,” says Michael Fitzgerald, executive director and head of US retail at W. P. Carey. “During 2023, we saw volume slowdowns of traditionally marketed sale-leaseback deals, as some sectors experienced 50, 75, or even 80 basis point increases in cap rates.” However, at the start of 2024, Fitzgerald notes that he’s seen a stable flow of developer-fueled deals and a higher demand for liquidity. As the market progresses into 2024 and beyond, understanding its direction can help investors make more strategic decisions. Low vacancy rates, creating new opportunities A recent report found that retail vacancy rates are at their lowest level in two decades, as rents continue to rise. The report compared 390 retail marketers across the United States and found that the national retail vacancy rate sat at just 4%. According to Fitzgerald, low vacancy rates are a positive sign that provides confidence in long-term leases and the ability to quickly replace tenants. “Let’s say a fitness operator signs a 20-year lease,” says Fitzgerald. “If retail vacancies are low, that’s a positive for us if we need to re-tenant, as we can likely replace them with a new tenant at or above the original price without compromising our income stream.” He explains that W. P. Carey typically focuses on finding deals in markets with growing rents, such as Phoenix, versus smaller and less vibrant markets. “When you get into underwriting situations where vacancy rates are low, it often allows us to get more aggressive with the cap rate and other deal terms,” says Fitzgerald. Looking into 2025 and beyond Another factor that could contribute to an uptick in activity is merger and acquisition deals. An increase in M&A typically corresponds to an uptick in sale-leaseback activity, as firms leverage proceeds as part of the capital stack for new acquisitions. Overall, Fitzgerald remains optimistic about the coming months. “I think the retail market will continue to be strong because there’s always compelling fundamental reasons why retailers want to sell their real estate rather than hold it,” says Fitzgerald. He explains that it comes down to retailers not being real estate companies. Businesses can generate better returns for investors by investing in their core competencies, ie. running retail operations, and often find holding onto real estate is a drag on their cash and liquidity. As a result, he predicts continued demand from retailers for creative ways to access that liquidity – such as sale-leasebacks.
Charting a Path Forward
The CFO role has evolved over the years, expanding from its traditional financial focus to a broad range of strategic responsibilities. Today's CFOs wear many hats – from financial planning to compliance and risk management and strategic decision-making, among many others. In an environment marked by rapid technology advancements, market volatility and regulatory changes, CFOs play a crucial role in guiding organizations through challenges to build resilience and maintain profitability. In this blog, we delve into CFOs’ top priorities for 2024, drawing from a recent Gartner survey, and explore how leveraging sale-leasebacks can unlock capital to address these priorities. 1. Leading Transformation Efforts Embracing technology and automation remains a top challenge for organizations. Recognizing the crucial role of technology in enhancing business efficiency, compliance and competitiveness, CFOs will focus more on leading digital transformation efforts, both within their departments and across the entire organization. CFOs are integral to driving business transformation, especially in evaluating the best initiatives to adopt and their contribution to the bottom line. As companies scale, continuous implementation of emerging technologies becomes essential for efficient growth management. 2. Evaluating or Improving Financial Strategy Managing the finance function is a core responsibility for CFOs, and is vital for business growth and continuity. With the current economic and market volatility, CFOs will focus more on evaluating and improving the finance function's strategy. A robust financial strategy is essential to meet short and long-term financial goals and ensure positive business outcomes. It offers a better understanding of the company's present financial situation, assesses potential risks, outlines income goals, identifies competencies, investment strategies and funding options necessary to realize those goals. 3. Improving Finance Metrics, Insights and Storytelling Understanding financial metrics and insights is crucial not just for CFOs, but the whole organization. As such, leveraging data visualization can help simplify complex concepts, streamline reporting and foster collaboration across the organization. This can enable companies to tell stories and drive better understanding of their messaging among core audiences, including investors, which can potentially boost valuation. CFOs will prioritize improving finance metrics, insights and storytelling to achieve these and other benefits. 