CPN - January 2009 - (Page 17) NET LEASE Frustrated Market Sale-Leaseback-Hungry Corporations, Buyers Thwarted by Debt Constraints By Paul Rosta E ven the most solid of net lease tenants now find it tough to penetrate the debt markets, and the sale-leaseback strategy harbors its greatest appeal in memory. Accordingly, net lease investment veterans expect interest in saleleasebacks to boom among corporate owners. “We’re really seeing it across a very broad spectrum,from the more challenged-credit to some of the strongest-credit tenants,” reported Jay Koster, Jones Lang LaSalle Inc. managing director of corporate capital markets. Corporate owners that want to pursue sale-leaseback strategies range from companies with a handful of assets to global giants, he noted. Buyers also view stepping up allocations for sale-leasebacks this year as a logical gambit.“I see the sale-leaseback concept as a home run for the investor,” said Marc Miller, executive vice president for Winoker Realty Co. Sale-leaseback structures offer immediate guaranteed rental cash flow that should give lenders the confidence to provide acquisition financing. At the same time, the new owner need not offer the seller-turnedtenant free rent or other incentives that a multitenant property owner must often consider. Ordinarily, the built-in appeal of sale-leaseback structures would add up to a bumper crop of new deals.But this is no ordinary time.For at least the first part of 2009, corporate owners’ interest in sale-leasebacks will likely far outstrip their ability to close deals. In fact, sale-leaseback transactions have already slipped dramatically. In the middle of December, volume totaled slightly less than $6.5 billion—45 percent of the $14.2 billion worth of deals tallied in 2007, according to Real Capital Analytics Inc.The sticking point continues to be the dire state of the capital markets,an issue that experts expect to influence sale-leasebacks Rise & Fallback (U.S. sale-leaseback volume) $16.00 $14.00 $12.00 Industrial Office Retail $1.0 $1.0 $2.4 $5.2 $6.0 $3.7 $4.0 $4.9 $1.0 $4.2 $9.1 $10.00 $ in Billions $2.9 $8.00 $6.00 $4.00 $2.00 $0.00 $0.8 $3.7 $1.8 2004 2005 2006 2007 2008* *as of Dec. 10, 2008 Source: Real Capital Analytics Inc. throughout 2009. “The challenge this year is going to be, ‘How do you get this done?’” explained U.S. Realty Advisors L.L.C. chairman & managing partner Richard Ader. NO NIBBLES Numerous investors face that hurdle, including the prospective buyer of a $50 million industrial asset that is on the market in the Southeast. Stan Johnson Co. senior director Jeff Hughes, who leads the building owner’s representative team, explained that the investor likes the well- located, investment-grade property and the owner-tenant’s solid credit but is seeking to finance 60 percent of the transaction, a debt level that just a few years ago would have been an easy sell to lenders. So far, though, none have been willing to bite.“The air just gets really thin today for the lenders willing to do a $30 million loan on a $50 million transaction,” Hughes said. That example is far from unique. Industry sources tell of a conservative, highly respected net lease investment company that last fall lined up financing from commercial banks for multiple Consumer Sectors Falter Retail and lodging experienced the largest delinquency increases in October. Year-to-date, retail delinquencies have increased 165 percent to $1.2 billion, and retail loans comprise approximately 30 percent of the outstanding loan balance in Standard & Poor’s rated CMBS. Lodging delinquencies, which have been flat for the past three months, jumped by 38 percent in October. This sector’s performance tends to be very volatile, as room rates can adjust nightly. As a result, delinquencies among CMBS loans that are backed by lodging properties can change very quickly, as occurred in the aftermath of the 2001 recession: From 2000 to 2001, lodging delinquencies more than tripled, and they peaked in December 2003 for a peak-to-trough increase of 466 percent. Source: Standard & Poor’s www.standardandpoors.com • Larry Kay • 212-438-2504 (delinquencies in millions of dollars) $1800 $1600 $1400 $1200 $1000 $800 $600 $400 $200 $0 Lodging Retail Multi-Family Office 17 Dec-2007 Mar-2008 Jun-2008 Sep-2008 Oct-2008 www.cpnonline.com • January 2009 • COMMERCIAL PROPERTY NEWS CMBS REALITY CHECK INDUSTRY PULSE http://www.standardandpoors.com http://www.cpnonline.com
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