Higher inflation, higher real estate valuation

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The next column was written by Andres Dallal, CEO of Investment, WP Carey, thought leader of GlobeSt.com. The opinions expressed are those of the author.

With renewed economic growth and rising consumer demand, the US economy is experiencing the largest spike in inflation in a decade. with an increase in consumer prices in May by 5% compared to last year.… The Fed expects inflation to continue to rise throughout the year. While inflation is often linked to negative factors such as higher consumer prices and higher labor costs, corporate tenant owners can benefit from a surge in demand for hard assets through the sale and leaseback of their corporate real estate.

In a sale and leaseback, the company sells its property to an investor for cash and concludes a long-term lease at the same time. The seller works with the buyer to structure the lease for a period that suits their needs without worrying about refinancing. The seller can then use the cash to grow their business, reduce debt, or pursue other higher-income initiatives.

While there are many reasons to use this cost-effective financing tool in any market environment, sellers gain additional benefits in the face of rising inflation.

  • Increased property value: During periods of inflation, there is a higher demand for hard assets such as commercial real estate, as this is a natural defense against inflation as it rises over time. This means that more buyers appear on the market, which intensifies competition and leads to higher property prices.
  • Less supply: Inflation leads to an increase in material and labor costs, which deprives developers of incentives to build new properties and restricts supply. This is placing a premium on existing high quality properties, confirming the fact that sellers can greatly benefit from their properties.
  • Higher borrowing costs: Borrowing costs are usually affected by periods of inflation, as inflation depreciates the currency and forces lenders to raise interest rates. As a result, loans will be a more expensive option for companies compared to long-term sale and leaseback financing from buyers that fully cover stocks that are better off in the face of inflation.
  • Advantageous rentalBefore inflation continues to accelerate, sellers have the ability to keep rates low on a very long-term basis. Leaseback leases are typically 15 to 25 years, compared to five or even 10 years for a commercial mortgage. Selling and leasing back also allows the seller to unlock 100% of the property’s value compared to a bank mortgage, where a loan to value ratio of 70% to 75% is more likely.

For corporate sellers looking for working capital, this means now is the time to act. When considering a sale and leaseback option, it is important to partner with an experienced wholly-owned purchaser with both the expertise to close quickly and the capital to support the long-term business goals of their tenants. WP Carey has specialized in sale and leaseback for nearly 50 years and prides itself on being a long-term partner for its tenants. If you or your client is interested in selling their corporate property, please contact us at [email protected]

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