4. Leading Change Management Efforts CFOs will also prioritize leading change management in 2024. Resistance to change among employees is a common challenge often triggered by factors like fear of the unknown, lack of trust in leadership or loss of control. Effective change management is thus vital to organizational success. Strategic leadership promotes consistency, builds employee trust, enhances cost management and enables organizational agility, among other benefits. 5. Optimizing Costs Optimizing costs is yet another area of precedence for CFOs in 2024. Strategic cost management is essential for the realization of organizational goals, especially in volatile times. Possible initiatives include, promoting cost-consciousness across the organization to reduce operating costs, adopting new technology and automation to address inefficiencies, embracing data-driven decision-making and improving vendor management. The Key to Make it All Happen The success of an organization's financial initiatives hinge on the availability of capital. Particularly in an uncertain rate environment, access to liquidity is essential in providing companies with flexibility and growth capital. For companies that own their real estate, sale-leasebacks offer an alternative capital source to support CFOs’ 2024 priorities. These transactions enable companies to access immediate funds while maintaining operational control of their facilities. However, several considerations must be addressed to determine the suitability of a sale-leaseback for a business. First, sale-leasebacks only makes sense if the company owns its real estate. Additionally, a strong credit profile is necessary and a willingness to commit to a long-term lease is essential. The W. P. Carey Solution With all the conditions met, a sale-leaseback is a handy strategy that CFOs can explore to raise the much-needed capital to support the above priorities. At W. P. Carey, we have helped many companies in North America and Europe leverage this financing solution for over 50 years. If you're considering unlocking capital for your operations this year through a sale-leaseback, contact W. P. Carey today!
Expectations for MIPIM 2024
MIPIM, the world's largest real estate conference, will get underway in Cannes next month with over 20,000 delegates expected to attend. As in years past, many will be looking for the conference to bring some clarity on what the real estate industry should be looking out for in the year ahead. While the industry outlook remains murky, investors entered 2024 with a sense of optimism. Here are the biggest questions delegates will be looking to answer at MIPIM 2024. Have Eurozone interest rates reached their peak? The market consensus is generally that the European Central Bank (ECB) has completed or is nearing the end of its rate hiking cycle. However, much to the disappointment of the market, the ECB did not give an indication on when rates would be cut. As a result, a continued upward pressure on yields and downward pressure on real estate valuations is expected through 2024. On a positive note, interest rates reaching their plateau should help jump start the investment market. Greater predictability will contribute to value discovery, cap rate stabilization and tightening bid-ask spreads. This will result in greater transaction activity and hopefully many discussions around prospective deals at MIPIM! What's the outlook for the European sale-leaseback market? Given borrowing costs are expected to remain high in 2024, sale-leasebacks will continue to be an attractive solution for companies to unlock the value of otherwise illiquid real estate assets. Furthermore, with a large share of speculative-grade debt expected to mature in 2025 and 2026, more companies will likely leverage sale-leasebacks for additional proceeds to get refinancing done. Sale-leasebacks offer permanent, long-term capital with no refinancing risk or balloon payments, which remains a very attractive alternative for companies in need of extra cash. In addition, M&A activity is expected to increase in 2024, with private equity firms sitting on over $2.5 trillion in dry powder. Typically when M&A activity increases, there is an uptick in sale-leaseback opportunities, as private equity firms are increasingly leveraging sale-leaseback financing as part of the capital stack for new acquisitions. How can the real estate industry make ESG commitments a reality? The rollout of the EU’s Corporate Sustainability Reporting Directive (CSRD) has put increased pressure on real estate companies to both implement and report on their ESG initiatives. As a result, companies are developing strategic plans to create and maintain sustainable real estate portfolios while also preparing to meet upcoming compliance standards. The challenge the real estate industry faces today is turning commitments into reality. One of the most important steps companies can take is creating more efficient and automated processes for the procurement and management of ESG data. The use of business intelligence and building technology significantly enhances the data collection process, allowing companies to evaluate potential building improvements, review opportunities to reduce emissions and meet future reporting requirements. MIPIM offers a valuable platform for the industry to discuss new ideas and possible solutions related to ESG.
