Sale-Leaseback Capital

In 2012, the dollar volume of corporate sale-leasebacks remained constrained for a variety of reasons. The uncertainty surrounding the economy and the historically low interest rate environment were the most significant contributors. Combined with the continued lack of new store development by most retailers, overall market activity has remained flat. As a result, capitalization rates continued to compress as the investor demand for yield increased. The highest quality deals in California are now being completed at cap rates below 5%.

Projected Volume
In 2013, volume should grow modestly as compared to 2012. Build-to-suit development should be the largest contributor to the increased volume as more banks are willing to make construction loans. The conservative loan underwriting that has been in place since the end of 2008 has gradually eased, and currently reflects more "normal" standards. Additionally, several Real Estate Investment Trusts have created "construction loan to own" programs, to assist developers in completing new projects while satisfying their investment requirements.

Current Pricing
Most investment-grade transactions are closing at capitalization rates of 5.75%-7%, while noninvestment grade, which are capable of being underwritten, are closing in the 8%-9.5% range. Lesser credits, particularly those involving larger assets, are still finding it difficult to complete a sale-leaseback transaction at any price.

Return Expectations
Equity yields continue to move down and are expected to continue in this direction over the course of 2013. Given that the interest rate environment is expected to remain stable, and at historically low levels, credit tenant sale-leaseback investments will become increasingly more attractive as an alternative investment vehicle, which will cause yields to further compress. Equity required to complete a leveraged transaction now sits at a more normal 30% level and is forecasted to move into the 20%-25% level by the end of 2013.

The information contained herein is for informational purposes only. It does not constitute an offer to sell nor a solicitation of an offer to buy an interest in any product offered by Mesirow Financial. Any offer can only be made to certain persons (such as Qualified or "accredited" investors, or Qualified Eligible Persons, as appropriate) whose eligibility to invest has been determined and only in jurisdictions where such offer is permissible and only through the appropriate offering materials for the product, which contain important information concerning risk factors and other material aspects of the investment.