MarketScoop: State of the U.S. Sale Leaseback Market
State of the U.S. Sale Leaseback Market: 2017 Year In Review
The net lease sector experienced $55.4 billion in overall transaction volume which is a slight decrease from 2016 overall transaction volume of $56.3 billion. In contrast, the sale leaseback market ended 2017 close to $14 billion in volume which is a 25% increase over 2016 transaction volume of $11.2 billion. Overall, cap rates decreased in each sector of the sale leaseback market and compressed 24 bps from 2016 to 2017 ending the year at an average of 6.51%.
At the beginning of 2017, we observed the rise of partial sale leasebacks which occur when a property owner sells its property and simultaneously signs a lease for a portion of that property. This is particularly true in the office category as owners grapple with shifting demographics and workplace utilization. As such, 90% of all partial sale leasebacks from 2017 were in the office category and comprised $2.1 billion in transaction volume. Average cap rates for the office sector compressed 22 bps from 2016 to 2017 ending the year at 6.93%.
Of the top 20 transactions by sales volume, nine were by retailers, representing 45% of total volume. Embattled retailers Sears and Macy’s sold approximately $658 million of sale leaseback assets for liquidity and to capitalize on attractive real estate valuations. Other retailers utilized their real estate as a way to raise funds for mergers, acquisitions and future exit strategies. Cap rates for the retail sector compressed 8 bps from 2016 to 2017 ending the year at an average of 6.18%.
For the past several years, demand for mission critical industrial facilities has been high, and this was no exception in 2017. In 2017, 67% of all industrial sale leasebacks took place outside of a primary market. By comparison, in 2016 65% of all industrial sale leasebacks occurred in a secondary or tertiary market. Average cap rates for the industrial sector compressed 30 bps from 2016 to 2017 ending the year at 7.15%.
2017 was a strong year for the sale leaseback market as companies utilized their real estate footprints as a means to raise capital and unlock value. We expect the momentum to continue in 2018 with companies leveraging their real estate as a capital-raising alternative and exit strategy for corporations, in particular as interest rates continue to rise.
Source: Stan Johnson Company, Real Capital Analytics, CoStar Group