Signature Associates

Possible sale-leaseback of Stellantis HQ opens opportunity with Auburn Hills campus

Posted By: The Detroit News on October 15, 2023.  For more information, please click here to read the source article.

The type of transaction the maker of Chrysler, Dodge, Jeep and Ram might pursue for its North American headquarters could open up development opportunities for the Auburn Hills site and infuse the corporation with additional cash, according to sale-leaseback brokers.

The United Auto Workers has objected amid a strike against the Detroit Three automakers to Stellantis NV seeking the ability to sell or close 18 U.S. facilities as part of contract negotiations. Most are Mopar vehicle parts distribution centers that the company is looking to consolidate and modernize without eliminating jobs, but the proposal also includes the company’s roughly 500-acre North American headquarters and technical center in Auburn Hills, The Detroit News previously reported.

Stellantis says it’s not abandoning the former Chrysler Corp. global headquarters, which is one of the largest buildings in the world by floor space and whose glass Pentastar top can be seen from Interstate 75. But it could give it the flexibility to sell the property and lease it back now that many of the workers based out of the facility are mostly working from home, leaving offices and parking lots empty most of the time.

Stellantis would join a chorus of companies, including Troy’s staffing company Kelly Services Inc., Chicago’s Motorola Solutions Inc. and Cleveland’s Sherwin-Williams Co., that are selling off their headquarters and instead leasing space. It provides them a source of liquidity with employees working remote or partially so. In Stellantis’ move to electric vehicles, additional capital could help to support the $35.5 billion the automaker has committed to invest in electrification and software by 2025.

“They’re probably looking to increase their cash position,” said Sam Abuelsamid, principal e-mobility analyst at market research firm Guidehouse Inc. “It would generate cash to cover their (capital expenditures) on battery plants and retooling over the next couple of years.”

Stellantis announced last week it will build a second, $3.2 billion battery plant in Kokomo, Indiana, with Samsung SDI. It doesn’t sell any all-electric vehicles now in the United States, but says it will have 25 models by 2030. The battery-electric Ram ProMaster commercial van launches in Mexico for Amazon.com Inc. before the end of the year, and the electric Ram 1500 REV, Dodge Charger muscle car, Jeep Recon SUV and Wagoneer “S” SUV all enter production next year.

Luke Timmis — partner and director of the sale-leaseback team at Southfield’s Signature Associates, a commercial real estate firm — estimates a site like it could fall in the range of large transactions between $250 million and $500 million.

The possibility of a selloff, though, leaves some workers at the site anxious. Although the complex is home to mostly white-collar employees not organized by the UAW, in addition to the offices, there are labs, engineering facilities and design studios. UAW-represented employees in skilled trades, engineering, maintenance and more work there, requiring the company to bargain for the ability to sell the site if it wishes.

“We definitely don’t want it to happen,” said Chris Young, 31, of Imlay City, a four-year UAW member who works in skilled trades at the technical center and hopes to get in his 30 years at the company. “It’s about the longevity for the jobs that are there right now. We don’t want to see them outsourced, jobs canceled or for people to lose their jobs.”

The automaker in 2021 officially instituted its “new era of agility” in response to workplace conditions changing from the COVID-19 pandemic. It estimated that employees who could would spend 70% of their time working remotely and 30% of their time in the office as a part of an evaluation “to enable our teams to be their most innovative, creative and efficient,” according to a previous statement. That evaluation included potential adjustments to its real estate portfolio.

“Specifically here in Auburn Hills, this is our North America headquarters,” Mark Stewart, chief operating officer in North America, told WWJ-AM (950) last month. “It will be our North America headquarters, but like everyone in the hybrid working environment, and looking at our overall footprint across the region, and specifically in the U.S., we have a lot of the building here in Auburn Hills that we’re not utilizing today. So, we’re looking at other use cases for that, certainly not leaving this footprint in any shape, form or fashion. But the areas we’re not using, we’re looking at some different repurposing for those.”

