Net Lease Review
NetGains
Leasing still leads the way for
risk-averse corporate space
users, leaving a pool of net
lease properties available for
the picking
Corporate real estate directors face the constant challenge of balancing opportunities with the operational and financial
goals of their companies. While certain
firms have stayed the course and continued with an
ownership strategy, leasing
remains the
transaction of
choice for corporate space users. And
with a glut of net-leased assets for sale,
demand by prospective buyers is also
picking up steam.
“The buy-lease decision boils down to
the cost of capital and how you see your
capital stack,” says Jonathan Hipp, president and CEO of Calkain Cos. Inc. in
Reston, VA. “Are you better off putting
By Alyson Grala
that money into the real estate or your
business?” He adds that most corporate
space users opt to funnel funds into their
core business, which ideally is generating
higher returns than asset ownership.
Whether this is the right strategy
depends on the weighted average cost of
capital, a calculation that blends the cost
of equity—generally 10% or higher—and
the cost of debt. As a result, companies
that are growing organically or through
acquisitions, and those with lower investment grade or sub-investment grade debt
ratings, often lean toward leasing. So do
higher-rated companies with liquidity
that have better investment opportunities
available within their core operations—
think retailers who reserve their rolls for
inventory.
Mike O’Malley, senior managing direc-
tor of global client solutions at Cushman
& Wakefield in Bethesda, MD, agrees, add-
ing that many of the firm’s corporate cli-
ents still view ownership as a risk. “Even
our clients with excess cash are reticent to
put that capital into building ownership,
unless it allows them to break into a new
market,” he says. “But by and large, these
companies are investing in new technol-
ogy, employees and even stock buybacks.”
The biggest problem with ownership is
that you need to have a long-term view,
says John Jugl Jr., EVP of corporate capi-
tal markets in the Denver office of Jones
Lang LaSalle. “In many cases, it’s hard for
companies to project cash flow over the
10- to 15-year life of a typical commercial
mortgage,” he says. However, companies
with large reserves of cash and short-term
investments, plus a high-investment grade
