What to Know When Leveraging Sale-leasebacks to Finance M&A
The finance option can be a useful tool in a potential deal
The global M&A market experienced record activity in 2021, topping $5 trillion for the first time as unprecedented dry powder, a low cost of capital and demand for inorganic growth fueled dealmaking. Savvy corporate acquirers and private equity investors looking to jump in on the action have seized the opportunity to use creative financing options that unlock equity, strengthen balance sheets and free up capital for strategic initiatives and additional transactions.
Enter stage right, the sale-leaseback.
In 2021, sale-leaseback volume topped $24 billion, up from nearly $13 billion in 2020. For those interested in joining the growing number of investors and acquirers leveraging sale-leaseback financing alternatives to supplement M&A activity, here’s what you need to know.
How do you know if a sale-leaseback should be part of an M&A transaction?
There are a couple of key considerations in determining whether to pursue a sale-leaseback as part of an M&A strategy. First, identifying whether or not owned real estate is critical to the pro forma business in the long run. A sale-leaseback is a long-term source of financing, so it’s important that the real estate involved is not only critical to the pro forma entity’s operations, but that the company is comfortable with committing to a meaningful lease term. Just as important is understanding the market’s appetite for the specific real estate and rent cash flow in contrast to the entity’s cost of capital. Tenant credit, facility criticality and quality of the real estate are all factors that contribute to how competitive a sale-leaseback strategy might be against more traditional financing strategies in supporting a transaction.
How do the current inflation levels and the Fed’s rate hike impact M&A volume and attractiveness of sale-leasebacks?
There are certainly some headwinds, with rising rates, the expected tightening of regulation and potential for changes in tax policy all driving a “wait and see” approach for some acquirers. However, activity so far in 2022 is still visible and the recent rate hikes and overall volatility in the debt capital markets make alternatives to traditional debt financing, such as sale-leasebacks, an even more attractive option in funding M&A strategies.
What are the advantages of sale-leasebacks compared to more traditional routes of financing?
There are quite a few advantages to financing via a sale-leaseback: the avoidance of many traditional debt challenges such as a balloon payment or need to refinance at the end of the term, and in some cases, less stringent financial covenants. In addition, many companies also benefit from the flexibility of extension options and operating lease treatment, all without immediately forgoing control of critical real estate or disrupting day-to-day operations. Depending on the buyer, sellers may also gain a long-term capital partner who can work with them far into the future to ensure their real estate continues to meet their evolving business needs.
It’s also important to remember the cost of capital for a real estate investor is often extremely competitive. In some cases, this—coupled with the fact that a real estate investor is better suited for property ownership as it aligns with its core competency—means a real estate investor will buy assets at a higher multiple compared to an M&A target’s valuation, thereby unlocking a value creation opportunity that benefits from the combined operating business and real estate value. In addition, some companies find that by converting illiquid real estate assets into liquid capital at a favorable cost, the pro forma company is able to optimize its cost of capital.
Conclusion
With optimism that M&A activity will remain strong despite the current market headwinds, I anticipate sale-leaseback activity will continue to soar in 2022, particularly as awareness of this valuable financing strategy among private equity investors and corporate owner-occupiers becomes more prevalent. When working with an experienced real estate investor, sale-leasebacks can be a powerful and reliable tool to finance acquisitions and fuel corporate growth.
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The Net Lease Market Finds Its Footing
Net lease investors have been on a wild ride over the last few years. The large run-up in benchmark rates beginning in 2022 created challenges around pricing expectations. However, Jason Patterson, executive director, investments at W. P. Carey, notes that despite some trade volatility and other factors, more stability in long-term rates over the past two years has helped those on both sides of a transaction find more common ground on where pricing should land. Bid-Ask Spreads Narrow as Pricing Stabilizes For much of the reset period, sellers were anchored in 2022-era valuations, while buyers priced deals on materially wider rates, and that gap has begun to narrow. “A slightly more range-bound 10-year Treasury provides some confidence on where pricing should shake out,” says Patterson. He adds that increased capital inflows to the net lease space have also further compressed bids, driving more transactions to pencil out on both sides. Where sellers once struggled to meet the market, a more stable pricing environment has made that alignment more achievable. Tighter Credit Spreads and Sale-Leasebacks Support Deal Flow Patterson explains that credit spreads broadly had been near record lows until recently, a condition that he describes as helping keep cap rates from widening significantly. Tighter spreads benefit net lease investors both in how deals are capitalized and in the cap rates at which tenants and developers expect to transact. Patterson notes that he expects to see an increase in sale-leaseback interest driven by a pickup in private equity and M&A activity. He also adds that lower short-term rates may stimulate deal flow in private equity, and a change in ownership often serves as the catalyst for a sale-leaseback arrangement. Moving forward, Patterson points to interest rate volatility and credit as two of the most important factors for net lease investors. Rate volatility, he notes, can quickly undermine returns. He also flags credit as a persistent area of focus, noting that while recent headlines have raised broader concerns, the long-term nature of net lease real estate may make those risks more muted than in other sectors. And as the market moves into a more active phase, those who keep a close eye on both will be best positioned to capitalize on what Patterson sees as a period of growing opportunity ahead.
