Unsettling Calm After the Storm

The credit freeze that came with the Panic of 2008 this fall has put the sale-leaseback business in a peculiar bind. Because obtaining financing is more difficult than it used to be, companies that happen to own real estate are looking ever more closely at the possibility of unlocking that capital via a sale-leaseback.The problem is that the pool of potential buyers for such properties has shrunk, and the remaining players are finding it hard to finance deals. Andrew Sandquist, senior vice president for the Oak Brook, Ill., office of CB Richard Ellis Inc. and a net lease investment specialist for the company’s investment properties group, noted that while the industry is soldiering on, it still has a long slog ahead of it.CPN recently spoke with Sandquist about the difficult state of the sale-leaseback market.CPN: How much has the sale-leaseback market suffered in the last few months?Sandquist: There is a lot of negativity related to valuation right now. Until recently, the commercial fundamentals were strong, but now we’re seeing negative trends in rent, pockets of increasing vacancies and an uptick in commercial mortgage defaults. Factoring those trends in, financial for sale-leasebacks has been hit as hard as other kinds of commercial real estate lending. There isn’t one statistic I can point to about sale-leasebacks, but it’s likely that sales volumes are down 60 to 80 percent from last year because of the difficulty of financing. I can’t overstate the matter. It’s very difficult, extremely difficult, to get financing in today’s market. The interest is still there, but the problem is the buyers can’t tap financing.CPN:What about buyers who do not need financing?Sandquist: The entities that are well capitalized can buy all-cash, but few investors want to do that. Investors that buy all-cash are demanding a premium that sale-leaseback generally doesn’t offer.CPN: Are you seeing seller financing?Sanquist: In some cases, but that’s difficult too. Whatever the financing situation, the highest probability of getting a deal done is in a core market like New York City, Chicago or Los Angeles. Trying to get a sale-leaseback done in a secondary or tertiary or rural market is challenging if not impossible. Once the credit market opens up, things will improve, but it’s impossible to forecast when that’s going to happen.