Safehold’s Ground Lease Remains Most Efficient Capital Solution Despite Headwinds

In the midst of a tumultuous year for the markets, Safehold closed over $1.3 billion of ground leases through the first three quarters of 2022. Partner Insights spoke to Marcos Alvarado, Safehold’s President and Chief Investment Officer, about the company’s progress in 2022, the impact of the current environment, and how the perception of ground leases has shifted over the past five years.

Commercial Observer: Safehold’s modern ground lease portfolio recently surpassed $6 billion, and you’ve closed over $1.3 billion in 2022. Talk a bit about Safehold’s investment activity in 2022.

Marcos Alvarado: 2022 has been a tumultuous year. I don’t think any of us anticipated the reaction to inflation and how that’s rippled through to the capital markets, and our investment arc has tracked that trajectory. Our business works very well when we have functioning capital markets. Over the last few months, those markets have been dysfunctional. When you look at our investment trajectory, at the beginning of 2022 we saw really solid volumes, and we’ve seen those taper off since. I don’t think that’s a reflection on our ground lease product, but a reflection on the broader macro environment. We closed almost $300 million in transactions in Q3 in the middle of that volatility. In Q4, we’ve announced a handful of transactions. We’re active, but we’re being cautious.

What factors have enabled Safehold to continue growing and building momentum despite the market headwinds?

When customers need a capital solution, we are still the most efficient capital in the market, and our customers realize that. We’ve been really focused on maintaining that cost of capital advantage on the liability side of our business, and we’ve been able to translate that back to our customers.

Have these problems with the economy forced Safehold to change the way it does business at all?

Since the beginning of the year, our cost of capital has become more expensive along with the broader market, and correspondingly our ground lease cost has increased for our customers. That being said, when customers look at their alternatives from a capital solution standpoint, they are probably 200 to 250 basis points out. So, we still believe we’re the lowest-cost, most efficient capital solution available to our customers today.

Has this experience been consistent across your customer base? How is it impacting deals?

Yes. We’re all going through this. If you’re a multifamily owner who 12 months ago thought your asset was worth $100, let’s say it’s worth $80 today. They’re going through the psychological impact of, I used to borrow at X, but now I borrow at Y and now my asset is worth less. If you have a view that this is a short-term event, in these volatile moments you may not want to sell or recapitalize your asset. Our customers are going through those sorts of decisions now. But if they decide to, then we’re here to provide them with the most efficient capital solution available.

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