- The dollar volume of U.S. sale leaseback transactions — through which companies can unlock equity by selling manufacturing sites, offices or other real estate while still occupying them through a long-term lease — fell by nearly half to $4.8 billion in the first quarter from $8.5 billion in the year-earlier period while transaction volume ticked down 6.9% to 173 from the 186 year-over-year, according to a May report from SLB Capital Advisors, a New York-based real estate advisory firm.
- The steep decline in total dollar volume stemmed in part from the unusually large $4 billion transaction involving the Venetian Resort Las Vegas in February 2022 that inflated the year-earlier volume, according to SLB managing partner Scott Merkle. In contrast, this year’s largest first quarter deals were Gaming & Leisure Properties’ $635 million purchase of two Bally’s properties in Rhode Island and Mississippi and Rexford Industrial’s acquisition of a warehouse for $365 million.
- While office vacancies have soared since the pandemic as more companies have pivoted to hybrid work setups, office sale leaseback transactions were somewhat of a bright spot in the quarter, ticking up to comprise 10% of the total deals by deal count in the quarter, up from from 6% in the fourth quarter, according to the report. “It’s a contrarian investment but the office sale leaseback market is open for business,” Merkle said in an interview.
The uptick in office sale leasebacks come as the U.S. office market’s first quarter vacancy rate ticked up to 17.8% — the highest in 30 years — as recession fears, hybrid work and more companies seeking to give up office space through subleases weighed on demand, CFO Dive previously reported.
Despite turmoil in the commercial real estate market, demand is still relatively strong from specialty buyers, Merkle said, such as real estate investment trusts or others that specialize in the transactions. While first quarter deal flow in both dollars and transactions slowed from the year-earlier period, total dollar volume and deal count were 40% and 9% higher respectively than all previous first quarters since 2018, according to the report.
“If you read some of the headlines you’d think sky was falling in the CRE market and that is definitely not the case,” Merkle said, adding that demand is still relatively strong from potential buyers. CFOs who are facing increasingly tight credit markets and higher cost of capital can use sale leasebacks to raise cash rather than letting an asset sit on their balance sheet, Merkle said.