Commercial real estate brokers say industrial companies looking to free up some capital need only to look as far as their own property for one potential source.
That’s because through sale-leaseback agreements with local or out-of-state investor groups, companies can put their real estate to work for them at a time when banks and other institutional lenders are slow to release financing for expansions or other needs.
The resurgence of this strategy is spurred primarily by recovering market conditions and by better investor margins in so-called secondary markets like Grand Rapids.
Prior to 2008 and 2009, sale-leaseback agreements were fairly commonplace, but almost vanished from the marketplace when the recession hit, according to industry sources. When the bottom fell out of the economy, many companies’ weak balance sheets couldn’t support such a transaction and what cash flow was in place didn’t give buyers much confidence to invest, sources said.
“It used to be a regular component of the marketplace,” said Colin Kraay, a commercial broker and investment group leader for Colliers International in Grand Rapids. “Now that the market has bounced back a bit and is more stable, we’re seeing a lot more interest in (sale-leasebacks) because there is so much less risk in these types of deals.”
Investors are looking for safe and stable investments, and West Michigan manufacturers and other businesses have proven to be a good bet for investors with cash on hand, Kraay said.
While an early January report from Brian Long, Grand Valley State University’s director supply chain management research, had the West Michigan industrial economy trending flat, a preliminarily purchasing managers index (PMI) released on Jan. 24 by research outlet Markit put U.S. manufacturing at a 22-month high. The report showed PMI at 56.1, up from 54.0 in December. This is the strongest rate of growth since March 2011, according to the firm.
In the West Michigan industrial market, which is responsible for a large portion of the recent momentum in commercial real estate sales and leasing, the remaining inventory of quality space is running thin. This is driving up prices for space, resulting in companies having a difficult time finding space if they’re looking to relocate or expand.
“The greater perspective is that we have a glut of manufacturing buildings and no demand, but that’s exactly the opposite of what we have. We are out of property,” said Duke Suwyn, president and CEO of West Michigan brokerage for Colliers.
This past year, rates for some industrial spaces rose from about $20 per square foot for a typical, run-of-the-mill, 20,000-square-foot industrial building to $40 per square-foot and beyond. Some buildings even garnered more than $60 per square foot, Suwyn said.
“When we get to that, we’re starting to approach new construction,” he said. “Quarter by quarter, rates continued to jump.”
That’s where sale-leaseback agreements started to come back into play, Kraay said. Some strong companies realized that they could cash in their space and free up some capital, while at the same time lock into a long-term fixed-rate lease and reduce their tax liability, he said. Those benefits have been enough to convince a growing number of companies that owning their own facilities is not the only solution, he said.
While the practice hasn’t become widespread just yet, Kraay said some strategic companies see sale-leaseback agreements as just one more option in the corporate strategy playbook.
“Historically, if you’re a manufacturer you own your own building. That’s just been the kind of West Michigan conservative mentality of long-term ownership,” Kraay said. “The reality is, is when a lot of these companies see growth opportunities, they can’t quite come up with enough capital to make that next jump. One of ways they can open up their business to grow is to sell the real estate and take what equity they get out of it to do an expansion, modernize facilities or hire people — whatever you need to do.”
On the buyer’s side, Grand Rapids hasn’t necessarily been on radar to the types of investors who are interested in lean, advanced manufacturing facilities, Kraay said. However, as West Michigan’s recovery continues to garner attention outside the region, many investors have started to give the area a second look as they search for emerging growth opportunities.
Another factor contributing to a return to sale-leaseback agreements: an aging population of business owners looking for exit strategies and estate planning, Kraay said.
So far, Kraay and others in the Colliers office have worked with buyers from Boston, Chicago, California, Tennessee and Ohio. In the fourth quarter of 2012, the Grand Rapids office closed on more than $30 million in investment real estate, which includes retail, office and industrial. For the first quarter of 2013, Kraay said the firm has roughly more than $35 million in investment real estate sales pending.
“That’s almost a return to where we were at the peak of the marketplace,” he said. “As far deal velocity and momentum, it’s pretty good. Those are pretty big numbers for West Michigan.”
For greater Grand Rapids as a whole, Kraay said the area could probably expect to see about $100 million in investment deals for the last two quarters.
Looking ahead for what’s to come in the market this year, Suwyn sees developers and companies looking at new industrial construction. While the gap between the cost of new construction and current inventory isn’t at parity, Suwyn predicts there will be a tipping point this year.
“Conversation is starting to occur on what do we build, when do we build it and where do we build it,” he said. “Has anybody really pulled the trigger yet? No. Do I expect someone to pull the trigger this year? Yes. There is no question we’ll see it.”