M&A
Sale-leasebacks Gain Momentum as Global M&A Values Grow
Private equity sponsors are rethinking how they access capital as the M&A market heats up. Global M&A values have climbed to $1.89 trillion in the first half of 2025, meanwhile fluctuating interest rates and tighter financing make traditional methods of raising capital less appealing. “The tighter rate environment is a moving target, particularly with the recent rate cut,” says Jason Patterson, executive director of investments at W. P. Carey. “As a general rule of thumb, alternative sources of capital, such as sale-leasebacks, are attractive right now, especially if you’re having trouble securing debt in a more structured transaction.” As firms look to move forward in the current market, many are finding strategic opportunities with sale-leasebacks to tap into capital, both before and after M&A deal closings. Capturing Flexibility Pre- and Post-Acquisition For private equity firms, a sale-leaseback offers flexibility throughout the merger and acquisition process. In the pre-acquisition phase, this strategy helps reduce equity requirements. “This can lower the equity needed to close, which is especially attractive at the start of an M&A deal,” says Patterson. On the post-acquisition side, Patterson notes that a large amount of capital often remains tied up in real estate, and that sale-leaseback proceeds can support new acquisitions, or fund reinvestment in the buildings themselves. Because of this flexibility, Patterson is seeing more sponsors incorporate sale-leasebacks into their regular strategies. Securing Certainty and Speed Patterson stresses that execution speed and reliability are critical when incorporating sale-leasebacks into a strategic playbook. “Having someone you can be certain is going to provide the capital necessary to close that acquisition on time is of the utmost importance,” says Patterson. As an example, he points to a transaction in which W. P. Carey funded more than $400 million at closing for a large pharmaceutical manufacturer. “It took a lot of coordination and trust among the parties,” says Patterson. “But having that certainty was extraordinarily valuable to the sponsor because they didn’t have to call their own capital or raise additional debt to fund the transaction.” Patterson also explains that groups sometimes lack sufficient information about the real estate transaction to even consider a sale-leaseback until they are near closing, which is why having a partner who can move quickly and reliably is important. Putting Proceeds to Work Once a sale-leaseback is completed, the proceeds can be deployed in a variety of ways. Patterson notes that some groups use the capital to grow the business or expand production. In other cases, proceeds might go toward paying down debt when the cost of funds under a sale-leaseback is more attractive than traditional financing. Patterson believes this flexibility could drive wider use of the strategy in future M&A transactions. “Many groups don’t always appreciate [that] they’re literally sitting on some of the most valuable sources of capital they have in the real estate they own,” says Patterson. “And as more become familiar with using sale-leasebacks as a strategy, I think it’s possible that it could increasingly be used in the M&A process.”
Net Lease Investors Adapt as Economic Uncertainty Lingers
Tariffs, interest rate fluctuations and macroeconomic uncertainties continue to reshape the net lease investment market. As these factors evolve, investors are working to make long-term decisions in an uncertain environment. “There’s a lot of volatility, especially around tariffs and trade policy,” says Jason Patterson, executive director of investments at W. P. Carey. “It’s difficult for a CFO or CEO to commit to a 20-year lease when so many of these factors are changing day to day.” This unpredictability has tempered deal volume, but as conditions stabilize, Patterson expects a resurgence in activity later in the year. The Impact of Interest Rate Volatility Interest rates have been a focal point for investors, particularly given their impact on pricing and transaction volumes. While rates have been trending downward recently, the past year has seen continued fluctuations, making it challenging for buyers and sellers to align on pricing expectations. “Investors really track the 10-year US Treasury as a guidepost for risk and pricing,” Patterson says. “The volatility we’ve seen has widened the bid-ask gap in many cases, making it harder for deals to come together.” He notes that as interest rates stabilize, market conditions should improve, leading to increased deal flow. Sale-Leasebacks Still Attractive Alternative to Unlocking Capital Uncertain economic conditions often prompt corporate real estate owners to explore sale-leaseback transactions as a means of unlocking capital. While Patterson hasn’t seen a major uptick yet, he expects that to change