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Special Report

The Industrial Spotlight

Industrial Spotlight, May 2018

High Demand for Stabilized Assets With a Long-Term Lease Boosts ...

High Demand for Stabilized Assets With a Long-Term Lease Boosts Investor Interest in Industrial Sale-Leaseback Deals

Appeal of sale-leasebacks on the rise. The convergence of three factors has sparked increased interest in sale-leaseback options for companies that own and occupy industrial space. The extended growth cycle and emergence of e-commerce has spurred demand for industrial space nationwide, pressuring vacancy rates to their lowest levels on record. At the same time, industrial property values have risen substantively, off ering property owners signifi cant profi t potential that can be reinvested into their businesses. Adding to this mix, new tax rules placed in eff ect this year will reshape business interest deductions and the cost-eff ectiveness of businesses owning the real estate in which they are located. The new tax code also allows for businesses to depreciate 100 percent of certain assets over one-year, leading business owners to invest more extensively into current operations. As a result, more companies are investigating sale-leaseback options. Through a sale-leaseback, the owner-user sells the real estate in which he or she operates to an investor, and then leases the property back for a fi xed period of time. This process unlocks the equity of the property, providing the company with additional capital to grow the business. The seller continues to occupy the facility per the terms of the agreement.

Strong fundamentals grows investor sentiment for industrial properties. Last year, the U.S. industrial vacancy rate fell 20 basis points to 5.1 percent, the lowest rate in more than 17 years and down 510 basis points from the high recorded in 2010. Substantially tight vacancy comes at a time of robust supply growth, with completions reaching a new high for the current cycle in 2017, at 245 million square feet. Considerable rent gains have also been recorded, marked by four straight years of 5 percent or greater increases, topped off by a 7.8 percent bump in 2017. Fundamentals in the sector will remain favorable through this year as the vacancy rate is forecast to decline 20 basis points in 2018, supporting an anticipated 6.6 percent increase to the average asking rent.

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