Why Institutional Capital Continues to Embrace Sale-leasebacks

As more corporate and private equity firms have turned to sale-leasebacks, deal volume has continued to grow compared with 10 or 20 years ago. That growth has caught the attention of institutional investors, such as J.P. Morgan Asset Management and Goldman Sachs, who may have previously viewed net lease or sale-leaseback as a niche asset class.

“I think as the market has grown, those asset managers have realized that there’s real scale to this market and a real opportunity even for the largest firms,” says Tyler Swann, co-head of North American investments at W. P. Carey.

For investors considering sale-leaseback strategies, that growing interest raises questions about how these assets hold up through market cycles and whether increased investor demand is changing pricing.

How Critical Real Estate Weathers Market Cycles

Swann explains that the sale-leaseback market has an investment track record long enough for investors to see how well assets performed during past market cycles. He also notes that the assets are usually very important to the companies operating them. As a result, even during downturns, companies need the real estate and tend to stick with it.

“If you buy highly critical real estate under well-structured leases, that asset tends to remain essential to a tenant’s business,” says Swann.

He notes that you can’t necessarily say the same for debt or equity investments, which are more heavily impacted by economic cycles. Swann adds that W. P. Carey is a long-term investor and is less impacted by short-term market downturns, given the company’s leases generally run 15 years or longer.

Rising Rates Haven’t Yet Cooled Sale-leaseback Demand

Large institutional investors entering the sale-leaseback market suggests that interest continues to grow, but Swann suggests its impact may be minimal on pricing or deal terms. “It seems at this point that every large asset manager has realized that they need a net lease platform in order to offer a full suite of investments to their clients,” says Swann.

When considering the months ahead, Swann acknowledges that continued long-term rate increases may affect future deal flow, but notes that demand from tenants and capital sources has remained strong. “The rise in rates that we’ve seen over the last six months hasn’t really had a major impact so far,” says Swann.

He points to one area where capital may be getting ahead of itself, which is the trend of very aggressive pricing for assets leased to investment-grade credits. However, he also notes that because W. P. Carey’s core focus is primarily on sub-investment-grade credits, that trend hasn’t had much of an impact on its business to date.

Overall, Swann views market pricing as fair and reasonable. And because recent rate increases haven’t had a major effect, he remains optimistic about deal flow over the next 12 months.