A spokesperson for Oakland County declined comment on reports that Stellantis could pursue a sale. In an email, Auburn Hills Mayor Kevin McDaniel said any possible changes would be speculative.

“We have not been made aware of any possible change in ownership methods for the Stellantis building in Auburn Hills,” he wrote. “Mark Stewart, COO for the company, has made very public statements that Stellantis has no plans to vacate its prominent Auburn Hills facility.”

Where the value is

In contrast to a straight sale of a property, a sale-leaseback provides some certainty for a community, said JC Asensio, managing director with commercial real estate advisory firm Newmark Group Inc.’s corporate capital markets group in Chicago. Long-term leases of 10 or even 20 years aren’t uncommon in such transactions and afford more worth to the sale.

“It certainly is an opportunity that’s going to attract a lot of interest,” said Briggs Goldberg, associate director with Newmark’s corporate capital markets group, about the possibility of a sale of Stellantis’ site. “Companies like Stellantis, in turn, can take the proceeds from the sale-leaseback transaction, and it can be used in a variety of ways to position the business for long-term success. It can be reinvested in the operations; it can be used to pay down debt; it can also be an opportunity to invest into the property over a period of time when you don’t have a game plan in place immediately.”

There also are tax benefits, experts said. These transactions are on the rise after the COVID-19 pandemic sent employees who could work remotely to their homes, revealing properties as a physical asset of which companies could take advantage financially.

The sale-leaseback market is difficult to measure because transactions can be done privately between the buyer and seller and are more difficult to track in smaller markets, Asensio said.

“A lot of the reason these aren’t public is the company that is pursuing a sale-leaseback, they don’t want to send the wrong message to to the community,” he said. “People hear the word ‘sale,’ and people think they’re leaving, when the sale-leaseback can mean that they’re staying for the very long term into perpetuity to have a long-term vision for the campus.”

The decline in need for office space, though, could present challenges for a sale of the building. Industrial sites, Timmis said, top the list of interest, because of the essential functions they perform, and since they are centers of profit. Bidders on these properties have doubled to between 16 and 21 after rent payments remained stable amid the pandemic. Research and development and lab space are difficult to replicate, making those assets valuable, as well.

Stellantis’ complex has about 5.4 million square feet. Its technical center was dedicated in 1991, and Chrysler Corp. announced the site would become its headquarters in 1992. Before then, Highland Park, a city surrounded by Detroit that by then had declined economically, had been its home.

“We’d been on the property for 65-70 years,” Brandt Rosenbusch, the automaker’s archivist, told The Detroit News about the Highland Park campus in an interview last year. “The buildings were dated. There was going to be a whole bunch of investment needed to upgrade them.”

There also was a push to move to what was known at the time as “platform engineering,” he said. “That’s what we called it within our company where, as opposed to having engineering over here, and purchasing over there, and design over here, it was integrating all of those groups into something where everybody worked directly together, and you really couldn’t do that in all these segmented, segregated buildings that you had to walk outside.”

By the time the company went looking for a new site in the mid-1980s, Detroit’s suburbs had been built out. The Auburn Hills property afforded enough space for the complex while having easy access to I-75 and M-59, Rosenbusch said.

Those physical attributes benefit pricing in a potential sale, but sale-leasebacks typically obtain between 25% and 50% above their appraised value, said Timmis.

“It’s not just brick-and-mortar, but an investment vehicle,” he said. “A long-term lease to a good company typically creates that arbitrage above appraised value.”

The contributions to that value are the length of the term of the lease and the tenant’s credit. Stellantis is the fourth-largest automaker in the world by volume, with ubiquitous brands and a long legacy. Its credit rating with Moody’s and Standard and Poor’s is investment-worthy, though lower-medium grade.

“They’ve been around for a long time,” Timmis said. “It has gone through the mud before. In life and business, the companies that have gone through the test of time and gone through the test of adversity tend to live long lives.”