Looking into the Crystal Ball
2023 was undoubtedly a challenging year for the net lease sector. High inflation, rising interest rates and other economic uncertainty caused a notable decrease in overall transaction volume, sparking apprehension about the trajectory of the industry. However, there have been some signs of renewed life in the market. Most experts believe we have hit the interest rate peak and expect cuts to be made in 2024. In addition, dealmakers generally anticipate that the M&A environment will improve given the market has stabilized, which could bring more investment opportunities to the market. While no one has a perfect crystal ball about what the future will hold, there are certainly reasons for optimism in 2024. Here are three net lease market predictions for the year ahead. Boost in net lease deal volume fueled by projected interest rate cuts The U.S. Federal Reserve indicated in its latest summary of economic projections that three cuts may be coming in the year ahead. The cuts are expected to be slow and gradual and will be dependent on the state of the economy, but investors reliant on third-party debt are hoping for a much-needed reduction in borrowing costs to remain competitive. The signaling of rate cuts is positive news for the market as it means interest rates have most likely reached their peak. This should help the market stabilize therefore narrowing the bid-ask spread between buyers and sellers, leading to a more active deal environment in 2024. In addition, many investors who have stood on the sidelines in anticipation that there will be more favorable opportunities down the road are likely to start jumping back into the market in 2024 and new entrants are expected to join in. Uptick in private equity sale-leasebacks as M&A surges The dealmaking environment in 2024 is already off to a better start than 2023. Inflation has declined, interest rates have likely reached their peak and private credit has become more widely available for more kinds of deals, while traditional credit markets are starting to improve. Private equity firms are also sitting on an unprecedented amount of dry powder – $2.59 trillion – with mounting pressures to deploy that capital into new investments. As a result, M&A activity is expected to increase in 2024. Along with an uptick in dealmaking, savvy private equity firms are expected to continue looking for alternative strategies for growth given lingering economic and geopolitical uncertainties. One effective strategy is through the sale-leaseback of their portfolio company real estate, which allows private equity firms to unlock immediate capital to redeploy into other initiatives, such as new acquisitions or portfolio company growth. Typically, when M&A activity surges, sale-leaseback opportunities follow, so more private equity-backed real estate deals will likely emerge in 2024. Pandemic office trends remain while industrial holds steady More than three years since the start of the pandemic, the real estate industry has finally accepted that the office sector will not return to the way it was before – and hybrid- and- remote work models are here to stay. As a result, offices have lost much of their appeal for investors, with transactions declining more than twice as much as any other property sector in 2023. W. P. Carey announced its strategic plan to exit office last year, through the spin-off of 59 office properties into Net Lease Office Properties and an office sale program to dispose of the remaining on-balance sheet assets. This trend is expected to continue into 2024 and some office investors will likely start to look for alternative uses for office assets – such as residential or industrial. Industrial, on the other hand, will continue to perform well into 2024, as re-shoring and nearshoring provide a boost to the sector. While the asset class is showing some signs of softening post-pandemic as the need for robust inventory decreases, the long-term outlook remains positive. Moody’s Analytics CRE forecasts that annual rent growth for warehouse and distribution properties will track at approximately 5-6% per year over the next 10 years, suggesting that the sector has moved on from its huge boom into a steadier state of growth.