as 2025 progresses. “There are early signs of increased sale-leaseback activity,” Patterson says. “While we haven’t seen a huge spike just yet, M&A activity has been improving, and sale-leaseback volume often follows that trend.” He also notes that while uncertainty can sometimes deter companies from making long-term commitments, it can also push them toward alternative capital options, such as sale-leasebacks, to improve liquidity. Preparing for What’s Next With so much uncertainty, investors are focusing on proactive strategies to reduce risk and position themselves for long-term success. According to Patterson, much of this work happens upfront, from structuring leases with protective provisions to ensuring asset selection aligns with long-term needs. “The good thing about net leases is that once you’ve bought a building and signed a lease, there’s an expectation of long-term stability and predictability,” he explains. “The key is making sure those early decisions — such as lease structuring and tenant selection — are as strong as possible.” Active asset management also plays an important role. Maintaining strong relationships with tenants, tracking performance and being flexible with their needs can help investors handle potential challenges in the future. While economic uncertainty continues to persist, investors who remain disciplined and adaptable will be well positioned for success, and Patterson remains optimistic about the net lease market in the months ahead. “I don’t see an impending cliff or major downturn,” he says. “The best approach is to stay informed, track policy changes and make smart, forward-looking decisions.”
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.
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.
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.
How Sale-Leasebacks Help PE Raise Capital in a Tight Market
Funding for growth, refinancing corporate debt, and merger and acquisition activities are top priorities for many private equity firms. A recent PwC report noted that 60% of CEOs plan to make at least one acquisition in the next three years. The report further explains that lower levels of M&A activity during 2023 created “pent-up buyer demand” moving into the current year. However, tapping into capital isn’t always easy when it is locked in assets. “It’s quite inefficient for private equity firms to have capital tied up in real estate assets that aren’t earning for them,” says Tyler Swann, managing director, investments at W. P. Carey. “An alternative is doing a sale-leaseback, which provides a much lower cost of accessing capital than traditional financing methods.” Understanding sale-leasebacks and their advantages can help private equity firms strategically manage growth funding, debt maturities and other capital needs. The advantages of sale-leasebacks With traditional financing strategies such as mortgages, terms are often shorter and exposed to higher market volatility. Accessing capital can also be time-consuming, a challenge for firms that need to move quickly for acquisition deals. That’s not the case with sale-leasebacks, notes Swann. “Sale-leasebacks are very flexible,” says Swann. “The processing time can be as short as 30 to 45 days between the initial call and the actual funding. It’s not unusual for us to get a call from a private equity firm saying, ‘We’re closing on a business in 30 days; can you be there to close with us as acquisition financing?’ And that’s something we can do.” He explains that capital uses also have very few restrictions, with the most common purposes being acquisition financing, dividend payments, and refinancing maturing debt. Misconceptions about sale-leasebacks As private equity firms consider sale-leasebacks, questions often linger regarding who qualifies for this type of financing. Many believe that because their real estate is in a secondary or tertiary market, or their asset doesn’t have a huge value, they won’t qualify. But according to Swann, that’s not necessarily true. “If you have a specialized manufacturing facility in a small market, you may think it won’t qualify because it’s not a high-quality warehouse in a market like Southern California,” says Swann. “Despite where an asset is located, if it’s profitable and contributing to the bottom line of a business, it could be a great candidate for a sale-leaseback.” As the market progresses through 2024, Swann expects sale-leaseback activity to continue upward, partly due to M&A activity and its flexibility to tap into capital quickly. “Every year, sale-leasebacks become a little more accepted in the private equity community as a source of financing,” says W. P. Carey’s Swann. “Ten or 20 years ago, corporate debt was by far the dominant option, but we continue to see an increase in sale-leaseback deals every year.”
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.
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!