Acquisitions and sale-leasebacks: Why tenants are making moves on their DFW real estate
This article originally appeared in the Dallas Business Journal - written by Ryan Salchert
According to some brokers, the trend of tenants buying the property they occupy and the execution of sale-leasebacks may also be on the rise.
"There's a huge influx of these tenants, especially on the industrial side, who are now purchasing their facilities. These aren’t the Amazon’s of the world necessarily, but a lot of the mom and pop users. There’s been this crazy demand and an influx in these new purchasers," said Chad Albert, principal and partner at NAI Robert Lynn.
Albert says there are a few factors driving this trend, including an increased confidence in the market from tenants and historically low interest rates.
"When you run an analysis as a tenant, you say, ‘Okay, if I sign a 10-year renewal at this facility or I purchase my own facility, the numbers end up being pretty comparable.’ Why not own? Especially when you've seen the appreciation in real estate over these last 10-12 years?" he said.
There are a number of local examples of companies opting to buy their property rather than continuing to lease. In late 2019, Xtreme Collision purchased a 24,240-square-foot building in Addison after leasing in the area for 15 years. Another company, Element Moving, had leased for 10 years before buying a 34,682-square-foot building at 12001 Denton Drive in Dallas last year.
"We’ve been considering it for quite a while. We realized paying someone else’s mortgage wasn’t for us. We needed to expand and it just made sense," said Elle Nesher, president and CEO of Element Moving.
With no rent and extra storage to pay for, Nesher says the business is saving moving with its new location. With another tenant taking a third of its space, the business is also benefiting from extra cash flow. Albert worked on both the Element Moving and the Xtreme Collision deals.
Larger companies have also made the decision to become their own landlords. In late 2019, Dallas-based online vehicle auction and automotive reseller Copart Inc. bought its headquarters building at 14185 N. Dallas Parkway. The company occupies just a portion of the 15-story, 400,000-square-foot building.
"I won’t name names, but I’m working with some clients who have always been tenants," said J. Holmes Davis, senior vice president and partner at Binswagner. "They’re now saying that because of being in a market like Dallas and knowing that they’ll be here for a long time, they’re changing their mind on leasing and they want to buy. Prices are going up and they’re thinking, 'Why would I throw money at a landlord when I can own?'"
Within the last month, Michigan-based Lineage Logistics acquired a 300,000-square-foot cold storage facility it fully occupies in Fort Worth. Around the same time, General Motors bought the 1.26 million-square-foot Arlington Automotive Logistics Center which it occupies.
A spokesperson for GM told the Business Journal in a statement that the company had a purchase option on the property as part of its original lease agreement and decided it would be advantageous to go ahead with an acquisition.
"It would make a lot of sense for an industrial user or any sort or manufacturer to own their plant because of all the business personal property that is installed into that facility," said Alex Coe, principal of Cresa's Dallas office. "If they're leasing that space for a 10-year term, by year seven it would be time to start talking about a renewal because if they drift too far away with that sort of investment in a building that you don't own, you're 100 percent a captive tenant."
Local brokers are also pointing out an increase in sale-leaseback activity, especially involving industrial property.
"There’s no question that given the strength of the industrial market, I’m seeing more and more sale-leaseback activity than I’ve ever seen. If you talk to some of the top capital markets guys, they’ll tell you that there’s a tremendous appetite for these transactions," said Davis.
Recently, Davis was involved in a massive sale-leaseback deal in Greenville featuring Mesquite-based Fritz Industries. The company sold its 1.03 million-square-foot warehouse and manufacturing facility to New York City-based EPM Partners.
"In certain cases, the value of these buildings that owners have had for 10-plus years have increased tremendously, maybe even doubling in value. They're now looking to capitalize on that and use that money to reinvest in their business," said Tom Walrich, principal at Lee & Associates.
Two of Walrich's colleagues, Stephen Williamson and Adam Graham, recently represented M2G Ventures and Pennybacker Capital in their acquisition of Tuesday Morning's headquarters building and three of its local warehouses. The deal was also a sale-leaseback. Walrich says he has a few other sale-leaseback deals in the works, all involving industrial properties.
"Another factor driving the demand that I'm seeing is the amount of money from capital markets being placed in industrial in North Texas," said Walrich. "Some of that is coming from investors who are typically known for buying office or retail property. They’re wanting to get into industrial and diversify their portfolio."
This increased demand has created some stiff competition for industrial real estate in North Texas, a trend that is likely to stay a while.
"A lot of companies speak about 24-hour, one-day shipments and where they need to be in the United States to handle more of that business. Industrial real estate is getting more and more competitive in Dallas not only because it costs a third of what it would in the northeast or in California, but also because we're in the middle of country," said Coe. "That and other factors are stacking up in Texas and Dallas’s favor."