What to Expect When Selling to W. P. Carey
W. P. Carey is a leading global real estate investment company, specializing in the acquisition of operationally critical, single-tenant properties in Europe and North America. With over 50 years of experience and a portfolio of over a thousand properties in 25 countries, W. P. Carey has an established track record of enabling companies to unlock the value of their real estate. We develop creative deal structures tailored to the unique needs of each seller and have the ability to structure complex, multi-asset, multi-jurisdictional deals. Whether you are interested in a sale-leaseback, build-to-suit or the sale of an existing net-leased property, we will work with you to understand your objectives and maximize the proceeds to reinvest in your business. We pride ourselves on a fast and efficient deal process, completed at a pace that meets the seller’s timing requirements. With the ability to close all equity and in as little as 30 days, W. P. Carey welcomes the opportunity to work with you. 1. Origination W. P. Carey works with the seller and its advisors to shape the scope of the transaction. During this initial phase, W. P. Carey seeks to understand your business needs and real estate portfolio and offers suggestions on the optimal structure based on your unique situation and goals. 2. Offer Using the insights gathered during the origination process, W. P. Carey presents a custom letter of intent outlining the key framework of the proposed transaction. We work together to refine the terms until both parties are in agreement. 3. Approval Following signature of the letter of intent, W. P. Carey presents the transaction to its investment committee and completes its underwriting process. The preparation and negotiation of the transaction documents takes place seamlessly in parallel. 4. Closing All documents are signed and funds are transferred to the seller. As an all-equity buyer, W. P. Carey does not need to obtain mortgage financing to fund its acquisition, providing fast execution and high closing certainty. Interested in selling your real estate to W. P. Carey? Contact us
From Risk to Resilience
Today, one thing you can count on is constant change. CFOs are steering companies through the murky waters of uncertainty, tasked with a long list of responsibilities that extend from financial planning to risk mitigation and operational strategy. They're the key players who have to balance near term-decisions with long-term outcomes. This article is all about providing CFOs with actionable insights on how to transition from risk management to resilience building. We'll examine the importance of investing in the right team, the transformative power of innovation and the art of managing cash flow for strategic growth. A special focus will be given to the potential of sale-leasebacks, an often underutilized form of alternative financing that can unlock significant capital. Whether you're a seasoned CFO or new to the role, this guide is the roadmap you need to help you rise above uncertainty and prepare your organization for sustainable growth. Invest in Your Team A strong team is the foundation of a resilient company. The right people bring wide-ranging perspectives that can make a real difference. What does this really mean for CFOs who are charting a course for growth and resilience? The Value of a Multifaceted Team A one-dimensional team just won't cut it in today's fast-paced business world. Companies need to have the right combination of skills and perspectives to navigate the complexities of the modern market. Each member of your team should bring a unique skill set that complements the others. Take Google, for example. The company succeeds because it values new ideas, driven by a diverse team of engineers, data scientists, marketers and even psychologists. This multifaceted approach has been key in Google's ability to stay ahead of the curve. Actionable Tip: Conduct a skills gap analysis to identify what your team is missing. Then, target those areas in your hiring and training efforts. The Importance of Continuous Learning The business landscape is always evolving, and your team should be doing the same thing. Continuous learning opportunities not only help team members get better at their job but also boosts employee morale and retention. Actionable Tip: Allocate a portion of your budget for employee development programs. Whether it's workshops, online courses or conferences, make learning a priority. Building a Culture of Resilience A resilient team can adapt to change, bounce back from setbacks and seize new opportunities. It's more than just the luck of the draw. Investing in your team is a deliberate, strategic move that results in growth and resilience. Actionable Tip: Invest in training programs and hire from a diverse talent pool to bring in a variety of skills and perspectives. Create a company culture where failure is seen as a learning opportunity. Encourage open communication to address challenges head-on. Embrace Innovation Innovation isn't just about thinking up the next big trend. It's about optimizing your current processes to be more efficient. Digitalization is a key player here. But how do CFOs use automation and technology to pursue operational excellence and business growth? The Digital Transformation Journey A digital transformation is a strategic overhaul of business activities, processes and models to fully take advantage of the changes and opportunities that digital technologies have to offer. General Electric (GE) underwent a massive digital transformation to evolve from an industrial company into a digital-industrial company. The process involved implementing new technologies but also rethinking their entire business model. Actionable Tip: Start by auditing your current tech stack. Identify outdated systems