Owner/User Buyers Making a Comeback

Banks Increasingly More Willing To Finance Sale/Leaseback, Build-to-Suits and Corporate Investments

Reprinted with permission from: Mark Heschmeyer, the CoStar Group

 Even well into a recovery, companies that own facilities have remained net sellers, raising cash by selling their property to investors and leasing back the space. 
Lately however, with increased financing options and a dwindling supply of large blocks of available space, more companies are warming up to the idea of owning their buildings once again.

"Owner/users are still net sellers, but there has been a pick-up in the amount volume of properties bought for occupancy," said Mark Gallagher, senior strategist in CBRE's Investment Strategy Services Group. "There are a number of owner buyers that have sufficient cash to either acquire or seek a developer of property in order to build-to-suit now that fewer large vacant floor spaces are available in strongest markets,” Gallagher said.
According to data from CoStar COMPs, while more corporate owner/users bought property last year valued at more than $500,000 than sold (5,577 buyers vs. 5,125 sellers.) However, the dollar volume of deals clearly weighed in favor of the sellers: $20.6 billion in properties sold vs. $16.8 billion bought.

“We're seeing a few things at play that are influencing corporate occupier decisions,” said Christian Beaudoin, director, Americas corporate research at Jones Lang LaSalle. “Among the majority of our clients, flexibility and agility seem to be key priorities, coming directly from the C-level. This is driving some very successful sale leasebacks, which give the occupier more flexibility and a huge gain on the value of their assets, while giving the buyer a stable credit tenant.”

Corporations are getting smarter about their real estate too, said Jones Lang LaSalle’s Rod “Lo” Loschiavo, a senior vice president in Fort Lauderdale.

“The most significant value creation in commercial real estate is in the lease as opposed to the bricks and mortar. A company with good credit could purchase a vacant building, execute a long-term lease and resell the property at a substantial profit,” Loschiavo said. “Often times, companies do not have the foresight to sell the property until it is no longer needed, resulting in a lower sale price down the road. But it appears as though more companies are selling these assets in the form of sale/leasebacks to maximize their return and take advantage of the premium investors are willing to pay today for the assets secured by the leases.”

Banks have re-entered the lending markets in a strong way last year after having sharply reduced the foreclosed properties and distressed loans in their portfolios as property values and the economy picked up. And owner-occupied loans are making up a big part of that lending increase.

“Certainly for 2013, commercial real estate term loans was an area of solid growth,” Andrew L. McDonald - chief credit officer and executive vice president of Columbia Bank in Tacoma, WA, told analysts last month. “Growth in commercial real estate term loans was centered primarily in owner-occupied properties, which accounts for approximately $25 million of the $31 million increase in this classification. Growth was centered in agricultural land, manufacturing facilities and warehouses.”

For the 12-months ended Sept. 30, 2013 (the last full quarter for which bank statistics are available), the nation’s banks increased the amount of owner-occupied CRE loans in their portfolios by $8.11 billion - a 1.7% increase to a total of $475.14 billion.

At the same time, borrowers are opting for shorter-term loans of from 3- to 5-years, which are right in banks’ wheelhouse.

“Banks have been pro owner-occupied lending for the past several years,” said Patrick Mahoney, principal, president and COO for NAI Realvest in Orlando. “The challenge until recently has been the financials of the underlying business. As the economy has improved businesses balance sheets are stronger and banks are more likely to look favorably on lending to them.”

Mahoney sees several factors tipping the buy vs. lease scale towards buyers.

“Property values were reset lower during the recession and if you couple that with the ability to get 90% leverage utilizing a combination of traditional and SBA loans, then owner-occupied real estate becomes a pretty good investment.”

Chris Crabtree, senior vice president, principal of Cassidy Turley in Pleasanton, CA, agrees that the owner/user buyer is making a comeback.

"As the economy strengthens, I’m finding that businesses are growing and they are beginning to feel more confident in taking risk so they are willing to consider an expansion," Mahoney said. For many small business owners, it makes sense to own as it is another tool, which is used to build wealth and spread risk."

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