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More Businesses Are Selling Their Warehouses For Quick Liquidity

For decades, companies looking to give themselves a financial cushion during periods of economic uncertainty have sold their headquarters buildings to a third party and leased the property back from the new owner.

Prologis' Pulaski Distribution Center outside of New York.

As the coronavirus pandemic has thrown many businesses' finances into disarray, these sale-leasebacks are becoming increasingly popular in the industrial real estate market.

About 13% of the country's sale-leaseback volume came from industrial deals in the second quarter, according to CoStar data, such as Big Lots’ $725M sale of its four distribution centers and cash-strapped grocery chain SuperValu’s unloading of eight distribution centers for $445M. A year earlier, the share of industrial in sale-leaseback deals was 4.7%.

About 6% of all commercial real estate transactions were sale-leasebacks in the second quarter, compared with 5.3% in the same period a year ago, and more than double the 2.4% in the 2018 second quarter, according to CoStar.  

More companies will look to sale-leasebacks to bolster their balance sheets, as additional short-term government stimulus help from the federal government is currently stalled in Congress. 

Both the companies who sell the properties and the REITs who purchase them benefit from the sale-leaseback process, according to Brad Thomas, senior analyst with iREIT, a website that tracks real estate investment trusts.

“A company can take that real estate that’s on their balance sheet, sell it and lease it back [and] still maintain control of the property for a long period of time,” Thomas said. “They can use that capital more efficiently to grow and maintain their business. I think you will see more of that going forward as we move into the next innings of the pandemic.”

Jason Fox, CEO of W.P. Carey, a REIT that focuses on single-tenant properties, expects the trend to continue as credit standards tighten from the buckling of the U.S. economy under the pressure of the worst public health crisis in more than a century.

“In the U.S., despite the decline in deal closings, pricing remained competitive, especially within warehouse and industrial, in which investors have generally been more willing to underwrite relative to retail and office,” Fox said during his company’s recent earnings conference call. “Recently, buyers and sellers started to come off the sidelines, and we're seeing more deal flow. So we expect U.S. deal activity to pick up in the second half of the year.”

The highest-quality industrial assets are priced higher than they were before the pandemic struck, Fox said.

Like other commercial real estate transactions, sale-leaseback deals have still happened less frequently than they did before the coronavirus shut down large swathes of the economy and made travel and building tours all but nonexistent.

Sale-leaseback deal volume in the first six months of the year was at $4.05B, according to Real Capital Analytics, less than half the $9.9B in deals that occurred during the same period in 2019. 

“Normally, the sale-leaseback market should be driven by changes in credit availability on the part of tenants,” Real Capital Senior Vice President Jim Costello wrote in an email. “That is not the driving force at the moment though. The uncertainty around the future of the pandemic is the driving influence, however.”

CORRECTION, AUG. 11, 6:10 P.M. ETA previous version of this story misstated the location of the Prologis distribution facility pictured. It is in New Jersey.