that are slowing things down and look for modern solutions that can streamline operations. Data-Driven Decision Making The ability to make informed decisions is a big competitive advantage. Data analytics tools can provide insights into customer behavior, market trends and operational efficiencies. That wealth of information provides many opportunities to take your operations to the next level. Actionable Tip: Invest in data analytics tools that can provide actionable insights. Train your team to interpret and use this data effectively. Automation Automation can take over repetitive tasks, freeing up your team to focus on more strategic initiatives. For CFOs who need to manage resources efficiently, the time saved is invaluable. Actionable Tip: Identify bottlenecks in your current processes and give some thought to how digital tools can eliminate them. Look for tasks that can be automated to save time and resources. Embracing innovation is a necessity for CFOs aiming for efficiency and growth. And remember, innovation isn't a one-time event but an ongoing process. Keep your eye on new technologies and be ready to adapt. Manage Cash Flow Managing cash flow can be quite a juggling act. You need cash for day-to-day operations, but also to invest in growth. This is where sale-leasebacks come into play as a form of alternative financing. But let's take a closer look at the nuances of cash flow management, especially for CFOs who are trying to steer the financial ship through both calm and choppy waters. The Liquidity Conundrum Liquidity is like oxygen for a business. Without it, your operations can grind to a halt. But hoarding money isn't the answer either because idle cash doesn't generate returns. Actionable Tip: Maintain a cash reserve covering at least three to six months of operating expenses. This gives you a safety net while allowing you to invest in growth. Creative Financing Investing in growth is important, but it's easier said than done, especially when liquidity is tight. Creative financing options like sale-leasebacks can be a lifesaver. What is a sale-leaseback? A sale-leaseback is when a company sells its property to an investor for cash and simultaneously enters into a long-term lease. This frees up capital tied in real estate, which can then be redirected toward growth initiatives. It’s also permanent capital that never has to be repaid so there is no future refinancing risk. For example, a retail chain could use a sale-leaseback strategy to free up capital and then turn around and invest in expanding its online presence. Actionable Tip: If you own valuable real estate, consider a sale-leaseback as a way to unlock permanent capital with no refinancing risk, while maintaining operational control of your building(s). The Role of Financial Forecasting Accurate financial forecasting can be a huge advantage. It helps you anticipate cash flow needs, making it easier to plan for investments and contingencies. It's another highly useful way CFOs can ensure financial stability and growth. Sale-leaseback arrangements also typically involve set lease payments over a period of many years (anywhere from 10-30 years). This predictability in cash outflows can make it easier to forecast future expenses. Actionable Tip: Invest in financial forecasting tools and, if possible, bring in experts who can help you make the most of them. Additional Strategies for CFOs Navigating the financial landscape requires more than just a good compass. It requires a multi-pronged strategy. In addition to investing in teams, embracing innovation and managing cash flow, there are other tactics CFOs can use to build resilience and drive growth. Scenario Planning Always have a Plan B and even a Plan C. The more prepared you are for different scenarios, the more resilient your company will be. During the COVID-19 pandemic, companies that had robust contingency plans were more nimble and able to better adapt to the new environment, ie. moving to remote work or finding new suppliers. Actionable Tip: Use financial tools to test out the impact of different business scenarios. This helps you prepare for unexpected issues, so you can make faster, smarter choices. Debt Management Look for ways to reduce or retire debt. This will improve your balance sheet, boost your credit metrics and increase cash flow. Sale-leasebacks can be another useful tool in this regard, enabling companies to unlock attractive capital to pay off debt coming due. Another benefit of a sale-leaseback is there is no refinancing risk or back-end balloon payments. Actionable Tip: Review your debt profile regularly and consider sale-leasebacks as a way to strengthen your balance sheet and avoid expensive debt refinancing. Transparency Keep the lines of communication open with all stakeholders. Transparency builds trust, which is invaluable in times of uncertainty. Actionable Tip: Use multiple channels like email updates, town halls or even social media to keep stakeholders informed. Transparency is about being honest when challenges arise. Final Thoughts: The Road to Resilience Resilience is about building a business that can withstand the shocks and disruptions that come its way and emerge stronger and even more competitive. For CFOs, this means wearing many hats — from being a strategic advisor and risk manager to an innovator and financial steward. Remember that resilience is a journey, not a destination. It requires continuing effort, strategic planning and the right set of financial tools. Sale-leasebacks are one such tool that every chief financial officer should have in their arsenal, offering a practical solution to one of the most pressing challenges: balancing liquidity and growth. Ready to unlock new growth opportunities for your business? Contact W. P. Carey today to explore whether or not a sale-leaseback makes sense for you!