MIPIM 2026: Where Capital, Conviction and Opportunity Converge
As the industry gathers once again in Cannes for MIPIM 2026, the European real estate investment landscape appears to be at an important inflection point. After several years defined by volatility, repricing and constrained liquidity, there are growing signs of stabilisation — though the recovery remains uneven and market-specific. Against that backdrop, three questions are likely to dominate conversations at MIPIM this year: Are European transaction volumes expected to improve? How will the sale‑leaseback market evolve amid a significant wall of maturing debt? Which sectors appear best positioned as investors recalibrate their strategies? The Outlook for European Transaction Volumes Pricing expectations between buyers and sellers have adjusted meaningfully over the past 18–24 months, following one of the sharpest repricing cycles the European real estate market has experienced in decades. After a prolonged period of stalled activity, valuations across many markets now show clear signs of stabilisation, supported by greater transparency around interest‑rate policy and financing costs. While long‑term rates remain elevated relative to the pre‑2022 environment, the pace of change has slowed, allowing investors to underwrite returns with greater confidence and begin re‑engaging selectively with the market. This improved clarity around cost of capital is starting to translate into renewed deal momentum in several core European markets. Savills reports that European investment volumes are expected to rise by around 18% in 2026 as pricing firms up, macroeconomic conditions stabilise and institutional capital returns more consistently across the main sectors. That said, recovery is unlikely to be uniform. We continue to see divergence between markets and sectors, with liquidity gravitating toward assets where fundamentals are strongest and underwriting assumptions can be supported over the long term. Sale‑leasebacks and the Growing Need for Capital One of the most prominent themes we expect to discuss at MIPIM 2026 is the growing demand for alternative sources of capital — particularly as a significant amount of corporate and real estate debt comes due this year and next. Across Europe, many owner-occupiers are facing refinancing challenges in an environment where traditional bank lending remains selective and difficult to access. At the same time, businesses are contending with higher operating costs, investment requirements linked to competitiveness, and the need to preserve balance‑sheet flexibility. In this context, sale‑leasebacks are increasingly being viewed as a strategic financing tool. By unlocking capital tied up in real estate, owner-occupiers can redeploy funds toward growth initiatives, operational requirements and debt paydown, while retaining long‑term operational control of their assets. Sectors to Watch: Industrial and Retail When it comes to sector preferences, industrial and retail assets continue to stand out, provided they are underpinned by strong occupier fundamentals. In the industrial space, manufacturing and logistics assets that play a critical role in supply chains remain attractive. Structural trends such as nearshoring, supply‑chain resilience and e‑commerce continue to support demand in many European markets. Assets that are modern, well‑located and tailored to tenant needs are increasingly difficult to replace, reinforcing their long‑term importance. Retail also remains an area of opportunity — particularly for formats that serve non‑discretionary or value‑oriented consumer demand. Grocery‑anchored retail, DIY, and other essential retail categories have demonstrated resilience through economic cycles, supported by consistent foot traffic and defensive spending patterns. A Measured but Constructive Outlook MIPIM 2026 comes at a time when optimism is returning to European real estate markets. While challenges remain, there is growing evidence that capital is being deployed at more significant levels — particularly where opportunities are grounded in fundamentals rather than short-term trends. The conversations in Cannes this year are likely to reflect that balance: pragmatic, selective, but increasingly forward‑looking. For long‑term investors focused on durable cash flows and partnership‑driven transactions, the environment continues to present compelling opportunities.
2026 Net Lease Outlook
After several years marked by inflation, interest rate uncertainty and selective buyer activity, the U.S. net lease market enters 2026 with more clarity – and more momentum. As pricing resets work through the real estate sector and investors gain confidence in the direction of capital markets, we expect an increase in transaction volume in the year ahead. Below are three predictions set to shape the U.S. net lease landscape in 2026. Transaction Volume Will Rebound as Pricing Stabilizes The reset in valuations throughout 2024 and 2025 has narrowed bid‑ask spreads and revived buyer activity. As the sector digested Fed policy shifts and debt markets steadied, transaction activity began increasing meaningfully – particularly in industrial and logistics. As a result, we expect a measurable uptick in volume in 2026 as investors lean into improved cost‑of‑capital visibility. Colliers forecasts that U.S. CRE transaction volume will grow 15–20% in 2026. Industrial Will Continue to Dominate Industrial demand is positioned to remain strong in 2026. As trade‑policy uncertainty eased in late 2025, many companies who had paused expansion or relocation decisions finally moved forward, bringing a wave of leasing activity that is carrying into the new year. E‑commerce also continues to be a powerful structural driver, underpinning robust leasing demand as retailers and logistics operators expand fulfillment capacity to meet consumer needs. At the same time, development pipelines have slowed, allowing the market to work through new supply. As a result, vacancy is expected to stabilize in 2026, reinforcing a fundamentally balanced environment for investors and occupiers alike. Rising M&A Activity Will Drive New Sale‑Leaseback Opportunities An anticipated rise in M&A activity will likely fuel an increase in sale‑leaseback opportunities in 2026. Private equity firms often use sale-leasebacks to reduce upfront equity requirements and enhance returns when acquiring a new business, especially in deals where real estate represents a meaningful share of the purchase price. On the post-acquisition side, sale-leasebacks can offer PE firms considerable financial flexibility, supporting reinvestment into the portfolio company’s business or even future follow-on acquisitions. Altogether, the anticipated surge in M&A is expected to expand the pipeline of high‑quality real estate coming to market, providing ample opportunity for sale-leaseback investors. Final Thoughts As 2026 unfolds, the U.S. net lease market is entering a period of renewed stability and opportunity. With transaction volumes rebounding, industrial demand holding firm and sale-leaseback activity accelerating alongside M&A trends, investors have multiple avenues to deploy capital strategically. Staying attuned to these drivers will be essential for navigating the year ahead.