Good credit and a long lease can help offset some other challenges like residual value: “Assuming the tenant went vacant, is it a scary thing to think about really relying and banking on Stellantis’ current and future health and stability to make payments over the course of the lease?” Timmis said. “What could you sell this for if it were vacant? It’d be a massive undertaking. A massive company of equal size would have to take something like this.”

Opportunities

Over the past two years, there’ve been many new buyer entrants into the sale-leaseback markets, the Newmark brokers said.

“As sale-leaseback become more and more popular, a more commonplace tool for companies to unlock capital, it’s sort of a ‘build it, and they will come,'” Asensio said. “As sale-leasebacks become more evolved from the corporate perspective and an opportunity to unlock capital-controlled, mission-critical factifies, the capital follows.”

Amid the Great Recession, sale-leasebacks were viewed as a “defensive” measure to prevent troubled companies from going belly up. In 2008, General Motors Co. explored the possibility of a sale leaseback for its Renaissance Center global headquarters in downtown Detroit, but it didn’t have any takers.

That picture changed starting around 2013 as the economy was humming along. With property values rising 2% to 3% per year, these transactions became dynamic moves.

“Instead of leaving property stagnant, doing nothing, you could put it to use to go on the offensive and a buy a competitor or expand to another region or have another product line,” Timmis said. “Your money is going to go a lot longer that way. Once that idea became more widely known, companies started to take advantage of it.”

In 2018, GM had conversations with Rocket Mortgage founder Dan Gilbert’s Bedrock LLC real-estate arm about a sale-leaseback, according to Crain’s Business Detroit. Investment for upgrades of the complex, built in the 1970s and early 1980s by Henry Ford II, though, halted conversations.

Real estate investment trusts tend to be highly prolific purchasers of sale-leasebacks, Timmis said. The largest ones are mostly out of state. Publicly traded examples in New York City include Blackstone Inc., Apollo Commercial Real Estate Finance Inc. and W.P. Carey Inc. A local REIT is the Taubman Co. in Bloomfield Hills, which is focused on malls.

REITs, though, tend to prefer single tenants, or subleasing that is less than 20% of the property. These are less risky and a sign of a strong business performance, Timmis said.

Added Goldberg about the Stellantis site: “Given the opportunistic nature of the campus with a potential redevelopment, given its size, and the fact that office is changing across the world, it’s likely that a private investor, a developer, someone who’s looking to be creative with the campus and roll up their sleeves with the tenant to find a different use for the property to reimagine the campus.”

He pointed to the sale in 2016 of Motorola’s former Schaumburg, Illinois, headquarters, now owned by real estate firm Urban Street Group. With the tech company signing a 10-year lease for 25% of the suburban Chicago campus, now known as the Veridian, redevelopment has added a Topgolf, a hotel and multi-family housing to the site.

“We’re seeing a lot of companies now only take a portion of the space and leasing it back for a long period of time,” Goldberg said, “and the future owners marketing that space or leasing to another user or downsizing the building footprint and redeveloping the campus into mixed-use with retail or hotel.”

Kelly Services entered a sale-leaseback in 2019. Sherwin-Williams last year announced a sale-leaseback under its under-constructed headquarters. Gannett Co. Inc., the newspaper publisher that owns the Detroit Free Press and prints The Detroit News, in March sold its Sterling Heights plant to an affiliate of Industrial Commercial Properties LLC, a developer based in Cleveland, and is leasing it back.

There also are mechanisms for the seller not to lose too much control over the property. This is through renewal options, right of first refusal and right of first option to buy the property back from the buyer or an ongoing or one-time right to buy the property back at a predetermined price in the future.

“That’s one of the beauties of a sale-leaseback,” Goldberg said. “It’s a blank canvas, and the seller, in most cases, gets to dictate the terms in which they are willing to continue occupying the building.”