Private Equity and Sale-leasebacks: Choosing the Perfect Partner
Private equity-backed deal volume has hit its lowest point in four years. Unsurprisingly, the biggest factor contributing to this decline is the high cost of debt due to rising interest rates, which has made private equity deals more expensive. As a result of the challenging capital environment, PE firms are turning to sale-leasebacks as part of their financing strategy. In a sale-leaseback, private equity firms can sell their portfolio company real estate to an investor for cash while the company simultaneously enters into a long-term lease. In doing so, the PE firm extracts 100% of the real estate’s value and converts an otherwise illiquid asset into working capital. This is particularly beneficial now, as cap rates on sale-leasebacks have risen significantly less than other forms of debt, making them an attractive funding alternative on a relative cost of capital basis. For PE firms evaluating a sale-leaseback, there are several factors to consider when choosing a partner to ensure the deal gets done quickly, efficiently and meets the needs of all parties. Here are three that are critical in today’s environment: Experience One of the most important qualities to look for in a sale-leaseback partner is experience. Ensuring the investor has a strong history of successfully closing transactions, including private equity-backed transactions, will ensure the process is smooth and well executed. In addition, if the deal involves multiple properties, countries or lease structures it’s important to look for a global investor with the ability to execute on complex, cross-border and multijurisdictional transactions. There are a number of new entrants in the sale-leaseback space, so working with an investor with several decades of experience may help maximize proceeds and make the process easier, particularly for PE firms exploring sale-leasebacks for the first time. Access to capital Another critical quality in a sale-leaseback partner – made more important in today’s environment – is access to capital. All-equity buyers, which are typically publicly traded REITs that access the public equity and debt markets, are better positioned to close on deals given they aren’t reliant on securing third-party debt financing at the time of close. This means they are less likely to re-trade and can offer better certainty of close when it comes to execution. Ability to meet timing constraints Many private equity firms considering sale-leasebacks are looking to do it in conjunction with a portfolio-company acquisition, leveraging the financing as part of the capital stack. This means that finding a sale-leaseback partner that can meet timing constraints is important, given the capital is needed to complete the corporate acquisition. Experienced and well-capitalized investors can typically provide a quicker and more efficient close, and some even have the ability to close in less than 30 days if required. For an example of how PE firms can use sale-leasebacks to help fund an acquisition, read about W. P. Carey’s recent deal with SK Capital and Apotex. Closing thoughts By finding a partner with these characteristics, private equity firms can successfully leverage a sale-leaseback to help capitalize on M&A opportunities and unlock value in portfolio-company real estate assets. W. P. Carey has 50 years of experience and has successfully closed nearly $6 billion in PE-backed deal volume. Contact us today if you’d like to evaluate a sale-leaseback as part of your financing strategy!
Is the Net Lease Industrial Market Still "Red Hot"?
