What to Anticipate in 2024: Outlook for Net Leases

Corporate real estate owners are forced to devise innovative plans for the upcoming year due to rising cap rates and interest rate volatility.

Owners of corporate real estate are navigating uncharted territory. With interest rates and borrowing costs rising due to the Federal Reserve, many are turning to unconventional means of funding their deficits. Additionally, as 2024 approaches, these businesses are curious about what lies ahead.Two major themes will continue to have an impact on the net lease market in 2024, according to Gordon Whiting, managing director and head of net lease real estate at TPG Angelo Gordon.

First, there are high cap rates, which are seen as the “new normal.” Second, he anticipates a rise in the innovative capital raising option, particularly sale-leasebacks, as long as corporate borrowing costs are high.

Raising cap rates is the “new normal.”
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Since cap rates are at a 15-year high, Whiting does not see a notable decline in 2024. According to Real Capital Analytics, US single-tenant cap rates increased to an average of 6.24% in the third quarter of 2023 as a result of cap rate expansion in the industrial and office sectors. Cap rates for sale-leasebacks have been reported to range from 7% to 8%, which is also higher than historical averages.

He goes on to say that the market is beginning to realize that high interest rates are here to stay after a decade of falling cap rates and cheap interest rates. This approval might lead to a rise in sale-leaseback volumes in 2024, enabling building owners to raise money by selling a building to an investor and leasing it back over an extended period of time.

According to Whiting, transaction volume will naturally increase as buyers and sellers feel more certainty about pricing as the markets get clarity around Fed tightening.

Increase in the Volume of Sale-Leaseback Transactions

Mr. Whiting points out that, based on statistics from Real Capital Analytics, the number of single-tenant net lease transactions is expected to reach over $45 billion by 2023. In 2024, he anticipates that figure to approach the historical five-year average of $80 billion. The need to generate funds in an era of costly finance will contribute to the growth.

According to Whiting, sale-leasebacks are a desirable type of funding that lets business owners keep operational control and are typically less expensive than corporate debt.

Sale-leasebacks are an appealing alternative to traditional financing choices because they don’t have as many financial covenants as they used to.

It’s crucial to keep in mind that, according to JP Morgan, high-yield bonds with maturities within the next three to five years make up around one-third of all leverage loans that are now in existence, adds Whiting. As we enter the new year, there will be strong tailwinds for an increase in sale-leasebacks due to the need for creative corporate finance options for firms.

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