Colliers Capital Markets recently sat down with Ron Zappile, Senior Vice President, Portfolio Strategy Consulting, and Connor Faught, Executive Vice President, Head of Corporate Capital Solutions, to discuss the current trends among corporate owners/occupiers.
Colliers Capital Markets (CCM): Why are corporate owners/occupiers now looking at their real estate holdings?
Ron Zappile (RZ): The price of debt is the obvious answer. We have one client whose entire growth strategy lies in developing new technology, and building that capacity is taking up more than the lion’s share of available funds. Plus, the client still has another portion of the portfolio to maintain. Excess real estate holdings as an alternative capital source are a potential answer. Owners/occupiers have always looked to identify inefficiencies and eliminate them. The difference this time is that COVID has put a shocking spotlight on the problem.
“Owners/occupiers have always looked to identify inefficiencies and eliminate them. The difference this time is that COVID has put a shocking spotlight on the problem.”
Connor Faught (CF): Corporate owners/occupiers are ensuring their portfolios are optimized and have been cutting costs across their businesses. Looking at opportunities to dispose of surplus properties, both buildings and land, has been a key focus in cost-cutting and capital raising. Based on the debt markets, some companies see that the value of their real estate can generate more capital than their core business today. Also, along those lines, if you go to raise bonds today, you often have to do that in larger tranches than a typical disposal or sale-leaseback value would be. In some cases, real estate has more flexibility than historically capital-raising areas. Evaluating these scenarios for our corporate clients has been vital in understanding the options for raising capital through their real estate portfolios.
CCM: Is this different than past cycles, outside of COVID’s impact?
CF: The focus on utilization and surplus is greater today than previously seen. The difference in this cycle is the emergence of utilization data where opportunities can easily be identified and actioned. For example, a lot of our clients are seeing vacancies in their HQs or campuses. As a result, they are looking to shrink their footprint but also take some of the money raised from sales or sale-leasebacks and upgrade the remaining space to enhance the environment and assist in employee recruitment and retention.
“As a result, they are looking to shrink their footprint but also take some of the money raised from sales or sale-leasebacks and upgrade the remaining space to enhance the environment and assist in employee recruitment and retention.”
CCM: How flexible are owners/occupiers with their sale-leaseback structures?
CF: A company’s long-term planning goals and capital needs will be a driving force. For example, do they need to control a site, and are they confident in their exit strategies after completing the lease term? After answering these questions, it’s a matter of whether the term the buyer needs aligns with the long-term real estate plan and capital desired from the corporate occupier. There is always an answer out there with creativity.
CCM: Do public and private corporations look at their real estate holdings in different ways?
RZ: Classic economics answer: It depends. Public corporations have public disclosure requirements and are reluctant to take write-downs even though it may be the “right” thing to do, among other reasons. In addition, decisions are more drawn out due to stakeholder engagement. Private corporations have much more flexibility and are nimbler because they have less internal bureaucracy to manage. While they should take place 2-3 years in advance, annual capital funding planning exercises are more “baked in” for publics than for privates.