Corporate Sellers Find Success in Sale-Leaseback Deals

CoStar Group - March 21, 2007

Several big corporations continue to take advantage of the overheated investment sales market, choosing to give up their role as landlords and become tenants in choice properties across the country.

Among those seeking to cash out their real estate: Sun Microsystems is getting ready to hit the market near Boston with the sale of its property in Burlington, MA. The technology company has tapped Jones Lang LaSalle to market the property to prospective buyers. Pricing is expected to be in excess of $200 million, according to sources familiar with the offering.

Sun Microsystems will lease back more than half of the space for 10 years. It will also lease some additional space for one year as it transitions out of some of the space. The offering is said to have already generated intense interest among bidders and is expected to close in June.

Last year, Sun Microsystems, sold one of three large office complexes in the San Francisco area to BioMed Realty Trust Inc. for $215 million. As part of the deal, Sun Microsystems signed 10 short-term leases for the 10 buildings at its Newark, CA, campus with plans to exit the property in phases over an 18-month period. BioMed Realty plans to reposition the property for use by life science tenants.

"Everyone who owns a building now whose core business is not real estate is looking at monetization strategies like sale-leasebacks because the capital markets enable them to get higher returns, making sale-leasebacks a viable strategy," said Josh Hirsh, an investment sales broker with Studley's Atlanta office.

Proof that sale-leasebacks are gaining favor can be found in the number of such deals tracked by CoStar. Based on an analysis of sale comparables, the number of sale-leaseback deals more than quadrupled from first quarter in 2006 to year-end. While there were three sale-leaseback transactions totaling $106 million at the beginning of last year, in the fourth quarter, the volume of deals jumped up to 13 deals totaling about $952 million, according to CoStar Group information.

The trend is holding steady so far this year. Corporate users, especially those also going through rapid industry consolidation, are looking to take advantage of the unabated appetites of investors and unload some real estate assets to pour the money back into their core businesses.

AT&T offers a prime example. Late last year, AT&T did a $270 million sale-leaseback deal in Bedminster, NJ, selling its 879,000-square-foot headquarters property at 900 Route 202/206 to MetLife Inc.

It kicked off the year by selling the 42-story office tower at 909 Chestnut St. in St. Louis to MB REIT, Inland American Real Estate Trust Inc.'s venture with Minto Builders, for $204.9 million or about $136.60 per square foot.

And it recently sold a couple of Milwaukee-area properties to Inland Real Estate Acquisitions Inc. for $31.2 million in sale-leaseback transactions.

Meanwhile, JPMorgan Chase went back to the sales market and struck a deal last week to sell its 598,000-square-foot Chase Tower at 611 Woodward Ave. in downtown Detroit to local firm Sterling Group. The bank signed a 10-year lease with renewal options for about 215,000 square feet of space, saying it "made more sense to be a long-term tenant than owning the building."

Last October, the bank sold a portfolio of 33 properties to a fund managed by Toronto-based Brookfield Asset Management for about $460 million. JPMorgan leased back significant portions of the 5.3 million-square-foot portfolio. Sphere: Related Content