SLB Outlook: A Stronger Year Ahead
ATLANTA—Conditions for the sale-leaseback market in the first two months of 2017 could hardly have been more different than the year-ago period, Shan Gastineau of Stan Johnson Co. tells GlobeSt.com.
Sale-leasebacks represented a healthy 21% of the overall net lease market last year, and while the overall dollar volume was off compared to the year prior, Stan Johnson Co. is expecting a stronger showing for SLBs in 2017. GlobeSt.com caught up with Shan Gastineau, Atlanta-based senior director with Stan Johnson, for his take on the outlook for this net lease sector.
GlobeSt.com: How has the sale-leaseback market faired during the first two months of 2017 compared to the first two months of 2016?
Shan Gastineau: We probably could not have picked two recent periods for a more interesting comparison. The state of the market in early 2016 was this: from the first of the year until the end of February, the yield on the 10-year Treasury had dropped precipitously 52 basis points, the S&P 500 had dropped 179 points during the first six weeks and the debt market was stalling. Deal flow and activity followed suit, slowing down to absorb the massive uncertainty. That the overall 2016 sale-leaseback sales volume ultimately was down from 2015 did not surprise us, considering how the year began and how the year ended.
What we’ve seen this year has so far been a different story. Since the election, the yield on the 10-year Treasury note is up 53 bps, the S&P 500 is up 225 points and the Federal Reserve is poised to raise rates. Based on deals we’re seeing, there is more velocity in the SLB market, both in speed and quantity. Additionally, the bid/ask spread between sellers and buyers doesn’t appear to be the obstacle that it was at this time last year.
GlobeSt.com: Describe the ideal company for an SLB.
Gastineau: There aren’t ideal companies so much as there are ideal circumstances for a sale leaseback. As we advise our clients, we really want to understand their corporate objectives and long term business strategy and work backward from there to help evaluate whether their real estate assets can be leveraged to further their core business objectives.
The solutions provided by the SLB market address very different challenges for companies; a) companies with less than investment grade credit needing to build or expand, and not having easy access to the credit markets for real estate needs, b) high growth companies wanting to redeploy capital out of their real estate holdings into their core business, c) companies wanting to transfer risk out of their real estate portfolio to the investors willing to take that risk, i.e., retail and office holdings, d) companies wanting to create options for long term exit strategies in their real estate due to growth, contraction, utilization, technology, and so on.
GlobeSt.com: Why should a company consider a sale leaseback?
Gastineau: Besides the alternative access to capital that SLBs provide, there are other considerations that should be weighed. Companies should consider taking advantage of today’s aggressive SLB pricing to take risk out of their holdings. Until 2008, many did not consider real estate a risk asset. We have now been dispossessed of that notion, and our corporate occupier clients are telling us that they consider it the risky asset that we believe it is. Corporate owners of retail space have yet to respond aggressively to the encroachment of e-commerce.
Corporate owners of office space have only recently begun to respond to the 30-year trend in smaller footprints per employee now driven by workplace engagement strategies. In the war for talent, companies who lease are leveraging tenant improvement allowances afforded at renewal or as part of a blend-extend initiative to implement capital-intensive workplace transformations. Our company has seen businesses as diverse as software developers and healthcare systems targeting less than 125 square feet per employee as part of broader engagement and recruiting initiatives, which are the far greater drivers of operating expense for major service organizations than rental expense. Finally, we are advising clients around opportunities to monetize their data centers as part of broad-based corporate approaches to risk mitigation.
GlobeSt.com: What SLB trends will we be talking about 12 months from now?
Gastineau: Barring fiscal mismanagement of the US economy or some negative exogenous event, we should be looking back on 2017 as a banner year for the sale-leaseback market. We believe it will exceed 2016 levels and continue to be a major component of the single tenant investment sales space. Even with the Fed raising rates two or three times this year, the long end of the yield curve could stay within a range that does not discourage transaction activity. Many have been hoping for a little inflation to come into the economy and this could encourage companies to deploy capital in more aggressive ways, putting real estate monetization in play.
We will continue to see growth in partial SLBs, particularly in the big box retail segment and companies with large office exposure. And again, we would not be surprised to see more companies leveraging SLB opportunities to finance their workplace engagement initiatives. Single-tenant occupiers in particular have the greatest latitude to implement their workplace strategy by integrating their desired amenities and services into their retrofit and making it a key consideration of their lease negotiations in a way that occupiers in multi-tenant office spaces cannot.