NEW YORK CITY-More institutions, pension funds and non-traded REITs are expanding into the triple-net-lease arena in 2012, but as the capital flows into the space, competition for the best properties is heating up. Panelists at ALM Real Estate Media Group’s RealShare Net Lease 2012 conference agreed the NNN sector would continue to see action due to long-term leases, fixed rental growth and favorable cap rates, reflecting the state of today’s slow-growing economy.
“To some degree, net lease goes well when the market is kind of frothy,” said Paul McDowell, chairman of the board and CEO of CapLease Inc., addressing more than 250 attendees at the New York Marriott Marquis on Tuesday morning. “When the market bottoms out, we become sexy again.”
At the same time, the trend signals bigger concerns, as explained by keynote speaker Sam Chandan, president and chief economist of Chandan Economics. Chandan explained while spending is increasing, personal incomes are not – a trend that is presenting a challenge for bricks-and-mortar retailers, property owners and investors who depend on consumers to drive retail sales.
“While all these other dynamics are going on, we know there are fundamental changes in the way Americans shop,” Chandan said. “It doesn’t affect every aspect of the retail landscape equally, but what we know is that there are some goods that lend themselves to substitution out of big-box retailing and into online sales to a greater degree.”
The labor market, while seeing steady gains, is still down 3.9% from the 2008 downturn, which Chandan said shows a relative weakness in the market. “Our ability to recover lost jobs and our ability to get people back to work and our ability to grow jobs that are ultimately critical for spending in the retail sector, now there is a bigger challenge for us,” he added, noting that the reliability of income drives the outcome of the success of the retail sector. “In real estate, it will be some time before we see more positive net absorption, stronger momentum in rent growth and occupancy rates that are high enough and NOI going quickly enough to see new construction.”
Despite economic headwinds, opportunities exist in the NNN space, especially for REITs, panelists agreed during the “State of the Net Lease Market” discussion. Fresh off its recent merger, Trevor Bond, president and CEO of WP Carey & Co. LLC said private REITs going public is a “positive trend” to create liquidity events. Under the deal, the company’s real estate portfolio will go from 14 million square feet to 43 square feet, which will be leased to 135 companies worldwide following the merger. It will have a total equity market capitalization of approximately $3 billion, and a total market capitalization of $5 billion.
“It will be a model for how well the market responds to the stock once it’s out there,” he said. “There are a whole host of challenges in going from a non-traded REIT to going public, but it allows our investors another possible exit strategy.”
Other panelists said overall cap rates have compressed and leases are generally longer, providing stability and less risk than in years past. In the build to suit market, Gordon Whiting, founder and senior portfolio manger of net lease strategy at Angelo, Gordon & Co. LP, said that the asset matters most.
“For us, the main question is how critical is that piece of real estate, more so than if it is a primary or secondary location,” he said.
(For more coverage of the event throughout the day, follow us at @GlobeStLIVE on Twitter, and watch for Real Estate Forum's April issue for a comprehensive look at the Net Lease Market.)
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