The Impact of Tariffs on Sale-Leasebacks
Sale-leaseback transactions have long been a strategic financial tool for businesses, allowing them to unlock capital tied up in real estate while retaining operational control of the property.
However, the economic landscape can significantly influence the feasibility and attractiveness if you are considering a sale-leaseback transaction. One such major economic factor is the imposition of tariffs, which can ripple through many industries and affect financial strategies and investor underwriting.
President Trump’s tariffs have become a central component of his administration’s trade policy and long-term economic growth initiative.The hope is that the end result will ultimately protect domestic industries and address long-term trade imbalances the United States has with other countries.
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While the intention is to bolster American manufacturing and reduce reliance on imports, this will take years to become reality and, in the interim, there are broader and more complex economic implications that come into play immediately for the economy and commercial real sellers and investors.
Economic uncertainty and risk assessment
Tariffs typically lead to increased costs for businesses reliant on imported goods or materials to create their products. For many industries tariffs create higher operational costs. requiring business owners in these industries to prioritize liquidity.
A sale-leaseback transaction could be an advantageous approach to solving your liquidity concerns rather than utilizing traditional debt or lines of credit. However, the president’s current policies are creating market uncertainty, which investors never like, and that “potential risk” could potentially affect the value of your property should you consider a sale-leaseback transaction.
However, balancing investor concerns over current trade policy uncertainty is the limited supply of quality sale-leaseback opportunities in today’s market. This lack of supply is, at least, currently overriding investor concern about the current administration’s trade policy.
Industry-specific considerations
The impact of tariffs varies across industries, and so does their influence on sale-leaseback transactions. Companies in sectors less affected by tariffs, such as technology or healthcare, may find sale-leaseback opportunities more viable compared to those in tariff-sensitive industries.
This sector-specific dynamic underscores the importance of using a trained professional with experience and market knowledge in navigating the challenges posed by tariffs if you are considering a sale- leaseback transaction in the near future.
Impact on commercial real estate valuation
The commercial real estate market is not immune to the effects of tariffs. Industries heavily impacted by tariffs, such as manufacturing and agriculture, may experience reduced profitability, leading to decreased demand from investors for certain industrial and commercial properties.
In tariff-affected industries, sellers may experience lower property valuations and, possibly, less favorable terms from investors, while sellers in industries unaffected by tariffs may see more desirable valuations and terms from investors.
Opportunities amid challenges
While tariffs can create hurdles, they also present opportunities. Businesses may leverage sale-leaseback transactions to mitigate the financial impact of tariffs by unlocking capital to invest in domestic production, enhance or create a domestic supply chain for materials they previously purchased outside the United States and provide liquidity more favorable than traditional sources of debt.
The current tariffs policy by President Trump’s administration highlights the need to be aware of the interconnectedness of our country’s trade policy and commercial real estate valuations and your company’s CRE strategies. Sale-leaseback transactions, while offering significant benefits, are not immune to the broader economic forces at play. Businesses and investors must navigate these challenges with an understanding of industry-specific dynamics while continuing to manage their risk.
Daniel Levison is principal broker for Commercial Property Consultants & CEO of CRE Holdings LLC.
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