The single-tenant net lease industrial market has been on fire in recent years. Buoyed by e-commerce growth, industrial properties were seeing record low cap rates and record high competition from investors following the COVID-19 pandemic. However, the sector has not been immune to recent macro-economic volatility. Search -In fact, quarterly transaction volume fell more than 46 percent in the first quarter of 2023, making it the slowest quarter reported by the net lease industrial sector since mid-2017. Does this mean that the industrial market is losing its steam? While some investors are waiting on the sidelines, trends including onshoring, supply/demand dynamics and rising interest in sale-leasebacks will help bolster the industrial market in the long term. Here’s why: Impact of onshoring Supply chain issues during the pandemic have been a major catalyst for onshoring in the industrial market. Having manufacturing facilities overseas meant accessibility was limited (or in some cases, completely restricted), which had a major impact on companies’ ability to get their product to consumers. As a result, more companies have focused on bringing their facilities back to the U.S., which has only been supported by lower labor-related costs, better automation technology and an accessible highway and interstate system. Technology companies have largely been leading the onshoring charge, with companies like Intel, Micron and Texas Instruments committing to building large manufacturing plants in the U.S. This has led to a steady rise in demand for warehouse and industrial spaces from U.S. companies, with notable growth seen in the Southeast. Supply/demand dynamics After several years of growth post-COVID, warehouse construction is on the decline due to higher interest rates, a slower economy and Amazon’s reduced spend on new facilities for 2023. 6,700 warehouses are expected to be built in 2023, a 35% reduction compared to the 10,000 built in 2022. Despite this, e-commerce growth is expected to keep demand for warehouse space strong, with rents anticipated to increase over the next year. The good news for investors is that cap rates are also on the rise – Search -up 35 basis points from record lows in 2022. As the buyer-seller price gap continues to close, more investors will likely jump back into the market, strengthening transaction volume in 2024. Uptick in sale-leaseback interest The volatility in the capital markets environment has certainly been challenging for companies, with cost of capital rising considerably given increasing interest rates. Alternative forms of financing such as sale-leasebacks have come to the forefront as companies look for ways to unlock capital. Sale-leasebacks offer a “naturally accretive” funding source, particularly for companies that own fungible, mission-critical real estate and are willing to sign a long-term lease. Industrial facilities have inherent criticality which makes them uniquely attractive to investors, making owners of these types of facilities great candidates for sale-leasebacks. While inflation is starting to cool, experts predict that the Fed won’t start cutting interest rates until 2024, which will encourage more industrial companies to pursue a sale-leaseback. With more opportunities likely coming to market and investors poised to execute (particularly all-equity buyers), we believe industrial will maintain its position as the “darling” of net lease for the foreseeable future.
Three Ways Real Estate Investors Can Recession-Proof Their Portfolios
Economic experts are continuing to signal that a recession could be on the horizon. A number of factors are contributing to this sentiment, but recent bank failures, tightening credit, interest rate increases and sustained high inflation are among the biggest. To help prepare in case of a downturn, below are three things real estate investors can do to “recession-proof” their portfolios and position their business for long-term success. Prioritize diversification When it comes to portfolio resiliency, diversification is key. Investing in a range of geographies, asset types and industries reduces potential risks tied to individual market volatility. If one particular asset class is more heavily impacted by a recession than others, having a diverse portfolio comprising several asset classes reduces the overall impact. Portfolio diversification also allows investors to allocate capital to where they are seeing the best risk-adjusted returns. This means investors can be nimble and take advantage of unique opportunities should they arise. Focus on mission-critical real estate To be successful in commercial real estate investing, it’s important to focus on properties with strong fundamentals, such as location, size and quality. However, when positioning a portfolio to weather all economic cycles, arguably the most important aspect of a property to focus on is “mission criticality,” or how important the property is to the tenant’s operations. When a property is mission critical, a tenant is more likely to remain in the facility – both in good times and in bad – for the long term. The worst thing that could happen during an economic downturn is to have a portfolio of vacant assets – and therefore limited rent payments – so by focusing on mission criticality, investors can better ensure durable, long-term cash flows. Analyze tenant credit and business Disciplined credit underwriting is critical to long-term portfolio success. Large tenants with a strong underlying credit and revenue history will be better equipped to weather downturns through access to liquidity, or in a worse-case scenario, have the ability to restructure and continue operating in their mission-critical properties. In addition to a tenant’s financials, it’s also important to examine the long-term outlook of the tenant’s business and industry. For instance, a tenant that produces electric car engines may have a better long-term outlook – and therefore be better suited to a long-term lease – than one that produces gas-powered engines given the trend toward electric vehicles. Final thoughts It’s never too late for real estate investors to look at their investment strategies and take steps to enhance their portfolio resiliency. Focusing on long-term stability – through diversification, mission-critical real estate and creditworthy tenants – versus short-term gains will help investors to build portfolios that will carry them through all market cycles.